Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 15: Reporting for
Segments and for Interim
Financial Periods
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
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Need for Disaggregated Financial Data
Different industries or geographic areas
may have different
 rates
of profitability
 growth
 types
opportunities
of risks
Difficult to analyze a firm engaging in
several industries or geographic areas
based on aggregated information
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Segmental Disclosures
Advantage
 unveiling
of information that has been merged in
the consolidated data
Disadvantages
 may
be misleading due to classification and
allocation problems, lack of user knowledge, etc.
 disclosure
to competing firms and labor unions
 information
overload for users
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Common Cost Allocation - Which?
Common costs should be
allocated to a segment for
external reporting purposes
only if they are included in
the segment’s internal
profit or loss calculations
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Common Cost Allocation - How?
Steps
Joint costs are accumulated into logical
and relatively homogeneous expense
pools
The pools are allocated to segments on
the basis of beneficial or casual
relationships as measured by activity or
output of the segments
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Common Cost Allocation - How?
Joint
costs
Expense
pools
Data processing
expenses
Centralized
warehouse
expenses
Segments
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Operating Segment
Definition:
 It is a component of the firm that engages in
business activities that earns revenues and
incur expenses
 The entity’s chief operating decision maker
regularly reviews the component’s operating
results
 Discrete financial information is available
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Determining Operating Segments
Modified management approach
 focus
on the way in which management
organizes segments internally to make
operating decisions and to assess
performance
aggregation criteria
quantitative thresholds
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Aggregation Criteria
An entity is permitted to aggregate operating
segments which are similar in all the following
areas:
 nature
of their products or services
 nature
of the production process
 types
or classes of customers
 methods
services
 nature
used to distribute products or provide
of regulatory environment
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Quantitative Thresholds
A segment is significant enough to be a
reportable segment if :
combined external and internal revenue > 10%
of the combined external and internal revenue of
all reportable segments;
 its
reported profit or loss > 10% of the total gross
profit (loss) of all operating segments reporting a
profit (loss); or
 its
 its
assets > 10% of combined assets of all
operating segments
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75% Combined Revenue Test
Combined sales to
unaffiliated customers of
all reportable segments
Combined sales to
unaffiliated customers of
Must be
> 75%
all operating segments
If the 75% test is not met, additional segments must be identified
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Segmental Disclosure Requirements
 general
information
 segment
operating profit or loss
 segment
assets
 bases
for measurement
 reconciliation
of segment amounts
and consolidated amounts for
revenue
profit or loss
assets
other significant items
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Segmental Disclosure Requirements
 interim
disclosures
 enterprisewide
disclosures
product or service
geographic area
major customers - each customer representing
10% or more of total enterprise revenues
 methods
of presentation
financial statements
footnotes to the financial statements
separate schedule
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Geographic Area
operations in foreign countries should
be grouped on the basis of
 proximity
 economic
affinity
 similarities
of business environments
 nature,
scale, and degree of
interrelationship of the operations in the
various countries
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Major Customers
 Purpose: To provide information about
dependency on one or more major customers
 Disclosure requirement
customer representing 10% or more of
total enterprise revenues
 each
 customers
who are federal, state, local, or
foreign government
 amount
of sales
 segment
making the sales
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Interim Financial Reporting
 Purpose: to provide timely financial
information for investment decision
making
 SEC disclosure requirement: Form 10-Q

comparative income statements for the
quarter and year-to-date for the current and
preceding year

comparative statements of financial position at
the end of the most recent quarter for the
current and preceding year
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Interim Reporting - Inventory Costing
 COGS
can be estimated using gross profit rate
 Liquidated
LIFO base should be charged at
replacement cost if expected to be replaced by
year end
 Inventory
loss from market declines expected to
recover before year end need not be recognized
 Price
and volume variances under standard
costing should be deferred if expected to be
absorbed by year end
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Interim Reporting - Income Taxes
Steps
(1) estimate effective tax rate for the full year
(2) year-to-date =
tax
provision
=
(3)
current
quarter’s tax
provision
income of
x
year-to-date
estimated
tax rate
year-to-date _ tax
tax provision
provision
up to
preceding
quarter
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Interim Reporting - Income Taxes
First Quarter JE
Income tax expense
Income tax payable
42,300
42,300
To record income tax provision for the first quarter as:
(actual first quarter income) x (estimated tax rate for the year)
= $15,000 x 28.2%
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Interim Reporting - Income Taxes
Second Quarter JE
Income tax expense
Income tax payable
48,900
48,900
Second quarter
First quarter
Year to date
tax provision
= $42,300
Year to date
tax provision
= $91,200
Difference = $48,900
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Interim Reporting - Accounting
Changes
Changes in estimate
 accounted
for in the interim period when
the change is made
 no
restatement of previous interim reports
 effect
on earnings disclosed
for current and subsequent
interim periods
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Interim Reporting - Accounting
Changes
Changes in principle
 if
the change occurs in the first quarter:
the cumulative effect should be included in the first
quarter income.
 if
the change occurs in other than the first quarter:
the cumulative effect should be shown as if it had
occurred in the first quarter. All other quarters
should be restated using the new method.
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Interim Reporting - Minimum Disclosure
 Gross
revenues, income tax provisions, extraordinary
items, cumulative effect of a change in accounting
principles, net income
 basic
and diluted EPS
 seasonal
revenue, or expenses
 segment
disposal; extraordinary, unusual or
infrequent items
 contingent
 changes
items
in accounting principles or estimates
 significant
changes in financial position
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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