Chapter 8Segment and Interim ReportingChapter Outline I.FASB
Accounting Standards Codification Topic 280, Segment Reporting
(FASB ASC 280), provides current guidance on segment
reporting.A.ASC 280 follows a management approach in which segments
are based on the way that management disaggregates the enterprise
for making operating decisions; these are referred to as operating
segments.B.Operating segments are components of an enterprise which
meet three criteria.1.Engage in business activities and earn
revenues and incur expenses.2.Operating results are regularly
reviewed by the chief operating decision-maker to assess
performance and make resource allocation decisions.3.Discrete
financial information is available from the internal reporting
system. C.Once operating segments have been identified, three
quantitative threshold tests are then applied to identify segments
of sufficient size to warrant separate disclosure. Any segment
meeting even one of these tests is separately reportable.1.Revenue
testsegment revenues, both external and intersegment, are 10
percent or more of the combined revenue, external and intersegment,
of all reported operating segments. 2.Profit or loss testsegment
profit or loss is 10 percent or more of the greater (in absolute
terms) of the combined reported profit of all profitable segments
or the combined reported loss of all segments incurring a
loss.3.Asset testsegment assets are 10 percent or more of the
combined assets of all operating segments.D.Several general
restrictions on the presentation of operating segments
exist.1.Separately reported operating segments must generate at
least 75 percent of total (consolidated) sales made by the company
to outside parties. 2.Ten is suggested as the maximum number of
operating segments that should be separately disclosed. If more
than ten are reportable, the company should consider combining some
operating segments. E.Information to be disclosed by operating
segment.1.General information about the operating segment including
factors used to identify operating segments and the types of
products and services from which each segment derives its
revenues.2.Segment profit or loss and the following components of
profit or loss.a.Revenues from external customers.b.Revenues from
transactions with other operating segments. c.Interest revenue and
interest expense (reported separately).d.Depreciation, depletion,
and amortization expense.e.Other significant noncash items included
in segment profit or loss.f.Unusual items and extraordinary items.
g.Income tax expense or benefit.3.Total segment assets and the
following related items.a.Investment in equity method affiliates.
b.Expenditures for additions to long-lived assets. Chapter 08 -
Segment and Interim Reporting
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20158-4
Solutions Manual8-1Copyright 2015 McGraw-Hill Education.All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
II.Enterprise-wide disclosures.A.Information about products and
services.1.Additional information must be provided if operating
segments have not been determined based on differences in products
and services, or if the enterprise has only one operating
segment.2.In those situations, revenues derived from transactions
with external customers must be disclosed by product or service.
B.Information about geographic areas.1.Revenues from external
customers and long-lived assets must be reported for (a) the
domestic country, (b) all foreign countries in which the enterprise
has assets or derives revenues, and (c) each individual foreign
country in which the enterprise has material revenues or material
long-lived assets. 2.U.S. GAAP does not provide any specific
guidance with regard to determining materiality of revenues or
long-lived assets; this is left to managements
judgment.C.Information about major customers.1.The volume of sales
to a single customer must be disclosed if it constitutes 10 percent
or more of total sales to unaffiliated customers. 2.The identity of
the major customer need not be disclosed.
III.International Financial Reporting Standards (IFRS) also
provide guidance with respect to segment reporting. A.IFRS 8,
Operating Segments, is based on U.S. GAAP. Major differences
between IFRS 8 and U.S. GAAP are:1.IFRS 8 requires disclosure of
total assets and total liabilities by operating segment if these
are regularly reported to the chief operating decision maker. U.S.
GAAP requires disclosure of segment assets but does not require
disclosure of segment liabilities.2.IFRS 8 specifically includes
intangibles in the scope of non-current assets to be disclosed by
geographic area. Authoritative accounting literature (FASB ASC)
indicates that long-lived assets to be disclosed by geographic area
excludes intangibles.3.U.S. GAAP requires an entity with a matrix
form of organization to determine operating segments based on
products and services. IFRS 8 allows such an entity to determine
operating segments based on either products and services or
geographic areas.
IV.To provide investors and creditors with more timely
information than is provided by an annual report, the U.S.
Securities and Exchange Commission (SEC) requires publicly traded
companies to provide financial statements on an interim (quarterly)
basis. A.Quarterly statements need not be audited.
V.FASB Accounting Standards Codification Topic 270, Interim
Reporting (FASB ASC 270) requires companies to treat interim
periods as integral parts of an annual period rather than as
discrete accounting periods in their own right.A.Generally, interim
statements should be prepared following the same accounting
principles and practices used in the annual statements.B.However,
several items require special treatment for the interim statements
to better reflect the expected annual amounts.1.Revenues are
recognized for interim periods in the same way as they are on an
annual basis.
