1. Slide 21-1 21 CHAPTER 21 INTERIM PERIOD REPORTING

2. Slide 21-2 21 FOCUS OF CHAPTER 21 l Conceptual Issues l Current Reporting Standards: The Requirements of APBO 28 l Involvement of Certified Public Accountants in Interim Period Reporting

3. Slide 21-3 21 Quarterly Reporting: Who Requires It? l Quarterly financial reporting : n Is NOT required by any official accounting pronouncement. n Is required by: s The New York Stock Exchange. s The Securities and Exchange Commission.

4. Slide 21-4 21 Conceptual Issues: The Fundamental Issue lShould interim financial statements be prepared using the SAME accounting principles and practices used to prepare annual financial statements? lThree different views exist: n The Discrete View. n The Integral View. n The Combination Discrete-Integral View.

5. Slide 21-5 21 Conceptual Issues: The Discrete View l The Discrete View: n No distinction is made between interim reporting and annual reporting. n The same accounting principles and practices used for annual reporting are used for interim reporting. Thus: s No special treatment for over - or underapplied overhead at interim dates. s No special accrual & deferral treatments.

6. Slide 21-6 21 Conceptual Issues: The Integral View l The Integral View: n A distinction is made between interim reporting and annual reporting. n The same accounting principles and practices used for annual reporting are NOT always used for interim reporting: s A special treatment for over - or underapplied overhead can be used. s Special accruals & deferrals are allowed.

7. Slide 21-7 21 APBO No. 28: A Combination Discrete-Integral Approach l APBO 28 requires use of annual reporting practices with certain exceptions. n Costs Associated with Revenues: s FOUR exceptions exist (see slides 8-11). n All Other Costs and Expenses: s An item may be given integral treatment if it clearly benefits more than one period.

8. Slide 21-8 21 APBO 28: Exceptions to Using Annual Reporting Practices l Costs Associated with Revenues : n Exception #1: Estimated gross profit rates may be used to determine COGS at interim dates. s A practicality-based exception--most entities do not take quarterly physical inventories.

9. Slide 21-9 21 APBO 28: Exceptions to Using Annual Reporting Practices l Costs Associated with Revenues : n Exception #2: Liquidation of LIFO base- period inventories that are expected to be replaced by year-end does not affect interim results. s Stated differently, COGS is to include the expected cost of replacing the liquidated LIFO base.

10. Slide 21-10 21 APBO 28: Exceptions to Using Annual Reporting Practices l Costs Associated with Revenues : n Exception #3: Declines in market prices that will probably be recovered by year- end (temporary declines) “need not” be recognized at the interim date. n An optional exception.

11. Slide 21-11 21 APBO 28: Exceptions to Using Annual Reporting Practices l Costs Associated with Revenues : n Exception #4: Purchase price variances and volume or capacity variances of inventoriable costs “should ordinarily” be deferred if such variances are: s Planned, AND s Expected to be recovered by year-end.

12. Slide 21-12 21 Seasonal Revenues, Costs, and Expenses lEntities having seasonal revenue patterns: n Must disclose the seasonal nature of their business. n Should consider providing supplemental financial information for the 12-month period ended at the interim reporting date for: s The current year. s The prior year.

13. Slide 21-13 21 Interim Income Tax Provisions: Dealing With Changes in Estimates lAt each interim date: n Make an estimate of the effective tax rate expected for the the full year. n Use the estimated tax rate to determine the year-to-date income taxes. lIf the estimated effective tax rate changes: n Include the cumulative effect in the current interim period. n Do NOT restate prior interim periods.

14. Slide 21-14 21 Special Items: No Special Treatment lReport the following items in the interim period in which they occur : n Disposals of segments of a business. n Extraordinary items. n Unusual items or infrequently occurring items (“ first cousins” to extraordinary items ). l CONTINGENT ITEMS: Accrue as usual-- based on the probable and reasonably estimable criteria of FAS 5.

15. Slide 21-15 21 Changes in Accounting Principles or Practices l No Restatement of Prior Years Allowed: n The cumulative effect is always reported in the first interim period whether the change is made in: s The first interim period. s Later interim periods ( MUST restate ALL prior interim periods). l Restatement of Prior Years Allowed: n Restate prior year interim reports.

16. Slide 21-16 21 SEC Requirements: Financial Statements Included in Form 10-Q l Balance Sheets Required: n As of end of the most recent interim quarter. n As of end of the preceding annual period. l Income Statements Required: n For latest interim quarter. n For year-to-date amounts. l Cash Flow Statements: n For year-to-date amounts--both the current year and the prior year.

17. Slide 21-17 21 SEC Requirements: Quarterly Financial Data l Quarterly financial data may be presented outside of the notes to the annual financial statements. l Outside auditors must REVIEW (in accordance with the AICPA’s review standards) the quarterly financial data whether the quarterly financial data are placed: n In the notes to the annual statements. n Outside of the notes.

18. Slide 21-18 21 Review Question #1 l In May 2004, Pertex incurred $60,000 of annual repairs that benefit an entire year. How much should be expensed in the second quarter under each of the following views: Discrete View Integral View A. $20,000 $15,000 B. $60,000 $15,000 C. $60,000 $20,000 D. $15,000 $60,000 E. $20,000 $60,000

19. Slide 21-19 21 Review Question #1--With Answer l In May 2004, Pertex incurred $60,000 of annual repairs that benefit an entire year. How much should be expensed in the second quarter under each of the following views: Discrete View Integral View A. $20,000 $15,000 B. $60,000 $15,000 C. $60,000 $20,000 D. $15,000 $60,000 E. $20,000 $60,000

20. Slide 21-20 21 Review Question #2 l At 3/3/04, Paxco had (1) underapplied factory overhead of $300,000 (that was planned) and (2) no inventory on hand. How can Paxco treat this $300,000 at 3/31/04? A. Expense in the first quarter whether or not expected to be absorbed by Y/E. B. Defer only if expected to be absorbed by Y/E. C. Defer if not expected to be absorbed by Y/E. D. Defer whether or not expected to be absorbed by Y/E.

21. Slide 21-21 21 Review Question #2--With Answer l At 3/3/04, Paxco had (1) underapplied factory overhead of $300,000 (that was planned) and (2) no inventory on hand. How can Paxco treat this $300,000 at 3/31/04? A. Expense in the first quarter whether or not expected to be absorbed by Y/E. B. Defer only if expected to be absorbed by Y/E. C. Defer if not expected to be absorbed by Y/E. D. Defer whether or not expected to be absorbed by Y/E.

22. Slide 21-22 21 End of Chapter 21 l Time to Clear Things Up-- Any Questions?