Chapter 14

Reporting for Segments and for Interim Financial Periods

1. A component of an enterprise that may earn revenues and incur expenses, and about which
management evaluates separate financial information in deciding how to allocate resources and
assess performance is a(n)
a. identifiable segment.
b. operating segment.
c. reportable segment.
d. industry segment.

2. An entity is permitted to aggregate operating segments if the segments are similar regarding the
a. nature of the production processes.
b. types or class of customers.
c. methods used to distribute products or provide services.
d. all of these.

3. Which of the following is not a segment asset of an operating segment?

a. Assets used jointly by more than one segment.
b. Assets directly associated with a segment.
c. Assets maintained for general corporate purposes.
d. Assets used exclusively by a segment.

4. SFAS No. 131 requires the disclosure of information on an enterprise's operations in different
industries for
1. each annual period presented.
2. each interim period presented.
3. the current period only.
a. 1
b. 2
c. 3
d. both 1 and 2

5. Which of the following is not required to be disclosed by SFAS No. 131?

a. Information concerning the enterprise's products.
b. Information related to an enterprise's foreign operations.
c. Information related to an enterprise's major suppliers.
d. All of the above are required disclosures.

6. To determine whether a substantial portion of a firm's operations are explained by its segment
information, the combined revenue from sales to unaffiliated customers of all reportable segments
must constitute at least
a. 10% of the combined revenue of all operating segments.
b. 75% of the combined revenue of all operating segments.
c. 10% of the combined revenue from sales to unaffiliated customers of all operating segments.
d. 75% of the combined revenue from sales to unaffiliated customers of all operating segments.
14-2 Test Bank to accompany Jeter and Chaney Advanced Accounting

7. A segment is considered to be significant if its

1. reported profit is at least 10% of the combined profit of all operating segments.
2. reported profit (loss) is at least 10% of the combined reported profit of all operating
segments not reporting a loss.
3. reported profit (loss) is at least 10% of the combined reported loss of all operating segments
that reported a loss.
a. 1
b. 2
c. 3
d. both 2 and 3

8. Which of the following disclosures is not required to be presented for a firm's reportable segments?
a. Information about segment assets
b. Information about the bases for measurement
c. Reconciliation of segment amounts and consolidated amounts for revenue, profit or loss, assets,
and other significant items.
d. All of these must be presented.

9. Current authoritative pronouncements require the disclosure of segment information when certain
criteria are met. Which of the following reflects the type of firm and type of financial statement for
which this disclosure is required?
a. Annual financial statements for publicly held companies.
b. Annual financial statements for both publicly held and nonpublicly held companies.
c. Annual and interim financial statements for publicly held companies.
d. Annual and interim financial statements for both publicly held and nonpublicly held companies.

10. An enterprise determines that it must report segment data in annual reports for the year ended
December 31, 2011. Which of the following would not be an acceptable way of reporting segment
information?
a. Within the body of the financial statements, with appropriate explanatory disclosures in the
footnotes
b. Entirely in the footnotes to the financial statements.
c. As a special report issued separately from the financial statements.
d. In a separate schedule that is included as an integral part of the financial statements.

11. Selected data for a segment of a business enterprise are to be separately reported in accordance with
SFAS No. 131 when the revenues of the segment is 10% or more of the combined
a. net income of all segments reporting profits.
b. external and internal revenue of all reportable segments.
c. external revenue of all reportable segments.
d. revenues of all segments reporting profits.
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-3

12. Long Corporation's revenues for the year ended December 31, 2011, were as follows
Consolidated revenue per income statement $800,000
Intersegment sales 105,000
Intersegment transfers 35,000
Combined revenues of all operating segments $940,000

Long has a reportable segment if that segment's revenues exceed

a. $80,000.
b. $90,500.
c. $94,000.
d. $14,000.

13. Revenue test

(dollars in thousands)
Wholesale Retail Finance
Segment Segment Segment
Sales to unaffiliated customers $3,600 $1,500 $-0-
Sales – intersegment 400 240 -0-
Loan interest income – intersegment -0- 120 900
Loan interest income – unaffiliated -0- 240 80
Income from equity method investees -0- 280 -0-

Determine the amount of revenue for each of the three segments that would be used to identify the
reportable industry segments in accordance with the revenues test specified by SFAS 131.

