Segment and Interim Reporting: Chapter Outline

Chapter 08 - Segment and Interim Reporting
CHAPTER 8
SEGMENT AND INTERIM REPORTING
Chapter 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.
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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.
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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.
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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.
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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 longlived 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
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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.
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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.
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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.
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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 prechange 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.
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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. C With 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. C If 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
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21. C (Determine quantitative threshold under revenue test for reportable segments)
Sales to outsiders
Intersegment transfers
Combined segment revenues
10% criterion
Minimum
$20,500
3,800
$24,300
x 10%
$ 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)
10% criterion
Minimum
$376,000
x 10%
$ 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 Test
Combined segment revenues
10% criterion
Minimum
$32,750,000
x 10%
$ 3,275,000
Segments meeting testA, B, C, E

Profit or Loss Test
Since there are no segments with a loss, this test is applied based on total
combined segment profit.
Combined segment profit
10% criterion
Minimum
$5,800,000
x 10%
$ 580,000
Segments meeting testA, B, C, E
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24. (continued)
Asset Test
Combined segment assets
10% criterion
Minimum
$67,500,000
x 10%
$ 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
Bonus
$70,000 x 1/4
$140,000 x 1/4
=
=
$17,500
35,000
$52,500
28. C (Determine net income to be reported in interim period)

Income as reported
Less: Extraordinary loss (recognized in full
in the interim period in which it occurs)
Add: Cumulative effect loss (handled through
adjustment of retained earnings balance
at the beginning of the year)
$100,000
(20,000)
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 = $120,000

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31. C (Journal entry for property tax expense recognized in interim period)
Dr. Property tax expense
Prepaid property taxes
Cr. Cash
$120,000
360,000
$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 =
15,000
5,300 units
$415,000
33. C
5,000 units x $80 = $400,000
300 units x $82 =
24,600
5,300 units
$424,600
34. (10 minutes) (Apply the Profit or Loss Test to Determine Reportable Operating
Segments)
Calculation of profit or loss.
Revenues
Intersegment Operating
from Outsiders
Transfers
Expenses
Profit
Cards
$1,200,000 + $ 100,000 $900,000 = $400,000
Calendars
900,000 +
200,000 1,350,000 =
Clothing
1,000,000
700,000 = 300,000
Books
800,000 +
50,000 770,000 =
80,000
Total
$ 780,000
Loss
$250,000
$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.
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35. (25 minutes) (Apply the Three Tests Necessary to Determine Reportable
Operating Segments)
Revenue Test (numbers in thousands)
Segment
Plastics
Metals
Lumber
Paper
Finance
Total
Revenues
$ 6,842
2,561
870
572
243
$11,088
Percentage
61.6% (reportable)
23.1% (reportable)
7.9%
5.2%
2.2%
100.0%
Profit or Loss Test (numbers in thousands)

Segment
Plastics
Metals
Lumber
Paper
Finance
Total
Revenues
$ 6,842
2,561
870
572
243
Expenses
$ 4,290
1,793
1,132
682
133
Profit
$2,552
768
110
$3,430
Loss
$
(reportable)
(reportable)
262
110
$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)
Segment
Plastics
Metals
Lumber
Paper
Finance
Total
Assets
$1,588
3,599
524
834
885
$7,430
Percentage
21.4% (reportable)
48.4% (reportable)
7.1%
11.2% (reportable)
11.9% (reportable)
100.0%
The plastics, metals, paper, and finance segments meet at least one of the three
tests and therefore are reportable.
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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.
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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)

Segment
Books
Computers
Maps
Travel
Finance
Total
Revenues Percentage
$ 205
9.3%
936
42.3% (reportable)
455
20.6% (reportable)
432
19.5% (reportable)
184
8.3%
$2,212
100.0%
Profit or Loss Test (numbers in thousands)

