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Chapter 24: Question 7CA_d (page 1455)

Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports. An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit. Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.

Instructions

(d) Identify the accounting difficulties inherent in segment reporting.

Short Answer

Expert verified

Deciding income tax, changes in accounting principles, and methods of computing net income are some of the difficulties inherent in segment reporting.

Step by step solution

01

Meaning of Segment Reporting

The financial statements of a company's operating segments or divisions are called segment reporting. Publicly traded companies must provide segment data, while privately-owned companies are not obligated to do so.

02

Explaining the accounting difficulties inherent in segment reporting

Following are some of the accounting challenges that come with segment reporting:

  1. Establishing transfer pricing is essential. When a section of an enterprise belongs to another sector of the same enterprise, the transfer fee is levied. There are several possible transfer values, and the corporation must choose one.
  2. The method for computing segment net income should be defined. Net income may simply be a contribution margin (sales minus variable expenses), or it may be a more traditional measure of net income. Variable costs must be recognized if a contribution-margin strategy is adopted. If a traditional net income measure is used, the net income of each segment must be determined for various things managed. The following are examples of such items:
  3. Determining whether ordinary expenses should be distributed across segments
  4. If general expenditures us to be allocated, choose the allocation bases.
  5. Identify which capital costs (interest, preferred dividends, and so on) should be allocated across segments.
  6. Determining whether a change in accounting principle should be attributed to the segments.
  7. Deciding how the income tax should be distributed in parts.
  8. To determine how minority share revenue, as well as income from investee enterprises, should be allocated to segments.
  9. It is necessary to determine how to segment information will be treated in interim financial reports.
  10. It's time to learn how to depict segment data in financial statements. Notes or separate financial statements may be used to make such a presentation.
  11. Additional disclosures, such as planned accounting policies, should be established.
  12. Annual comparisons should be taken into account. This would require a recapitulation of the previously reported segment data which is now being given for comparative reasons.

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Most popular questions from this chapter

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.

d) Gansner Company realized a large gain on the sale of investments at the beginning of the second quarter. The company wants to report one-third of the gain in each of the remaining quarters.

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below.

  1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
  2. A flood loss of $80,000 occurred on March 1, 2018.

What effect do these subsequent events have on 2017 net income?

An article in the financial press entitled “Important Information in Annual Reports This Year” noted that annual reports include a management’s discussion and analysis section. What would this section contain?

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. What, if any, is the ethical dilemma in this situation?

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Compute the return on assets, profit margin on sales, earnings per share, price-earnings ratio, and current ratio for each of the 5 years for Matheny Inc.
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