Wholesale Retail Finance

a. $3,600 $1,500 $ -0-
b. 4,000 1,740 -0-
c. 4,000 1,980 980
d. 4,000 2,380 980

14. Which of the following is not part of the information about foreign operations that is required to be
disclosed?
a. Revenues from external customers
b. Operating profit or loss, net income, or some other common measure of profitability
c. Capital expenditures
d. Long-lived assets
14-4 Test Bank to accompany Jeter and Chaney Advanced Accounting

15. Eaton, Inc., discloses supplemental industry segment information. The following data are available
for 2011.
Traceable
Segment Sales operating expenses
A $420,000 $255,000
B 480,000 300,000
C 300,000 165,000
$1,200,000 $720,000

Additional 2011 expenses, not included above, are as follows:

Indirect operating expenses $240,000

General corporate expenses 180,000

Appropriate common expenses are allocated to segments based on the ratio of a segment's sales to
total sales. What should be the operating profit for Segment C for 2011?
a. $135,000
b. $ 75,000
c. $ 105,000
d. $ 30,000

16. Gant Company has four manufacturing divisions, each of which has been determined to be a
reportable segment. Common operating costs are appropriately allocated on the basis of each
division's sales in relation to Gant’s aggregate sales. Gant’s Delta division accounted for 40% of
Gant's total sales in 2011. For the year ended December 31, 2011, Delta had sales of $5,000,000 and
traceable costs of $3,600,000. In 2011, Gant incurred operating costs of $350,000 that were not
directly traceable to any of the divisions. In addition, Gant incurred interest expense of $360,000 in
2011. In reporting supplementary segment information, how much should be shown as Delta's
operating profit for 2011?
a. $1,400,000
b. $1,256,000
c. $1,260,000
d. $1,116,000

17. For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the
ending inventory value for

Interim Annual
Reporting Reporting
a. No No
b. No Yes
c. Yes No
d. Yes Yes

18. Inventory losses from market declines that are expected to be temporary
a. should be recognized in the interim period in which the decline occurs.
b. should be recognized in the last (fourth) quarter of the year in which the decline occurs.
c. should not be recognized.
d. none of these.
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-5

19. Gains and losses that arise in an interim period should be

a. recognized in the interim period in which they arise.
b. recognized in the last quarter of the year in which they arise.
c. allocated equally among the remaining interim periods.
d. deferred and included only in the annual income statement.

20. If a cumulative effect type accounting change is made during the first interim period of a year
a. no cumulative effect of the change should be included in net income of the period of change.
b. the cumulative effect of the change on retained earnings at the beginning of the year should be
included in net income of the first interim period.
c. the cumulative effect of the change should be allocated to the current and remaining interim
periods of the year.
d. none of these.

21. Which of the following does not have to be disclosed in interim reports?
a. Seasonal costs or expenses.
b. Significant changes in estimates.
c. Disposal of a segment of a business.
d. All of these must be disclosed.

22. For interim financial reporting, the effective tax rate should reflect

Anticipated Extraordinary
Tax Credits Items
a. Yes Yes
b. Yes No
c. No Yes
d. No No

23. Companies using the LIFO method may encounter a liquidation of base period inventories at an
interim date that is expected to be replaced by the end of the year. In these cases, cost of goods sold
should be charged with the
a. cost of the most recent purchases.
b. average cost of the liquidated LIFO base.
c. expected replacement cost of the liquidated LIFO base.
d. none of these.

24. In considering interim financial reporting, how did the Accounting Principles Board conclude that
each reporting should be viewed?
a. As a "special" type of reporting that need not follow generally accepted accounting principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.

25. When a company issues interim financial statements, extraordinary items should be
a. allocated to the current and remaining interim periods of the current year on a pro rata basis.
b. deferred and included only in the annual income statement.
c. included in the determination of net income in the interim period in which they occur.
d. charged or credited directly to retained earnings so that comparisons of interim results of
operations will not be distorted.
14-6 Test Bank to accompany Jeter and Chaney Advanced Accounting

26. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the
entire year, when should they be expensed?
a. An allocated portion in each of the last three quarters
b. An allocated portion in each quarter of the year
c. In full in the first quarter
d. In full in the second quarter

27. During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000.
What portion of the gain should Dodge report in its income statement for the second quarter of
2011?
a. $90,000
b. $45,000
c. $30,000
d. $ -0-

28. In January 2011, Abel Company paid $200,000 in property taxes on its plant for the calendar year
2011. Also in January 2011, Abel estimated that its year-end bonuses to executives for 2011 would
be $800,000. What is the amount of expenses related to these two items that should be reflected in
Abel's quarterly income statement for the three months ended June 30, 2011 (second quarter)?
a. $ -0-
b. $250,000
c. $ 50,000
d. $200,000

29. For interim financial reporting, a company's income tax provision for the second quarter of 2011
should be determined using the
a. statutory tax rate for 2011.
b. effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of
the first quarter of 2011.
c. effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of
the second quarter of 2011.
d. effective tax rate expected to be applicable for the second quarter of 2011.