Segment
Revenues
Books
$ 205
Computers
936
Maps
455
Travel
432
Finance
184
Total
$2,212
Expenses
$ 218
899
400
284
132
$1,933
Profit Loss
$ 13
$ 37
55
148
52
$292 $ 13
(reportable)
(reportable)
(reportable
(reportable)
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)
Segment
Books
Computers
Maps
Travel
Finance
Total
Assets
$ 206
1,378
248
326
1,240
$3,398
Percentage
6.1%
40.5% (reportable)
7.3%
9.6%
36.5% (reportable)
100.0%
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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
Maps
Travel
Finance
Total
$ 696
416
314
37
$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
Spain
Italy
Greece
Total
$4,610,000
80.3%
395,000
6.9%
272,000
4.7%
463,000
8.1%
$5,740,000 100.0%
Long-lived Asset Test

United States
Spain
Italy
Greece
Total
$1,894,000
83.7%
191,000
8.4%
106,000
4.7%
72,000
3.2%
$2,263,000 100.0%
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.
8-17
Education.
39. (20 minutes) (Allocate costs incurred in one quarter that benefit the entire year
and determine income tax expense
a. Determination of Net Income by Quarter -- Estimated Annual Tax Rate 40%
Sales
Cost of goods sold
Administrative costs
Advertising costs
Executive bonuses
Provision for bad debts
Annual maintenance costs
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

$ 1,300,000 $ 1,560,000 $ 1,820,000 $ 2,080,000
(430,000)
(510,000)
(580,000)
(630,000)
(190,000)
(225,000)
(230,000)
(240,000)
(25,000)
(25,000)
(25,000)
(25,000)
(19,000)
(19,000)
(19,000)
(19,000)
(16,000)
(16,000)
(16,000)
(16,000)
(18,000)
(18,000)
(18,000)
(18,000)
Pre-tax income
Income tax*
Net income
602,000 $ 747,000 $ 932,000 $ 1,132,000

(240,800)
(298,800)
(372,800)
(452,800)
361,200
448,200
559,200
679,200
* Calculation of income tax by quarter:

Pre-tax income this quarter $ 602,000 $ 747,000 $ 932,000 $ 1,132,000
Cumulative pre-tax income
$
Estimated income tax rate
Cumulative income tax to be
recognized to date
$
Cumulative income tax
recognized in earlier periods
$
Income tax this quarter
602,000 $ 1,349,000 $ 2,281,000 $ 3,413,000

40%
40%
40%
40%
240,800
240,800
539,600
240,800
$
298,800
912,400
$ 1,365,200
539,600
912,400
372,800
452,800
8-18
Education.
39. (continued)
b. Determination of Net Income by Quarter -- Change in Estimated Annual Tax Rate
Pre-tax income
Income tax*
Net income

$ 602,000 $ 747,000 $ 932,000 $ 1,132,000
(240,800)
(298,800)
(327,180)
(430,160)
$
361,200
* Calculation of income tax by quarter:

1st Quarter
Pre-tax income this quarter $ 602,000
Cumulative pre-tax income
$ 602,000
Estimated income tax rate
40%
Cumulative income tax to be
recognized to date
$ 240,800
Cumulative income tax
recognized in earlier periods
$ 240,800
Income tax this quarter
448,200
604,820
701,840
2nd Quarter 3rd Quarter 4th Quarter

$ 747,000 $ 932,000 $ 1,132,000
$ 1,349,000 $ 2,281,000 $ 3,413,000
40%
38%
38%
$
539,600
240,800
$
298,800
866,780
$ 1,296,940
539,600
866,780
327,180
430,160
8-19
Education.
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:
2014
1st Q.
Sales
Cost of goods sold (FIFO)
Operating expenses
Income before income taxes
Income taxes (40%)
Net income
2nd Q.
3rd Q.
2015
4th Q.
1st Q.
$10,000 $12,000 $14,000 $16,000 $18,000

3,800
2,000
4,200
1,680
$2,520
4,600
2,200
5,200
2,080
$3,120
5,200
2,600
6,200
2,480
$3,720
6,000
3,000
7,000
2,800
$4,200
7,400
3,200
7,400
2,960
$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-todate information, and comparative information for similar periods in 2014 as
follows:
Net income
Net income per common share
Three Months Ended

