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
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.

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. ASC 250-10-S99 reminds financial statement preparers that in its
Concepts Statement 2, the FASB stated the essence of the concept of materiality as follows:
The omission or misstatement of an item in a financial report is material if, in the light of
surrounding circumstances, the magnitude of the item is such that it is probable that the
judgment of a reasonable person relying upon the report would have been changed or
influenced by the inclusion or correction of the item.
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 25010-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. 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, the FASB could establish a materiality threshold low enough, for example,
5% of total revenues, that would be likely to ensure that material countries are disclosed
regardless of whether they are material for quantitative or qualitative reasons. A bright-line
materiality threshold would ensure a minimum level of disclosure and would enhance the
comparability of financial disclosures provided across companies.

Answers to Questions
1.

Consolidation presents the account balances of a business combination without regard for
the individual component companies 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. C
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. D
21. D (Determine quantitative threshold under revenue test for reportable
segments)
Sales to outsiders
Intersegment transfers
Combined segment revenues
10% criterion
Minimum

$18,000
3,000
$21,000
x 10%
$ 2,100

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)
Revenues Test
Combined segment revenues $32,750,000
10% criterion
x 10%
Minimum
$ 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
$5,800,000
10% criterion
x 10%
Minimum
$ 580,000
Segments meeting testA, B, C, E
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

$60,000 x 1/4
$120,000 x 1/4

= $15,000
= 30,000
$45,000

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

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
from Outsiders

Intersegment
Operating
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.
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
$ 6,425
2,294
738
455
186
$10,098

Percentage
63.7% (reportable)
22.7% (reportable)
7.3%
4.5%
1.8%
100.0%

Profit or Loss Test (numbers in thousands)

Segment
Plastics
Metals
Lumber
Paper
Finance
Total

Revenues
$ 6,425
2,294
738
455
186

Expenses
$ 3,975
1,628
967
610
103

Profit
$2,450
666
83
$3,199

Loss
$
(reportable)
(reportable)
229
155
$384

Since $3,199 is larger in absolute terms than $384, it will serve as the basis
for testing. Each of the profit or loss figures will be compared to $319.90
(10% x $3,199).

Asset Test (numbers in thousands)

Segment
Plastics
Metals
Lumber
Paper
Finance
Total

Assets
$1,363
3,347
314
609
768
$6,401

Percentage
21.3% (reportable)
52.3% (reportable)
4.9%
9.5%
12.0% (reportable)
100.0%

The plastics, metals, 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)

Segment
Books
Computers
Maps
Travel
Finance
Total

Revenues
$ 205
936
455
432
184
$2,212

Percentage
9.3%
42.3% (reportable)
20.6% (reportable)
19.5% (reportable)
8.3%
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
314
132
$1,963

Profit Loss
$ 13
$ 37
55
118
52
$262 $ 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 $26,200 (10% x
$262,000) 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%

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
Computers
Maps
Travel
Finance
Total

Sales to Outsiders
$ 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

$1,894,000
191,000

83.7%
8.4%

Italy
Greece
Total

106,000
4.7%
72,000
3.2%
$2,263,000 100.0%

None of the individual foreign countries meets either the revenue or longlived 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)
a. Determination of Income by QuarterEstimated Annual Tax Rate 40%
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales
$1,000,000 $1,200,000 $1,400,000 $1,600,000
Cost of goods sold
(400,000)
(480,000)
(550,000)
(600,000)
Administrative costs
(175,000)
(180,000)
(185,000)
(195,000)
Advertising costs
(25,000)
(25,000)
(25,000)
(25,000)
Executive bonuses
(20,000)
(20,000)
(20,000)
(20,000)
Provision for bad debts
(13,000)
(13,000)
(13,000)
(13,000)
Annual maintenance costs
(15,000)
(15,000)
(15,000)
(15,000)
Pre-tax income
$352,000
$467,000
$592,000
$732,000
Income tax*
(140,800)
(186,800)
(236,800)
(292,800)
Net income
$211,200
$280,200
$355,200
$439,200
* Calculation of income tax by quarter:
Pre-tax income this quarter $352,000
Cumulative pre-tax income $352,000
Estimated income tax rate
x 40%
Cumulative income tax
to be recognized to date
$140,800
Cumulative income tax
recognized in earlier periods
-0Income tax this quarter
$140,800

$467,000
$819,000
x 40%

$592,000
$732,000
$1,411,000 $2,143,000
x 40%
x 40%

$327,600

$564,400

$857,200

140,800
$186,800

327,600
$236,800

564,400
$292,800

b. Determination of Income by QuarterChange in Estimated Annual Tax Rate

Pre-tax income
Income tax**
Net income

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

$352,000
$467,000
$592,000
$732,000
(140,800) (186,800)
(208,580)
(278,160)
$211,200
$280,200
$383,420
$453,840

