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.

e) Fredonia Company has estimated its annual audit fee. It plans to pro rate this expense equally over all four quarters.

Short answer

It is acceptable under GAAP.

Step-by-step solution

Meaning of GAAP

GAAP are the rules and ideas of financial accounting that are universally recognized in the United States,as the name suggests. The goal of GAAP is to make financial statements and reporting more relevant, dependable, and comparable for those who utilize the data.

Explaining whether it is acceptable under GAAP or not

The yearly audit fee is a cost that helps the organization throughout the year. Companies are urged to estimate these items regularly, which frequently results in year-end revisions. As a result, this cost may be spread out across four quarters.