2.Interim statements should not reflect the effect of a LIFO
liquidation if the units of beginning inventory sold are expected
to be replaced by year-end; inventory should not be written down to
a lower market value if the market value is expected to recover
above the inventory's cost by year-end; and planned variances under
a standard cost system should not be reflected in interim
statements if they are expected to be absorbed by year-end.3.Costs
incurred in one interim period but associated with activities or
benefits of multiple interim periods (such as advertising and
executive bonuses) should be allocated across interim periods on a
reasonable basis through accruals and deferrals.4.The materiality
of an extraordinary item should be assessed by comparing its amount
against the expected income for the full year.5.Income tax related
to ordinary income should be computed at an estimated annual
effective tax rate; income tax related to an extraordinary item
should be calculated at the margin.
VI.FASB ASC 270 provides guidance for reporting changes in
accounting principles made in interim periods.A.Unless
impracticable to do so, an accounting change is applied
retrospectively, that is, prior period financial statements are
restated as if the new accounting principle had always been used.
B.When an accounting change is made in other than the first interim
period, information for the interim periods prior to the change
should be reported by retrospectively applying the new accounting
principle to these pre-change interim periods.C.If retrospective
application of the new accounting principle to interim periods
prior to the change of change is impracticable, the accounting
change is not allowed to be made in an interim period but may be
made only at the beginning of the next fiscal year.
VII.Many companies provide summary financial statements and
notes in their interim reports. A.U.S. GAAP imposes minimum
disclosure requirements for interim reports.1.Sales, income tax,
extraordinary items, cumulative effect of accounting change, and
net income.2.Earnings per share.3.Seasonal revenues and expenses.4.
Significant changes in estimates or provisions for income
taxes.5.Disposal of a business segment and unusual items.6.
Contingent items.7. Changes in accounting principles or
estimates.8.Significant changes in financial position.B.Disclosure
of balance sheet and cash flow information is encouraged but not
required. If not included in the interim report, significant
changes in the following must be disclosed:1.Cash and cash
equivalents.2.Net working capital.3.Long-term liabilities.4.
Stockholders' equity.
VIII.Four items of information must also be disclosed by
operating segment in interim financial statements: revenues from
external customers, intersegment revenues, segment profit or loss,
and, if there has been a material change since the annual report,
total assets.
IX.IAS 34, Interim Financial Reporting, provides guidance in
IFRS with respect to interim financial statements.A.Unlike U.S.
GAAP, IAS 34 requires each interim period to be treated as a
discrete accounting period in terms of the amounts to be
recognized. As a result, expenses that are incurred in one quarter
are expensed in that quarter even though the expenditure benefits
the entire year. And there is no accrual in earlier quarters for
expenses expected to be incurred later in the year.
Answer to Discussion Question: How Does a Company Determine
Whether a Foreign Country is Material?
In his well-publicized The Numbers Game speech delivered in
September 1998, former SEC chairman Arthur Levitt cited materiality
as one of five gimmicks used by companies to manage earnings.
Although his remarks were not specifically directed toward the
issue of geographic segment reporting, the intent was to warn
corporate America that materiality should not be used as an excuse
for inappropriate accounting. To make the point even more salient,
ASC 250-10-S99 (SAB Topic 1.M, Assessing Materiality, originally
issued by the SEC as Staff Accounting Bulletin (SAB) 99,
Materiality), warns financial statement preparers that reliance on
a simple numerical rule of thumb, such as 5% of net income, is not
sufficient. And in paragraph QC 11 of Statement of Financial
Accounting Concepts (SFAC) 8, the FASB stated the essence of the
materiality aspect of relevance as follows: Information is material
if omitting it or misstating it could influence decisions that
users make on the basis of the financial information of a specific
reporting entity.Consequently, the Board cannot specify a uniform
quantitative threshold for materiality or predetermine what could
be material in a particular situation. Further, ASC 250-10-S99
reminds companies that both quantitative and qualitative factors
should be considered in determining materiality. With respect to
segment reporting, ASC 250-10-S99 states:
The materiality of a misstatement may turn on where it appears
in the financial statements. For example, a misstatement may
involve a segment of the registrant's operations. In that instance,
in assessing materiality of a misstatement to the financial
statements taken as a whole, registrants and their auditors should
consider not only the size of the misstatement but also the
significance of the segment information to the financial statements
taken as a whole. A misstatement of the revenue and operating
profit of a relatively small segment that is represented by
management to be important to the future profitability of the
entity" is more likely to be material to investors than a
misstatement in a segment that management has not identified as
especially important. In assessing the materiality of misstatements
in segment information - as with materiality generally - situations
may arise in practice where the auditor will conclude that a matter
relating to segment information is qualitatively material even
though, in his or her judgment, it is quantitatively immaterial to
the financial statements taken as a whole.
Thus, in addition to quantitative factors, such as the relative
percentage of total revenues generated in an individual foreign
country, companies should consider qualitative factors as well.
Qualitative factors that might be relevant in assessing the
materiality of a specific foreign country include: the growth
prospects in that country and the level of risk associated with
doing business in that country.