30. Which of the following reporting practices is permissible for interim financial reporting?
a. Use of the gross profit method for interim inventory pricing.
b. Use of the direct costing method for determining manufacturing inventories.
c. Deferral of unplanned variances under a standard cost system until year-end.
d. Deferral of inventory market declines until year-end.

31. Which of the following statements most accurately describes interim period tax expense?
a. The best estimate of the annual tax rate times the ordinary income (loss) for the quarter.
b. The best estimate of the annual tax rate times income (loss) for the year to date less tax expense
(benefit) recognized in previous interim periods.
c. Average tax rate for each quarter, including the current quarter, times the current income (loss).
d. The previous year's actual effective tax rate times the current quarter's income.
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-7

32. The computation of a company's third quarter provision for income taxes should be based upon
earnings
a. for the quarter at an expected annual effective income tax rate.
b. for the quarter at the statutory rate.
c. to date at an expected annual effective income tax rate less prior quarters' provisions.
d. to date at the statutory rate less prior quarters' provisions.

33. Finney, a calendar year company, has the following income before income tax provision and
estimated effective annual income tax rates for the first three quarters of 2011:

Income Before Estimated Effective

Income Tax Annual Tax Rate
Quarter Provision at the End of Quarter
First $120,000 25%
Second 160,000 25%
Third 200,000 30%

Finney's income tax provision in its interim income statement for the third quarter should be
a. $74,000.
b. $60,000.
c. $50,000.
d. $144,000.

34. An inventory loss from a market price decline occurred in the first quarter. The loss was not
expected to be restored in the fiscal year. However, in the third quarter the inventory had a market
price recovery that exceeded the market decline that occurred in the first quarter. For interim
reporting, the dollar amount of net inventory should
a. decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of the market price recovery.
b. decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of the decrease in the first quarter.
c. not be affected in the first quarter and increase in the third quarter by the amount of the market
price recovery that exceeded the amount of the market price decline.
d. not be affected in either the first quarter or the third quarter.

35. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for
Interim Annual
Reporting Reporting
a. Yes No
b. Yes Yes
c. No No
d. No Yes
14-8 Test Bank to accompany Jeter and Chaney Advanced Accounting

Problems

14-1 The following information is available for Torrey Company for 2011:

a. In early April Torrey made major repairs to its equipment at a cost of $90,000. These repairs
will benefit the remainder of 2011 operations.

b. At the end of May, Torrey sold machinery with a book value of $35,000 for $45,000.

c. An inventory loss of $60,000 from market decline occurred in July. In the fourth quarter the
inventory had a market value recovery that exceeded the market decline by $30,000.

Required:
Compute the amount of expense/loss that would appear in Torrey Company's June 30, September
30, and December 31, 2011, quarterly financial statements.

14-2 Stein Corporation's operations involve three industry segments, X, Y, and Z. During 2011, the
operating profit (loss) of each segment was:
Operating
Segment Profit (Loss)
X $ 600
Y 8,100
Z (6,300)

Required:
Determine which of the segments are reportable segments.

14-3 Bass Industries operates in four different industries. Information concerning the operations of these
industries for the year 2011 is:

Revenue
Industry Operating Segment
Segment Total Intersegment Profit (Loss) Assets
A $ 24,000 $4,200 $ 2,700 $ 22,400
B 18,000 2,200 (2,000) 25,200
C 90,000 14,000 3,600 70,000
D 168,000 -0- 23,700 162,400
$300,000 $28,000 $280,000

Required:
Complete the following schedule to determine which of the above segments must be treated as
reportable segments.
10% Test For
Segment Revenue Op. Profit (Loss) Segment Assets Reportable?
A

D
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-9

14-4 Logan Company prepares quarterly financial statements. The following information is available
concerning calendar year 2011:

Estimated full-year earnings $3,000,000

Full-year permanent differences:
Penalty for pollution 150,000
Estimated dividend income exclusion 60,000
Actual pretax earnings, 1/1/11 to 3/31/11 480,000
Nominal income tax rate 40%

Required:
Compute the income tax provision for the first quarter of 2011.

