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Segment and Interim

Financial Reporting
Chapter 14

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Learning Objective 1
Understand the management
approach to segment
reporting.

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Identifying Reportable Segments


Segments determined by the management
approach are called operating segments.
Statement 131 characterizes an operating
segment as a component of an enterprise

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Identifying Reportable Segments


(1) that engages in business activities from which
it may earn revenues and incur expenses;
(2) whose operating results are regularly
reviewed by the chief decision maker;
and (3) for which discrete financial
information is available.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Aggregation Criteria

An enterprise may combine similar operating


segments if aggregation is consistent with the
objectives of Statement No. 131 and the
segments have similar economic characteristics.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Quantitative Thresholds
Operating segments are reportable
if they meet materiality thresholds.
Once reportable segments are identified,
all other operating segments are combined
with other business activities in an all other
category for reporting purposes.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Reconsideration of
Reportable Segments
Reported segments must include 75%
of all external revenue.
If reportable segments do not meet this criterion,
additional segments must be identified as
reportable, even if they do not meet the
quantitative thresholds.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Learning Objective 2
Apply reportable operating
segment tests.

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Illustration of the Tests for


Reportable Operating Segments
Phil-Brown Corporation applies
the three materiality tests.
Revenue test

Asset test

Operating profit test


2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

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Revenue Test

Operating
Segments
Revenue

Food
Paper
Copper
Finance
Total

$150,000
170,000
40,000
60,000
$420,000

Reportable
Intersegment Test Value
Segment Under
Revenue (10% $670,000) Revenue Test?

0
200,000
0
50,000
$250,000

$67,000
67,000
< 67,000
67,000

Yes
Yes
No
Yes

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 10

Asset Test
Operating
Segments
Identifiable
Assets

Food
Paper
Copper
Finance
Total

$ 200,000
250,000
60,000
500,000
$1,010,000

Test Value
(10% $1,010,000)

<

$101,000
101,000
101,000
101,000

Reportable
Segment
Under Asset
Test?

Yes
Yes
No
Yes

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Operating Profit Test


Operating
Segments
Operating
Profit

Food
Paper
Copper
Finance
Total

Operating
Segments
Operating
Loss

$ 25,000
55,000
$(10,000)
50,000
$130,000

Reportable
Segment
Under
Test Value
Operating
(10% $130,000) Profit Test?

<

$13,000
13,000
13,000
13,000

Yes
Yes
No
Yes

$(10,000)

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 12

Learning Objective 3
Comprehend segment disclosure
and enterprisewide
disclosure details.

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Segment Disclosures
The basis of organization used by the chief
operating decision maker to determine
operating segments must be disclosed.
Any aggregation of operating segments
used in arriving at these reportable
segments must also be disclosed.

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Segment Disclosures
Profit/loss and asset information
Measurement
Reconciliation requirements
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Enterprisewide Disclosures
Products and services
Geographic information
Major customers
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Learning Objective 4
Understand the similarities and
differences of interim reporting
and annual reporting.

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Interim Financial Reporting


Interim financial reports are commonly
issued on a quarterly basis.
They typically include cumulative,
year-to-date information, as well
as comparative information for
corresponding periods of the prior year.

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Nature of Interim Reports

Interim financial reports provide more timely,


but less complete, information than
annual financial reports.

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Product Costs

A company can use this method for


interim reporting purposes when it does
not use the perpetual inventory method.

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Product Costs

LIFO inventory layers can be liquidated


during an interim period but expected
to be replaced by year end.
Cost of sales can include the replacement
cost of the liquidated LIFO layer if the
reduction is determined to be temporary.
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Product Costs

Permanent inventory market declines


are recognized in the interim period.

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Product Costs

Planned variances under a standard


cost system that are expected to be
absorbed by year end are usually
deferred at the interim date.

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Expenses Other Than Product


Costs
Annual expenses
Advertising costs
Income taxes
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Learning Objective 5
Compute interim-period
income tax expense.

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Computation of the Estimated


Annual Effective Tax Rate
Small Corporation bases its estimate on
the following assumed tax-rate schedule:
If Taxable Income Is:
But
Over
Not Over
0
$ 50,000
$ 50,000
75,000
75,000
100,000
100,000
335,000
355,000

The Tax Is:


Pay

$ 7,500
13,750
22,250

Excess
15%
25
34
39
34

Of the
Amount Over
0
$ 50,000
75,000
100,000
0

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Small Corporation Estimated


Quarterly Income Tax
Quarter Estimated Income
First
$ 20,000
Second
30,000
Third
25,000
Fourth
25,000
Totals
$100,000

Rate Estimated Tax


15%
$ 3,000
15
4,500
25
6,250
34
8,500
$22,250

$22,250 $100,000 = 22.25%

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 27

Small Corporation Estimated


Quarterly Income Tax

Income year-to-date
Quarterly period income
Tax expense (22.25%)
Net income

First
Quarter
$20,000
$20,000
4,450
$15,550

Second
Quarter
$50,000
$30,000
6,675
$23,325

Third
Quarter
$75,000
$25,000
5,563
$19,438

Fourth
Quarter
$100,000
$ 25,000
5,563
$ 19,438

Fiscal
$100,000
$100,000
22,250
$ 77,750

$20,000 22.25% = $4,450

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 28

Learning Objective 6
Grasp both GAAP and SEC
interim reporting requirements.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 29

Guidelines for Preparing


Interim Statements
At a minimum (per APB Opinion No. 28),
publicly traded companies should report:
1 a Sales or gross revenues
b Provision for income taxes
c Extraordinary items net of income taxes
d Cumulative-effect-type changes in
accounting principles
e net income
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 30

Guidelines for Preparing


Interim Statements
2 Basic and diluted earnings per share
3 Seasonal revenue, costs, or expenses
4 Significant changes in estimates of income
tax expense
5 Disposal of a segment of a business and
extraordinary and unusual items
6 Contingent items
7 Changes in accounting principles and estimates
8 Significant changes in financial position
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 31

Segment Disclosures in
Interim Reporting
1

Revenue from external customers

Intersegment revenues

A measure of segment profit or loss

Total assets for which there has been a


4
material change since the last annual report

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Segment Disclosures in
Interim Reporting
A description of any differences in the basis
5 of segmentation or measurement of segment
profit or loss since the last annual report
A reconciliation between segment
6
and total profits

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 14 - 33

SEC Interim Financial Disclosures


The SEC requires that quarterly reports be
prepared for the companys stockholders
and for filing with the SEC.
These reports are to be prepared using
GAAP and are filed on Form 10-Q.

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SEC Interim Financial Disclosures


Part I of Form 10-Q contains the
following summary of contents:
Part I Financial Information
Item 1 Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Item 2 Managements Discussion of Financial
Condition and Results of Operations
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SEC Interim Financial Disclosures


Companies present comparative balance
sheets as of the end of the current quarter
and at the prior year-end.
Comparative income statements are presented
for the current quarter and the same quarter of
the prior year plus the current year-to-date
and the prior year-to-date.
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End of Chapter 14

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