There are competing arguments for the FASB establishing a
significance test for determining material foreign countries. On
one hand, such a quantitative materiality test flies in the face of
the warning provided in ASC 250-10-S99 and SFAC 8. For example, a
10% of total revenue or long-lived asset test might give companies
an excuse to avoid reporting individual countries that would be
material for qualitative reasons. Assume that from one year to the
next a company increases its revenues in China from 2% of total
revenues to 6% of total revenues. Although 6% of total revenues
would not meet a 10% test, the relatively large increase in total
revenues generated in China could be material in that it could
affect an investors assessment of the companys future prospects.
This company might be reluctant to disclose information about its
revenues in China because of potential competitive harm.
On the other hand, one could argue that if the FASB were to
establish a relatively low disclosure threshold of, say, 5% of
total revenues, that many countries that financial statement users
would deem to be of significance would be disclosed regardless of
whether they are deemed material for quantitative or for
qualitative reasons. However, it could also result in disclosures
being provided that are not material, i.e., capable of influencing
decisions made by financial statement users.
In any event, establishing a materiality threshold would be
inconsistent with the FASBs conclusion in SFAC 8 that it cannot
predetermine what could be material in a particular situation.
Answers to Questions
1.Consolidation presents the account balances of a business
combination without regard for the individual component units that
comprise the organization. Thus, no distinction can be drawn as to
the financial position or operations of the separate enterprises
that form the corporate structure. Without a method by which to
identify the various individual operations, financial analysis
cannot be well refined.
2.The word disaggregated refers to a whole that has been broken
apart. Thus, disaggregated financial information is the data of a
reporting unit that has been broken down into components so that
the separate parts can be identified and studied.
3.According to the FASB, the objective of segment reporting is
to provide information to help users of financial statements:a.
better understand the enterprises performance,b. better assess its
prospects for future net cash flows, and c. make more informed
judgments about the enterprise as a whole.
4.Defining segments on the basis of a companys organizational
structure removes much of the flexibility and subjectivity
associated with defining industry segments under prior standards.
In addition, the incremental cost of providing segment information
externally should be minimal because that information is already
generated for internal use. Analysts should benefit from this
approach because it reflects the risks and opportunities considered
important by management and allows the analyst to see the company
the way it is viewed by management. This should enhance the
analysts ability to predict management actions that can
significantly affect future cash flows.
5.An operating segment is defined as a component of an
enterprise:a.that engages in business activities from which it
earns revenues and incurs expenses, b.whose operating results are
regularly reviewed by the chief operating decision maker to assess
performance and make resource allocation decisions, and c. for
which discrete financial information is available.
6.Two criteria must be considered in this situation to determine
an enterprises operating segment. If more than one set of
organizational units exists, but there is only one set for which
segment managers are held responsible, that set constitutes the
operating segments. If segment managers exist for two or more
overlapping sets of organizational units, the organizational units
based on products and services are defined as the operating
segments.
7.The Revenue Test. An operating segment is separately
reportable if its total revenues amount to 10 percent or more of
the combined total revenues of all operating segments. The Profit
or Loss Test. An operating segment is separately reportable if its
profit or loss is 10 percent or more of the greater (in absolute
terms) of the combined profits of all profitable segments or the
combined losses of all segments reporting a loss.
The Asset Test. An operating segment is separately reportable if
its assets comprise 10 percent or more of combined assets of all
operating segments.
8.For reportable operating segments, the following information
must be disclosed:a.Revenues from sales to unaffiliated
customers.b.Revenues from intercompany transfers.c.Profit or
loss.d.Interest revenue.e.Interest expense.f.Depreciation,
depletion, and amortization expense.g.Other significant noncash
items included in profit or loss.h.Unusual items included in profit
or loss.i.Income tax expense or benefit.j.Total assets.k.Equity
method investments.l.Expenditures for long-lived assets.
m.Description of the types of products or services from which the
segment derives its revenues.
9.If operating segments are not based upon products or services,
or a company has only one operating segment, then revenues from
sales to unaffiliated customers must be disclosed for each of the
companys products and services. 10.Information must be provided for
the domestic country, for all foreign countries in which the
company generates revenue or holds assets, and for each foreign
country in which the company generates a material amount of
revenues or has a material amount of assets.
11.Two items of information must be reported for the domestic
country, for all foreign countries in total, and for each foreign
country in which the company has material operations: (1) revenues
from external customers, and (2) long-lived assets.
12.The minimum number of countries to be reported separately is
one: the domestic country. If no single foreign country is
material, then all foreign countries would be combined and two
lines of information would be reported; one for the United States
and one for all foreign countries. U.S. GAAP does not provide any
guidelines related to the maximum number of countries to be
reported. 13.The existence of a major customer and the related
amount of revenues must be disclosed when sales to a single
customer are 10 percent or more of consolidated sales.
14.U.S. GAAP requires disclosure of a measure of segment assets,
but does not require disclosure of a measure of segment
liabilities. IFRS 8 requires disclosure of total assets and total
liabilities by segment if such a measure is regularly provided to
the chief operating decision maker
15.U.S. publicly traded companies are required to prepare
quarterly financial reports to provide investors and creditors with
relevant information on a more timely basis than is provided by an
annual report.