14.5 XYZ Corporation has eight industry segments with sales, operating profit and loss, and identifiable
assets at and for the year ended December 31, 2011, as follows:

Sales to Sales to
Segment
Unaffiliated Affiliated Profit or (Loss)
Assets
Customers Customers
Steel $1,350,000 $150,000 $265,000 $2,250,000
Auto Parts 1,200,000 --- 450,000 1,430,000
Coal Mine 600,000 450,000 (300,000) 1,200,000
Textiles 530,000 220,000 150,000 750,000
Paint 1,120,000 380,000 300,000 1,050,000
Lumber 710,000 --- (75,000) 600,000
Leisure Time 690,000 --- 110,000 450,000
Electronics 600,000 --- 300,000 670,000
Total $6,800,000 $1,200,000 $1,200,000 $8,400,000

Required:
A. Identify the segments, which are reportable segments under one or more of the 10
percent revenue, operating profit, or assets tests.
B. After reportable segments are determined under the 10 percent tests, they must be
reevaluated under a 75 percent revenue test before a final determination of
reportable segments can be made. Under this 75 percent test, identify if any other
segments may have to be reported.
14-10 Test Bank to accompany Jeter and Chaney Advanced Accounting

14.6 Ace Company, which uses the FIFO inventory method, had 508,000 units in inventory at
the beginning of the year at a FIFO cost per unit of $20. No purchases were made during
the year. Quarterly sales information and end-of-quarter replacement cost figures follow:

End-of- Quarter
Quarter Unit Sales Replacement Cost
1 200,000 $17
2 60,000 18
3 85,000 13
4 61,000 18
The market decline in the first quarter was expected to be nontemporary. Declines in other
quarters were expected to be permanent.

Required:
Determine cost of goods sold for the four quarters and verify the amounts by computing
cost of goods sold using the lower-of-cost-or-market method applied on an annual basis.

14-7 Barr Company’s actual earnings for the first two quarters of 2011 and its estimate during
each quarter of its annual earnings are:

Actual first-quarter earnings $ 800,000

Actual second-quarter earnings 1,020,000
First-quarter estimate of annual earnings 2,700,000
Second-quarter estimate of annual earnings 2,830,000

Barr Company estimated its permanent differences between accounting income and taxable
income for 2011 as:

Environmental violation penalties $ 45,000

Dividend income exclusion 320,000

These estimates did not change during the second quarter. The combined state and federal
tax rate for Barr Company for 2011 is 40%.

Required:
Prepare journal entries to record Barr Company’s provisions for income taxes for each of
the first two quarters of 2011.
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-11

Short Answer
1. In SFAS No. 131, the FASB requires all public companies to report a variety of information
for reportable segments. Define a reportable segment and identify the information to be
reported for each reportable segment.

2. Publicly owned companies are usually required to file some type of quarterly (interim)
report as part of the agreement with the stock exchanges that list their stock. Indicate two
problems with interim reporting and GAAP’s position on this reporting.

Short Answer Questions from the Textbook

1. For what types of companies would segmented financial reports have the most significance?
Why?

2. Why do financial statement users (financial analysts, for example) need information about seg-
ments of a firm?

3. Define the following: (a)Operating segment.(b)Reportable segment.

4. Describe the guidelines to be used in determining (a) what constitutes an operating segment, and
(b) whether a specific operating segment is a significant segment.

5. List the three major types of enterprise wide information disclosures required by SFAS No.
131[ASC 280], and explain how the firm’s designation of reportable segments affects these
disclosures.

6. What segmental disclosures are required, if any, for interim reports?

7. What type of disclosure is required of a firm when the major portion of its operations takes place
within a single reportable segment?

8. List the types of information that must be presented for each reportable segment of a com-pany
under the rules of SFAS No. 131 [ASC 280].

9. Describe the methods that might be used to disclose reportable segment information.

10. What types of information must be disclosed about foreign operations under SFAS No.
131[ASC 280–10–50–40]?

11. How are foreign operations defined under SFASNo. 131 [ASC 280]?

12. If the operations of a firm in some foreign countries are grouped into geographic areas, what
factors should be considered in forming the groups?
14-12 Test Bank to accompany Jeter and Chaney Advanced Accounting

13. When must a firm present segmental disclosures for major customers? What is the reason for
this requirement?

14. How are common costs distinguished from general corporate expenses for segmental purposes?

15. What is the purpose of interim financial reporting?

16. Some accountants hold the view that each interim period should stand alone as a basic ac-
counting period, whereas others view each interim period as essentially an integral part of the
annual period. Distinguish between these views.