39. (continued)
** Calculation of income tax by quarter:
Pre-tax income this quarter $352,000
Cumulative pre-tax income $352,000
Estimated income tax rate
x 40%
Cumulative income tax
to be recognized to date
$140,800
Cumulative income tax
recognized in earlier periods
-0Income tax this quarter
$140,800

$467,000
$819,000
x 40%

$592,000
$732,000
$1,411,000 $2,143,000
x 38%
x 38%

$327,600

$536,180

$814,340

140,800
$186,800

327,600
$208,580

536,180
$278,160

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 2012 and the first quarter of 2013:
2012
1st Q.
Sales
Cost of goods sold (FIFO)
Operating expenses
Income before income taxes
Income taxes (40%)
Net income

2nd Q.

3rd Q.

2013
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 2013 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 2013, with yearto-date information, and comparative information for similar periods in 2012
as follows:

Net income
Net income per common share

Three Months Ended

June 30
2012
2013
$3,120
$4,560
$3.12
$4.56

Six Months Ended

June 30
2012
2013
$5,640
$9,000
$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)
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).
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.

2.

3.

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 2010, each of the four companies defined operating
segments on the basis of products/services.
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.
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
2010) refers the reader to a Summary of Operating Segments table (on
page 39 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 2010 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
World
Other

U.S.
Europe
-

U.S.
E/ME/A
-

U.S.
Developed Europe

Japan

Japan

- Emerging Markets
- Developed Rest

Other

Other

of

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.

Research Case 5Within Industry Comparison of Segment Information (60

minutes)
The purpose of this assignment is to show students how segment
information can be used to gain insights into the nature and location of a
companys operations, and give them an opportunity to compare and
contrast this information for two companies in the same industry. The
responses to this assignment will depend upon the companies selected by
the student for analysis. Students should discuss both the operating
segments and geographic areas in which the companies operate. They
might discuss the extent to which the two companies compete with each
other in terms of product lines or geographic areas, as well as the extent to
which this information can be compared. For example, if one company
defines operating segments on the basis of products and another company
in the same industry defines operating segments geographically, meaningful
comparisons between the two companies will be difficult to make.
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 18 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 16 Segments.
Operating Income
Fiscal Year Ended January 31, 2011
Quarter Ended April 30, 2010
Quarter Ended July 31, 2010
Quarter Ended October 31, 2010
Quarter Ended January 31, 2011

Walmart
U.S.

Walmart
International

SAM'S
CLUB

$ 19,914
4,
638
4,
879
4,399
$ 5,998

$ 5,606

$ 1,711

1,095

429

1,299
1,223
$ 1,989

428
367
487

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 18 can be used to assess profitability in terms of profit margin (Net
income/Net sales) by quarter.
Fiscal Year Ended January 31, 2011
Amounts in millions
Q1
Q2
Q3
Q4
Consolidated net income
$ 3,444
$ 3,747
$ 3,590
$ 5,178
Net sales
99,097
103,016
101,239
115,600
Net income/Net sales
3.48%
3.64%
3.55%
4.48%
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 16 can be used to assess profitability in terms of operating profit margin
(Operating income/Revenues) and return on assets (Operating income/Total
assets) by segment.

Walmart

Walmart

SAMS

U.S.

International

CLUB

$ 19,914

$ 5,606

260,261

109,232

49,459

7.65%

5.13%

3.46%

$ 19,914

$ 5,606

Total assets of continuing operations

89,725

72,021

12,531

Operating income/Total assets

22.19%

7.78%

13.65%

Fiscal year ended January 31, 2011

Operating income (loss)
Net sales
Operating income/Net Sales
Operating income (loss)

1,711

1,711

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, that segments Return on Assets is very
low. Return on Assets must be interpreted with caution, however, because the
ending balance in Total Assets 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 (7.78%) 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 operating
revenues
Eurasia & Africa
Europe
Latin America
North America
Pacific

2010
6.96%
14.30%
11.22%
30.52%
14.36%

2009
6.90%
17.30%
10.61%
25.62%
14.41%

Percentage growth in net operating

revenues
Eurasia & Africa
Europe
Latin America
North America
Pacific

2009 to
2010
21.19%
-0.81%
27.03%
42.99%
19.63%

2008 to
2009
-9.37%
-8.77%
-15.41%
-5.36%
-6.16%

Operating income as a percentage of

net operating revenues (profit margin)
Eurasia & Africa

2010
38.34%

2009
31.63%

Europe
Latin America
North America
Pacific

56.70%
58.36%
13.57%
38.85%

52.44%
53.91%
21.64%
38.56%

2008
6.87%
17.13%
11.32%
24.45%
13.86%

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 smaller percentage
of total revenues. In addition, revenue growth in Europe has been negative 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?