16.Companies are required to follow an "integral" approach in
which each interim period is considered to be an integral part of
an annual accounting period, rather than a "discrete" accounting
period in its own right. For several items, the integral approach
requires deviation from the general rule that the same accounting
principles used in preparing annual statements should also be used
in preparing interim statements.
17.Cost-of-goods-sold should be adjusted in the interim period
to reflect the cost at which the liquidated inventory is expected
to be replaced, thus avoiding the effect of the LIFO liquidation on
interim period income.
18.Income tax expense related to interim period income is
determined by estimating the effective tax rate for the entire
year. That rate is then applied to the cumulative pre-tax income
earned to date to determine the cumulative income tax to be
recognized to date. The amount of income tax recognized in the
current interim period is the difference between the cumulative
income tax to be recognized to date and the income tax recognized
in prior interim periods.
19.When an accounting change occurs in other than the first
interim period, information for the pre-change interim periods
should be reported based on retrospective application of the new
accounting principle. If retrospective application of the new
accounting principle to pre-change interim periods is not
practicable, the accounting change may be made only at the
beginning of the next fiscal year.
20.The following minimum information must be disclosed in an
interim report:a.Sales, income tax, extraordinary items, cumulative
effect of accounting change, and net income.b.Earnings per
share.c.Seasonal revenues and expenses.d. Significant changes in
estimates or provisions for income taxes.e.Disposal of a business
segment and unusual items.f. Contingent items.g. Changes in
accounting principles or estimates.h.Significant changes in the
following items of financial position:1.Cash and cash
equivalents.2.Net working capital.3.Long-term liabilities.4.
Stockholders' equity.
21.Four items of segment information are required to be included
in interim reports: revenues from external customers, intersegment
revenues, segment profit or loss, and total assets if there has
been a material change in assets from the last annual report.
22.Under IAS 34, an annual bonus paid in the fourth quarter of
the year would be recognized fully in that quarter. There would be
no accrual of an estimated bonus expense in the first three
quarters of the year. Under U.S. GAAP, the annual bonus would be
estimated at the beginning of the year and a portion of the
estimated bonus would be accrued as expense in each of the first
three quarters.
Answers to Problems
1. D
2. C
3. A
4. C
5. B
6. D
7. C
8. A
9. B
10. B
11. A
12. C
13.CWith regard to major customers, U.S. GAAP (FASB ASC 280)
only requires disclosure of the total amount of revenues from each
such customer and the identity of the segment or segments reporting
the revenues.
14.D
15.D
16.A
17.C
18.D
19.CIf there has been a material change from the last annual
report, total assets, but not individual assets, for each operating
segment must be disclosed.
20.B
21. C(Determine quantitative threshold under revenue test for
reportable segments) Sales to outsiders$20,500Intersegment
transfers 3,800 Combined segment revenues$24,30010% criterion x 10%
Minimum$ 2,430 22. A(Determine quantitative threshold for
disclosure of a major customer) Revenues from a single customer
must be disclosed if the amount is 10 percent or more of
consolidated sales. Consolidated sales only includes sales to
outsiders; intersegment sales are eliminated.
Consolidated sales (combined sales to outsiders)$376,00010%
criterion x 10% Minimum$ 37,600
23. D(Determine reportable segments under the profit or loss
test)
Total operating losses of $1,020,000 (K and M) are larger than
total operating profits of $770,000. Thus, based on the 10 percent
criterion, any segment with a profit or loss of $102,000 or more
must be separately disclosed. K, O, and P do not meet that standard
while L, M, and N do.
24. C(Determine reportable segments under three tests) Revenue
TestCombined segment revenues$32,750,00010% criterion x 10%
Minimum$ 3,275,000
Segments meeting testA, B, C, E
Profit or Loss TestSince there are no segments with a loss, this
test is applied based on total combined segment profit.Combined
segment profit$5,800,00010% criterion x 10% Minimum$ 580,000
Segments meeting testA, B, C, E
24. (continued)
Asset TestCombined segment assets$67,500,00010% criterion x 10%
Minimum$ 6,750,000
Segments meeting testA, B, C, D, E
Five segments are separately reportable.
25. D
26. B(Determine minimum number of reportable segments under 75%
rule) The test to verify that a sufficient number of industry
segments is being disclosed is based on revenues generated from
unaffiliated customers. The four segments that are to be separately
disclosed show outside sales of $520,000 out of a total for the
company of $710,000. Since this portion is only 73.2 percent of the
companys total, the 75 percent criterion established by the U.S.
GAAP has not been met.