June 30
2014
2015
$3,120
$4,560
$3.12
$4.56
Six Months Ended

June 30
2014
2015
$5,640
$9,000
$5.64
$9.00
8-20
Education.
41. (10 minutes) (LIFO liquidation in interim report)

Determination of Cost-of-Goods-Sold and Gross Profit
Sales (110,000 units @ $20)
Cost-of-goods-sold
100,000 units @ $14
10,000 units @ $15 (replacement cost)
Gross profit
$2,200,000
$1,400,000
150,000
1,550,000
$650,000
Journal Entries to Record Sales and Cost-of-Goods-Sold

Dr. Cash or Accounts Receivable
Cr. Sales Revenue
Dr. Cost-of-goods-sold
Cr. Inventory
Excess of Replacement Cost over
Historical Cost of LIFO Liquidation
$2,200,000
$2,200,000
$1,550,000
$1,520,000
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).
8-21
Education.
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.
8-22
Education.
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?
8-23
Education.
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 Squibb
Eli Lilly
Merck
Pfizer
U.S.
Europe
Japan, Asia Pacific, and
Canada
Latin America, Middle East,
and Africa
Emerging Markets
Other
U.S.
Europe
-
U.S.
E/ME/A
-
U.S.
Developed Europe
Japan
Japan
Other
Other
Emerging Markets
Developed Rest of World
-
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.
8-24
Education.
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.
2.
3.
4.
5.
The nature of the products and services provided by each operating segment.
The nature of the production process.
The type or class of customer.
The distribution methods.
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.
8-25
Education.
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.
8-26
Education.
2. The disclosures required under ASC 280 could be provided in the following
manner:
Operating Segments
Segment profit (loss)*
Sales to outside parties
Intersegment sales
Depreciation and amortization
Segment assets
Expenditures for additions to long-lived assets
Automobiles
Trucks Helicopters
Ships
$
881,292 $ 456,530 $ 348,878 $ (58,879)
4,007,304
3,796,432
1,411,235
1,003,809
644,243
180,345
3,987,776
349,776
307,982
170,976
3,209,078
365,543
-097,638
1,587,006
276,655
-058,617
1,209,970
23,695
Reconciliation of Segment Results to Consolidated Totals

Revenues:
Total segment revenues
Elimination of intersegment revenues
Total consolidated revenues
$ 11,171,005
952,225
$ 10,218,780
Profit or loss:
Total segment operating profit before depreciaton and amortization
Unallocated amounts:
Depreciation and amortization
Interest expense
Total consolidated income before income taxes
Assets:
Total segment assets
Unallocated corporate headquarters assets
Total consolidated assets
1,627,821
(507,576)
(130,655)
989,590
9,993,830
1,008,988
$ 11,002,818
8-27
Education.
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.
8-28
Education.
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.
Operating Income
Fiscal Year Ended January 31, 2012
Quarter Ended April 30, 2011
Quarter Ended July 31, 2011
Quarter Ended October 31, 2011
Quarter Ended January 31, 2012
Walmart
Walmart
U.S.
International
20,367 $
6,214 $
4,650
1,096
4,985
1,415
4,627
1,397
6,105 $
2,306 $
SAM's
Club
1,865
459
492
390
524
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.
Amounts in millions
Income from continuing operations
Net sales
Income from continuing
operations/Net sales
Fiscal Year Ended January 31, 2012

Q1
Q2
Q3
Q4
$
3,578 $
3,937 $
3,501 $
5,438
103,415
108,638
109,516
122,285
3.46%
3.62%
3.20%
4.45%
These results indicate that profit margins are highest in the fourth quarter of
the year, the quarter with the largest percentage of total sales.
8-29
Education.
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.
Walmart
Walmart
U.S.
International
$20,367
$6,214
264,186
125,873
7.71%
4.94%
Fiscal year ended January 31, 2012

