©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Segment and Interim Financial Reporting Chapter 14

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Understand the management approach to segment reporting.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 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 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 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 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 Learning Objective 2 Apply reportable operating segment tests.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of the Tests for Reportable Operating Segments Revenue testAsset test Operating profit test Phil-Brown Corporation applies the three materiality tests.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Revenue Test Operating Reportable Segment’sIntersegmentTest Value Segment Under Revenue Revenue (10% × $670,000) Revenue Test? Food$150,000$ 0  $67,000Yes Paper 170, ,000  67,000Yes Copper 40,000 0< 67,000 No Finance 60,000 50,000  67,000Yes Total$420,000$250,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Asset Test Operating Reportable Segment’s Segment Identifiable Test Value Under Asset Assets(10% × $1,010,000) Test? Food$ 200,000  $101,000 Yes Paper 250,000  101,000 Yes Copper 60,000< 101,000 No Finance 500,000  101,000 Yes Total$1,010,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Operating Profit Test Reportable Operating Operating Segment Segment’s Segment’s Under Operating Operating Test Value Operating ProfitLoss (10% × $130,000) Profit Test? Food$ 25,000  $13,000Yes Paper 55,000  13,000Yes Copper $(10,000)< 13,000 No Finance 50,000  13,000Yes Total$130,000$(10,000)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Comprehend segment disclosure and enterprisewide disclosure details.

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Segment Disclosures Profit/loss and asset information Measurement Reconciliation requirements

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Enterprisewide Disclosures Products and services Geographic information Major customers

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4 Understand the similarities and differences of interim reporting and annual reporting.

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Nature of Interim Reports Interim financial reports provide more timely, but less complete, information than annual financial reports.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Product Costs A company can use this method for interim reporting purposes when it does not use the perpetual inventory method.

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Product Costs Permanent inventory market declines are recognized in the interim period.

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Expenses Other Than Product Costs Annual expenses Advertising costs Income taxes

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 5 Compute interim-period income tax expense.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 OverNot Over 0$ 50,000 $ 50,000 75,000 75, , , , ,000 – The Tax Is: Of the Pay+ Excess Amount Over 15% 0 $ 7,500+25$ 50,000 13, ,000 22, ,

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Small Corporation Estimated Quarterly Income Tax $22,250 ÷ $100,000 = 22.25% QuarterEstimated Income Rate Estimated Tax First$ 20,000×15%$ 3,000 Second 30,000×15 4,500 Third 25,000×25 6,250 Fourth 25,000×34 8,500 Totals$100,000$22,250

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Small Corporation Estimated Quarterly Income Tax $20,000 × 22.25% = $4,450 FirstSecond Third Fourth QuarterQuarterQuarterQuarter Fiscal Income year-to-date$20,000$50,000$75,000$100,000$100,000 Quarterly period income$20,000$30,000$25,000$ 25,000$100,000 Tax expense (22.25%) – 4,450 – 6,675 – 5,563 – 5,563 – 22,250 Net income$15,550$23,325$19,438$ 19,438$ 77,750

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 6 Grasp both GAAP and SEC interim reporting requirements.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Guidelines for Preparing Interim Statements At a minimum (per APB Opinion No. 28), publicly traded companies should report: 1aSales or gross revenues bProvision for income taxes cExtraordinary items net of income taxes dCumulative-effect-type changes in accounting principles enet income

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Segment Disclosures in Interim Reporting Revenue from external customers Intersegment revenues Total assets for which there has been a material change since the last annual report A measure of segment profit or loss 4

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Segment Disclosures in Interim Reporting A description of any differences in the basis of segmentation or measurement of segment profit or loss since the last annual report A reconciliation between segment and total profits 5 6

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn SEC Interim Financial Disclosures The SEC requires that quarterly reports be prepared for the company’s stockholders and for filing with the SEC. These reports are to be prepared using GAAP and are filed on Form 10-Q.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 – Management’s Discussion of Financial Condition and Results of Operations

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

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 14