27. C(Determine expense amounts to be recognized in interim
period)
Depreciation $70,000 x 1/4 = $17,500Bonus$140,000 x 1/4 = 35,000
$52,500
28. C(Determine net income to be reported in interim period)
Income as reported$100,000 Less: Extraordinary loss (recognized
in full in the interim period in which it occurs)(20,000)Add:
Cumulative effect loss (handled through adjustment of retained
earnings balance at the beginning of the year) 16,000 $ 96,000
29. C(Determine bonus expense to be recognized in interim
period)
Bonus $1,000,000 x 1/4 = $250,000
30. C(Determine property tax expense to be recognized in interim
period)
Property taxes $480,000 x 1/4 = $120,00031. C(Journal entry for
property tax expense recognized in interim period)
Dr. Property tax expense$120,000 Prepaid property taxes
360,000Cr. Cash$480,000
32. A(Determine COGS in interim period under LIFO with LIFO
liquidation)
5,000 units x $80 = $400,000 300 units x $50 = 15,0005,300 units
$415,000
33. C5,000 units x $80 = $400,000 300 units x $82 = 24,6005,300
units $424,600
34.(10 minutes) (Apply the Profit or Loss Test to Determine
Reportable Operating Segments)
Calculation of profit or loss.RevenuesIntersegmentOperatingfrom
Outsiders TransfersExpensesProfitLoss Cards$1,200,000+$ 100,000
$900,000 = $400,000Calendars900,000+ 200,000 1,350,000
=$250,000Clothing1,000,000700,000= 300,000Books800,000+
50,000770,000 = 80,000 Total$ 780,000$250,000
Any segment with an absolute amount of profit or loss greater
than or equal to $78,000 (10% x $780,000) is separately reportable.
Based on this test, each of the four segments must be reported
separately.
35.(25 minutes) (Apply the Three Tests Necessary to Determine
Reportable Operating Segments)
Revenue Test (numbers in thousands)
SegmentRevenuesPercentagePlastics$ 6,842 61.6%
(reportable)Metals 2,561 23.1% (reportable)Lumber 870 7.9%Paper 572
5.2%Finance 243 2.2% Total$11,088100.0%
Profit or Loss Test (numbers in thousands)
SegmentRevenuesExpensesProfitLossPlastics$ 6,842$ 4,290$2,552$
(reportable)Metals 2,561 1,793 768 (reportable)Lumber 870 1,132 262
Paper 572 682 110 Finance 243 133 110 Total$3,430$372
Since $3,430 is larger in absolute terms than $372, it will
serve as the basis for testing. Each of the profit or loss figures
will be compared to $343 (10% x $3,430).
Asset Test (numbers in thousands)
SegmentAssetsPercentagePlastics$1,588 21.4% (reportable)Metals
3,599 48.4% (reportable)Lumber 524 7.1%Paper 834 11.2%
(reportable)Finance 885 11.9% (reportable) Total$7,430100.0%
The plastics, metals, paper, and finance segments meet at least
one of the three tests and therefore are reportable.
36.(20 minutes) (A Variety of Computational Questions about
Operating Segment and Major Customer Testing)
a.Total revenues for Fairfield (including intersegment revenues)
amount to $4,200,000. Minimum revenues for required disclosure are
10% or $420,000.
b. Disclosure of operating segments is considered adequate only
if the separately reported segments have sales to unaffiliated
customers that comprise 75% or more of total consolidated sales. In
this situation that requirement is met. Red, Blue, and Green have
total sales to outsiders of $3,137,000 (or 86%) of total
consolidated sales of $3,666,000. Thus, disclosure of these three
segments would be adequate.
c.Major customer disclosure is based on a level of sales to
unaffiliated customers of at least 10% or, for Fairfield, $366,600
($3,666,000 x 10%).
d.This test is based on the greater (in absolute terms) of
profits or losses. In this problem, the total profit of Red, Blue,
Green, and White ($1,971,000) is greater than the total loss of
Pink and Black ($316,000). Therefore, any segment with a profit or
loss of $197,100 or more (10% x $1,971,000) is reportable. Using
this standard, Red, Blue, Black, and White are of significant
size.
37.(25 minutes) (Apply the three tests necessary to determine
reportable operating segments and determine whether a sufficient
number of segments is reported)
Revenue Test (numbers in
thousands)SegmentRevenuesPercentageBooks$ 205 9.3%Computers 936
42.3% (reportable)Maps 455 20.6% (reportable)Travel 432 19.5%
(reportable)Finance 184 8.3% Total$2,212100.0%
Profit or Loss Test (numbers in thousands)
SegmentRevenuesExpensesProfitLossBooks$ 205$ 218$ 13Computers
936 899$ 37(reportable)Maps 455 400 55(reportable)Travel 432 284
148(reportableFinance 184 132 52 (reportable)
Total$2,212$1,933$292$ 13
This test is based on the greater (in absolute amount) of total
profit from profitable segments or total loss from segments with a
loss. In this case, any segment with profit or loss greater than or
equal to $29,200 (10% x $292,000) is separately reportable. Asset
Test (numbers in thousands)
SegmentAssetsPercentageBooks$ 206 6.1%Computers 1,378 40.5%
(reportable)Maps 248 7.3% Travel 326 9.6% Finance 1,240 36.5%
(reportable) Total$3,398100.0%
37. (continued)
Test for Sufficient Number of Segments Being Reported
Four of Masons segments (computers, maps, travel, and finance)
meet at least one of the tests carried out above. To determine
whether a sufficient number of segments is being reported, revenues
from unaffiliated parties for these four segments must comprise at
least 75% of total consolidated revenues. Consolidated revenues
(sales to outside parties and interest income-external) for the
company amount to $1,644. These four segments do make up over 75%
(actually $1,463 or 89%) of this total. Therefore, this company is
presenting disaggregated information for enough of its segments.