Operating income (loss)
Net sales
Operating income/Net Sales
Operating income (loss)
Total assets of continuing operations
Operating income/Total assets
$20,367
93,050
21.89%
$6,214
81,364
7.64%
SAMS
CLUB
$1,865
53,795
3.47%
$1,865
12,823
14.54%
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.
8-30
Education.
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 revenues
Eurasia & Africa
Europe
Latin America
North America
Pacific
Total
2011
%
2,841
7.21%
5,474
13.89%
4,690
11.90%
20,571
52.19%
5,838
14.81%
39,414 100.00%
Percentage growth in total net

revenues
Eurasia & Africa
Europe
Latin America
North America
Pacific
2010 to 2011
11.15%
4.29%
13.81%
83.59%
10.76%
Operating income as a percentage of

total net revenues (profit margin)
Eurasia & Africa
Europe
Latin America
North America
Pacific
2011
38.40%
56.45%
60.02%
11.27%
36.84%
2010
%
2,556
9.00%
5,249
18.48%
4,121
14.51%
11,205
39.45%
5,271
18.56%
28,402 100.00%
2009 to 2010
16.34%
0.88%
6.16%
35.47%
8.12%
2010
38.34%
56.70%
58.36%
13.57%
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.
8-31
Education.
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?
8-32
Education.

Segment and Interim Reporting: Chapter Outline

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Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Answer to Discussion Question: How Does a Company Determine Whether a Foreign

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

An operating segment is defined as a component of an enterprise:

Two criteria must be considered in this situation to determine an enterprises operating

Chapter 08 - Segment and Interim Reporting

For reportable operating segments, the following information must be disclosed:

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

22. A (Determine quantitative threshold for disclosure of a major customer)

23. D (Determine reportable segments under the profit or loss test)

Segments meeting testA, B, C, E

Segments meeting testA, B, C, E

Chapter 08 - Segment and Interim Reporting

Segments meeting testA, B, C, D, E

28. C (Determine net income to be reported in interim period)

29. C (Determine bonus expense to be recognized in interim period)

$1,000,000 x 1/4 = $250,000

30. C (Determine property tax expense to be recognized in interim period)

$480,000 x 1/4 = $120,000

Chapter 08 - Segment and Interim Reporting

Chapter 08 - Segment and Interim Reporting

Profit or Loss Test (numbers in thousands)

Chapter 08 - Segment and Interim Reporting

36. (20 minutes) (A Variety of Computational Questions about Operating Segment

Chapter 08 - Segment and Interim Reporting

Revenue Test (numbers in thousands)

Profit or Loss Test (numbers in thousands)

Chapter 08 - Segment and Interim Reporting

38. (15 minutes) (Apply materiality tests adopted by a company to determine

Long-lived Asset Test

Chapter 08 - Segment and Interim Reporting

a. Determination of Net Income by Quarter -- Estimated Annual Tax Rate 40%

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

602,000 $ 747,000 $ 932,000 $ 1,132,000

* Calculation of income tax by quarter:

602,000 $ 1,349,000 $ 2,281,000 $ 3,413,000

Chapter 08 - Segment and Interim Reporting

b. Determination of Net Income by Quarter -- Change in Estimated Annual Tax Rate

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

* Calculation of income tax by quarter:

2nd Quarter 3rd Quarter 4th Quarter

Chapter 08 - Segment and Interim Reporting

$10,000 $12,000 $14,000 $16,000 $18,000

Three Months Ended

Six Months Ended

Chapter 08 - Segment and Interim Reporting

41. (10 minutes) (LIFO liquidation in interim report)

Journal Entries to Record Sales and Cost-of-Goods-Sold

To record cost-of-goods-sold with a historical cost of $1,520,000 and an excess of

Chapter 08 - Segment and Interim Reporting

Develop Your Skills

The two most important operating segments in terms of percentage of total

Chapter 08 - Segment and Interim Reporting

The two operating segments with the largest growth in revenues.

The two most profitable operating segments in terms of profit margin.