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.

f) LaBrava Company was reasonably certain it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in the third quarter when the strike is in progress. LaBrava Company management thinks this is more representative of normal second- and third-quarter operations.

Short answer

It is not acceptable under GAAP.

Step-by-step solution

Meaning of Financial Reporting

Financial reporting is the publication of an organization's financial results to its stakeholders and the general public. The controller, who may be aided by the investor relations officer if the company is publicly owned, is responsible for this reporting.

Explaining whether it is acceptable under GAAP or not

Revenue from products sold should be recorded on the same basis as for the full year during the interim period. Because the firm generally recognizes a sale when it ships, the revenue should be recognized in the second quarter rather than deferred. To do differently would be an inconsistency in the execution of corporate accounting policy and a violation of general revenue recognition accounting principles.