Segment Sales to Outsiders Computers$ 696Maps 416Travel 314Finance
37 Total$1,463
38. (15 minutes) (Apply materiality tests adopted by a company
to determine countries to be reported separately)
Revenue Test (sales to unaffiliated parties)
United States$4,610,000 80.3%Spain 395,000 6.9%Italy 272,000
4.7%Greece 463,000 8.1% Total$5,740,000100.0%
Long-lived Asset Test
United States$1,894,000 83.7%Spain 191,000 8.4%Italy 106,000
4.7%Greece 72,000 3.2% Total$2,263,000100.0%
None of the individual foreign countries meets either the
revenue or long-lived asset materiality test, so no foreign country
must be reported separately. However, information must be presented
for the United States separately and for all foreign countries
combined.
39. (20 minutes) (Allocate costs incurred in one quarter that
benefit the entire year and determine income tax expense
39. (continued)
40.(15 minutes) (Treatment of accounting change made in other
than first interim period)
Retrospective application of the FIFO method results in the
following restatements of income for 2014 and the first quarter of
2015:
201420151st Q.2nd Q.3rd Q.4th Q.1st
Q.Sales$10,000$12,000$14,000$16,000$18,000Cost of goods sold
(FIFO)3,8004,6005,2006,0007,400Operating
expenses2,0002,2002,6003,0003,200Income before income
taxes4,2005,2006,2007,0007,400Income taxes
(40%)1,6802,0802,4802,8002,960Net income
$2,520$3,120$3,720$4,200$4,440
Net income in the second quarter of 2015 is $4,560 [$20,000
9,000 3,400 = $7,600 3,040 (40%) = $4,560].
The accounting change is reflected in the second quarter of
2015, with year-to-date information, and comparative information
for similar periods in 2014 as follows:
Three Months EndedSix Months EndedJune 30June
302014201520142015Net income$3,120$4,560$5,640$9,000Net income per
common share $3.12$4.56$5.64$9.00
41. (10 minutes) (LIFO liquidation in interim report)
Determination of Cost-of-Goods-Sold and Gross Profit
Sales (110,000 units @ $20)$2,200,000Cost-of-goods-sold 100,000
units @ $14$1,400,000 10,000 units @ $15 (replacement cost) 150,000
1,550,000Gross profit$650,000
Journal Entries to Record Sales and Cost-of-Goods-Sold
Dr. Cash or Accounts Receivable$2,200,000Cr. Sales
Revenue$2,200,000Dr. Cost-of-goods-sold$1,550,000Cr.
Inventory$1,520,000 Excess of Replacement Cost over Historical Cost
of LIFO Liquidation 30,000
To record cost-of-goods-sold with a historical cost of
$1,520,000 and an excess of replacement cost over historical cost
for beginning inventory liquidated of $30,000 (($15 $12) x 10,000
units).
Develop Your Skills
Research Case 1Segment Reporting (60 minutes)
This assignment requires the student to select a company and
find the note on operating segments in that companys annual report.
The responses to this assignment will depend upon the company
selected by the student for analysis.
Research Case 2Interim Reporting (60 minutes)
This assignment requires students to select a company, find the
most recent quarterly report for that company, and then determine
whether the company provides the minimum disclosure required as
listed in the text. The responses to this assignment will depend
upon the company selected by the student for analysis.
Research Case 3Operating Segments (60 minutes)
This assignment requires students to find the note on operating
segments in each company's annual report, determine three items of
information (answer three questions) from those notes, and prepare
a written summary of their findings. The primary objective of this
requirement is to help students develop their ability to present
such findings in a written format. In answering these questions,
students will become familiar with the different formats and
terminology used by companies in providing operating segment
information. The answers to these questions will change depending
upon the most recent annual report available on the companys
website. The following general observations indicate how these
questions might be answered.
1.The two most important operating segments in terms of
percentage of total revenues.The answer to this question is
determined by calculating the ratio segment revenues/total segment
revenues for each segment of each company. Companies might use
different terms to describe revenues including net sales and net
sales to external customers. Companies are required to disclose
both revenues from sales to external customers and revenues from
intersegment sales. This question should be answered using revenues
from sales to external customers if reported separately. In 2012,
each of the four companies defined operating segments on the basis
of products/services.
