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What is an operating segment, and when can information about two operating segments be aggregated?

Short Answer

Expert verified

An operational segment can be part of a business. If the financial characteristics of the operating segments are comparable, they may be combined to form a reportable section and considered collectively for the purposes of the estimate prerequisite.

Step by step solution

01

Meaning of Operating Segment

An operating segment is a part of a larger company that is a profit center, has access to specific financial data, and whose results are assessed on a regular basis by the firm's primary function choice-maker for performance appraisal and asset allocation.

02

Identifying when information about two operating segments be aggregated

The information surrounding the two operating segments may have been gathered because it was not by chance that the sections shared the same fundamental characteristics:

  1. The nature of goods and administration,
  2. The nature of the production process,
  3. The type of course of the customer. ,
  4. Commodity or profit dispersal strategies, and
  5. The nature of the administrative environment.

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Most popular questions from this chapter

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment
Total Revenue
Operating Profit (Loss)
Identifiable Assets
W
\( 60,000
15,000
\)167,000
X
10,000
3,000
83,000
Y
23,000
(2,000)
21,000
Z
9,000
1,000
19,000

\(102,000
\)17,000
$290,000

Instructions

Determine which of the operating segments are reportable based on the:

c) Identifiable assets test.

Operating profits and losses for the seven industry segments of Foley Corporation are:

Penley $ 90 Cheng 20

Konami 40 Takuhi (34)

KSC (25) Molina 150

Red Moon 50

Based only on the operating profit (loss) test, which industry segments are reportable?

Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay

2017 Industry

2015

2016

2017

Averages

Current ratio

2.09

2.27

2.51

2.24

Quick ratio

1.15

1.12

1.19

1.22

Inventory turnover

2.40

2.18

2.02

3.50

Net sales to stockholdersโ€™ equity

2.71

2.80

2.99

2.85

Return on common stockholdersโ€™ equity

0.14

0.15

0.17

0.11

Total liabilities to stockholdersโ€™ equity

1.41

1.37

1.44

0.95

Millay is being reviewed by several entities whose interests vary, and the companyโ€™s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millayโ€™s financial position.

Archibald MacLeish Bank. The bank is processing Millayโ€™s application for a new 5-year term note. Archibald MacLeish has been Millayโ€™s banker for several years but must reevaluate the companyโ€™s financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warrenโ€™s clients.

Working Capital Management Committee. This is a committee of Millayโ€™s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the companyโ€™s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

a) Describe the analytical use of each of the six ratios presented above.

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburnโ€™s cash flow problems are due primarily to the companyโ€™s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets

2018

2017

Cash

\) 18,200

\( 12,500

Notes receivable

148,000

132,000

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & Equipment (net of depreciation)

1,449,000

1,420,500

Total assets

\)1,852,000

\(1,740,500

Liabilities and Stockholdersโ€™ Equity

Accounts payable

\) 79,000

\( 91,000

Notes payable

76,000

61,500

Accrued liabilities

9,000

6,000

Common stock (130,000 shares, \)10 par)

1,300,000

1,300,000

Retained earnings*

388,000

282,000

Total liabilities and stockholdersโ€™ equity

\(1,852,000

\)1,740,500

*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue

\(3,000,000

\)2,700,000

Cost of goods sold*

1,530,000

1,425,000

Gross margin

1,470,000

1,275,000

Operating expenses

860,000

780,000

Income before income taxes

610,000

495,000

Income taxes (40%)

244,000

198,000

Net income

\( 366,000

\) 297,000

Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

c). Assume that the percentage changes experienced in fiscal year 2018 as compared with fiscal year 2017 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburnโ€™s desire to finance the plant expansion from internally generated funds realistic? Discuss.

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