Question

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

c) Republic Company wrote inventory down to reflect lower-of-cost-or-market in the first quarter. At year-end, the market exceeds the original acquisition cost of this inventory. Consequently, management plans to write the inventory back up to its original cost as a year-end adjustment.

Short answer

It is acceptableunder GAAP.

Step-by-step solution

Meaning of Interim Reporting

Interim reporting is described as statutory compliance imposed on any publicly owned corporationor other similar entity for the purpose of compiling and presenting financial statements for a period less than a year's accounting period.

Explaining whether it is acceptable under GAAP or not

Any decrease in inventory value should be notified as soon as possible. Any further recoveries of losses on the same inventory should be reported as profits in subsequent intermediate periods of the same fiscal year. The gains, however, should not exceed the losses already reported.