2. The two operating segments with the largest growth in
revenues.This question is answered by calculating the ratio
(current year segment revenues previous year segment
revenues)/previous year segment revenues for each segment of each
company. 3. The two most profitable operating segments in terms of
profit margin.This question is answered by calculating the ratio
segment profit/segment revenues for each segment of each company
(again using revenues from sales to external customers if
separately reported). Segment profit goes under a variety of names
including operating earnings, income from continuing operations,
standard margin, and operating profit. Some companies might provide
information for more than one measure of profit, e.g., income
before income taxes and operating income, in which case the
instructor might wish to indicate which measure of profit to
consider in answering this question. There is no right or wrong
measure of profit to use. General Electric does not include segment
profit in its operating segment note, but instead (in 2012) refers
the reader to a Summary of Operating Segments table (on page 44 of
the annual report), which is part of Management's Discussion and
Analysis.After reviewing the information provided by each of these
companies in its segment note, instructors might wish to add
additional questions to this assignment. For example, do these
companies use generally accepted accounting principles in preparing
segment information? Does each company provide a reconciliation to
consolidated totals?
Research Case 4Comparability of Geographic Area Information (60
minutes)
This assignment requires students to find the note on geographic
areas in each company's annual report and then prepare a report
describing the comparability of this information. In preparing this
assignment, students will see the different formats used by
companies in providing this information, and the different levels
of detail on geographic areas provided. The comparability of this
information will change depending upon the most recent annual
report available on the companys website. The following comparison
based upon the 2011 annual reports represents the type of analysis
students might perform in solving this assignment.
Geographic Areas Reported by Four Pharmaceutical Companies
Bristol-Myers SquibbEli
LillyMerckPfizerU.S.U.S.U.S.U.S.EuropeEurope----E/ME/A----Developed
EuropeJapan, Asia Pacific, andCanada----JapanJapan-Latin America,
Middle East,and Africa---Emerging Markets--Emerging
Markets---Developed Rest of WorldOtherOtherOther-
The only geographic area that can be directly compared across
these four pharmaceutical companies is the United States.
Bristol-Myers Squibb provides somewhat more detailed information
than the other companies. Only Eli Lilly and Merck report an
individual country (Japan) other than the U.S. Issues that could be
discussed include different quantitative thresholds used by
companies in determining what is a material country, and the fact
that disclosure of geographic areas aggregated above the individual
country level (e.g., E/ME/A, Emerging Markets) is not required. One
can assume that Bristol-Myers Squibb does not have a material
amount of revenues or assets in any single country and voluntarily
provides information on a more aggregated, regional basis. The same
appears to be true for Pfizer. Eli Lilly and Merck provide
information for a combination of both individual countries (Japan)
and aggregated regional area (Europe, E/ME/A). Pfizer has perhaps
the most different basis for determining geographic areas, focusing
on developed vs. emerging markets.
Evaluation CaseOperating Segment Disclosures (60 minutes)
1.Two questions must be considered in evaluating CHICs operating
segment disclosures: (a) have reportable operating segments been
appropriately determined, e.g., is it appropriate to combine the
Helicopters and Ships divisions into one segment designated as
Other, and (b) are the disclosures provided for each segment in
compliance with FASB ASC Topic 280, Segment Reporting?
With respect to question (a), ASC 280 allows (but does not
require) segments to be combined if they have essentially the same
business activities in essentially the same economic environments.
In determining whether business activities and environments are
similar, management must consider these aggregation criteria:
1.The nature of the products and services provided by each
operating segment.2.The nature of the production process.3.The type
or class of customer.4.The distribution methods.5.If applicable,
the nature of the regulatory environment.
Segments must be similar in each and every one of these areas to
be combined.
The facts of this case indicate that the types of customers and
method used to distribute products differ across the four
divisions, and each division must comply with industry-specific
regulations. Thus, the Helicopters and Ships divisions may not be
combined into one reportable segment on the basis of having
essentially the same business activities in essentially the same
economic environments. The Helicopters and Ships divisions still
could be combined into a single Other category if neither division
meets any of the quantitative thresholds for disclosure as a
separate segment. Revenue test: Total segment revenues are
$11,171,005; thus, any segment with more than $1,117,100 in sales
is separately reportable. Automobiles, Trucks, and Helicopters meet
this threshold.Profit (loss) test: Total segment profits of $
1,686,700 ($881,292 + $456,530 + $348,878) exceed total segment
losses of $58,879, thus any segment with profit or loss greater
than $168,670 is separately reportable. Automobiles, Trucks, and
Helicopters meet this threshold.Asset test: Total segment assets
are $9,993,830, thus any segment with assets greater than $999,383
is separately reportable. All four segments, including Ships, meet
this threshold.As a result of applying these tests, each division
must be reported as a separate segment; combining Helicopters and
Ships into one segment does not comply with ASC 280.
With respect to question (b), Note X. Operating Segments
prepared by CHICs accountant fails to disclose information for the
Helicopters and Ships segments separately. Note X. also fails to
separately disclose revenues from sales to outside parties and
revenues from intersegment sales, as well expenditures for
additions to long-lived assets and depreciation and amortization.
Interest expense and income taxes need not be disclosed by segment
because these items are not reported by segment to the chief
operating decision maker. CHICs accountant also has neglected to
provide a reconciliation of segment amounts to consolidated
totals.
2.The disclosures required under ASC 280 could be provided in
the following manner:
Accounting Standards Case 1 Segment Reporting (15 minutes)
Source of guidance: FASB ASC 280-10-55-2: Segment Reporting;
Overall; Implementation Guidance and Illustrations; Operating
Segments - Equity Method Investees
ASC 280-10-55-2 states An equity method investee could be
considered an operating segment, if, under the specific facts and
circumstances being considered, it meets the definition of an
operating segment, even though the investor has no control over the
performance of the investee. Thus, in response to the questions
asked in the case:(a)an equity method investment can be treated as
an operating segment for financial reporting purposes, (b)under the
conditions that it meets the definition of an operating segment,
that is, (1) it engages in business activities from which it earns
revenues and incurs expenses, (2) the chief operating decision
maker regularly reviews its operating results to assess performance
and make resource allocation decision, and (3) its discrete
financial information is available.
Accounting Standards Case 2Interim Reporting (15 minutes)
Source of guidance: FASB ASC 270-10-50-6: Interim Reporting;
Overall; Disclosure; Contingencies
Contingencies that could be expected to affect the fairness of
presentation of financial data at an interim date must be disclosed
in interim reports in the same manner required for annual
reports.
The materiality of a contingency should be judged in relation to
annual financial statements.
Analysis CaseWalmart Interim and Segment Reporting (60
minutes)
1. Assess the seasonal nature of Walmarts sales and income for
the company as a whole and by operating segment.
The excerpt from Note 17 Quarterly Financial Data shows that
Walmart experienced a significant increase in net sales and income
in the quarter ended January 31 over the previous three quarters of
the year. This is not surprising given that this quarter includes
the holiday season.
Operating income for the quarter ended January 31 can be
determined for each segment by subtracting the amounts reported in
the three quarterly reports from the amounts reported in Note 15
Segments.
These results show the seasonal nature of the companys two
largest segments (Walmart U.S. and Walmart International), with a
significantly larger amount of operating income generated in the
quarter ended January 31 than in the other quarters.
2. Assess Walmarts profitability by quarter and by segment.
Note 17 can be used to assess profitability in terms of profit
margin (Income from continuing operations/Net sales) by
quarter.
These results indicate that profit margins are highest in the
fourth quarter of the year, the quarter with the largest percentage
of total sales.
Note 15 can be used to assess profitability in terms of
operating profit margin (Operating income/Net sales) and return on
assets (Operating income/Total assets of continuing operations) by
segment.
These results indicate that Walmart U.S. by far is the most
profitable segment for Walmart Stores, Inc. Although the Walmart
International segment has a reasonable Operating Profit Margin
(4.94%), that segments Return on Assets is very low (7.64%). Return
on Assets must be interpreted with caution, however, because the
ending balance in Total Assets of Continuing Operations is used in
the denominator of the ratio rather than the average amount of
Total Assets for the year. The Walmart International segments
Return on Assets (7.64%) is understated, for example, if a
significant portion of Total Assets was acquired late in the
year.
Excel CaseCoca-Cola Geographic Segment Information (60
minutes)
1. The ratios required to be calculated for the Coca-Cola
Company are as follows:
Percentage of total net revenues2011%2010%
Eurasia & Africa 2,841 7.21% 2,556 9.00%
Europe 5,474 13.89% 5,249 18.48%
Latin America 4,690 11.90% 4,121 14.51%
North America 20,571 52.19% 11,20539.45%
Pacific 5,838 14.81% 5,271 18.56%
Total 39,414 100.00% 28,402 100.00%
Percentage growth in total net revenues2010 to 20112009 to
2010
Eurasia & Africa11.15%16.34%
Europe4.29%0.88%
Latin America13.81%6.16%
North America83.59%35.47%
Pacific10.76%8.12%
Operating income as a percentage of
total net revenues (profit margin)20112010
Eurasia & Africa38.40%38.34%
Europe56.45%56.70%
Latin America60.02%58.36%
North America11.27%13.57%
Pacific36.84%38.85%
2. There is no right or wrong answer to this question. Students
could argue that Latin America and Europe would be the areas of the
world in which to expand because profit margin is highest in these
areas. There would seem to be more room to expand in Latin America
given that this area has a slightly smaller percentage of total net
revenues than Europe. In addition, revenue growth in Europe has
been small in the most recent two years, so expansion might not be
feasible in this region. Eurasia & Africa and Pacific also have
relatively high profit margins. The company generates the smallest
percentage of total revenues in Eurasia & Africa, so perhaps
there is an opportunity for growth in this area.
3. There is a great deal of non-accounting information that one
would need to determine a specific region of the world in which to
focus expansion. For example, one might need to gather information
to answer the following questions: Is there a sufficiently large
population with enough disposable income to be able to purchase the
companys products? Are raw materials available locally? Is there a
well-developed transportation infrastructure that would allow the
products to be brought to consumers at a reasonable cost? Do local
customs, culture, religion, etc. affect drinking habits, especially
the consumption of soft drinks?