17.Describe the basic procedure for computing in-come tax provisions for interim financial state-
ments.

18.Describe how changes in estimates should be treated in interim financial statements.

19.What are the minimum disclosure requirements established ASC 270 for interim financial
reports?

20.What is the general rule regarding the treatment of costs and expenses associated directly with
revenues for interim reporting purposes?

Business Ethics Question from Textbook

SMC Inc. operates restaurants based on various themes, such as Mex-delight, Chinese for the
Buffet, and Steak-it and Eat-it. The Steak-it and Eat-it restaurants have not been performing well
recently, but SMC prefers not to disclose these details for fear that competitors might use the
information to the detriment of SMC. The restaurants are located in various geographical locations,
and management currently measures profits and losses and asset allocation by restaurant concept.
How-ever, when preparing the segmental disclosures under SFAS No. 131 [ASC 280], the
company reports the segment information by geographical location only. The company recently
hired you to review the financial statements.
1.What disclosures should the company report for segment purposes?
2.The company’s CEO believed that the rules in SFAS No. 131 [ASC 280] are vague and
that the company could easily support its decision to dis-close the segment data by
geographic regions. What would you recommend to the CEO and how would you
approach the issues?
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-13

ANSWER KEY

Multiple Choice

1. b 10. c 19. a 28. b

2. d 11. b 20. b 29. c
3. c 12. c 21. d 30. a
4. d 13. c 22. b 31. b
5. c 14. c 23. c 32. c
6. d 15. b 24. d 33. a
7. d 16. c 25. c 34. b
8. d 17. c 26. b 35. b
9. c 18. c 27. a

Problems
14-1 June 30 Sept. 30 Dec. 31
Major repairs $30,000 $30,000 $30,000
Gain on Sale (10,000)
Inventory loss/(gain) ________ 60,000 (60,000)
$20,000 $90,000 $(30,000)

14-2 Both segments Y and Z are reportable segments because the amount of their operating profit (loss)
is more than 10% of $8,700 ($600 + 8,100) - the combined operating profit of segments that did not
incur a loss. Any segment with an operating profit (loss) of $870 or more is a reportable segment.

14-3 10% Test For

Segment Revenue Op. Profit (Loss) Segment Assets Reportable?
A 8% (1) 9% (5) 8% (9) No
B 6% (2) 7% (6) 9% (10) No
C 30% (3) 12% (7) 25% (11) Yes
D 56% (4) 79% (8) 58% (12) Yes

(1) 24,000/300,000 (7) 3,600/30,000

(2) 18,000/300,000 (8) 23,700/30,000
(3) 90,000/300,000 (9) 22,400/280,000
(4) 168,000/300,000 (10) 25,200/280,000
(5) 2,700/30,000 (11) 70,000/280,000
(6) (2,000)/30,000 (12) 162,400/280,000

14-4 Estimated pretax full-year income $3,000,000

Add: Pollution penalty 150,000
Less: Estimated dividend income inclusion (60,000)
Estimated full-year taxable income $3,090,000

Estimated income tax payable ($3,090,000 × 0.40) $1,236,000

Estimated effective tax rate ($1,236,000/$3,000,000) 41.2%

First quarter tax provision ($480,000 × 0.412) $197.760

14-14 Test Bank to accompany Jeter and Chaney Advanced Accounting

14-5 A. Revenue Test – 10%

($6,800,000 + $1,200,000) = $700,000
Steel, Auto Parts, Coal Mine, Paint
Operating Profit – 10% ($1,575,000) = $157,500
Steel, Auto Parts, Coal Mine, Paint, Electronics
Segment Assets – 10% ($8,400,000) = $840,000
Steel, Auto Parts, Coal Mine, Paint

Reportable segments applying the 10% tests are: Steel, Auto Parts, Coal Mine, Paint and Electronics.

B. 75% Revenue Test – 75% ($6,800,000) = $5,100,000

Since the 75% revenue test only applies to “Sales to Unaffiliated Customers” only, the five
reportable segments from Part A only include $4,870,000 ($1,350,000 + $1,200,000 +
$600,000 + $1,120,000 + $600,000) worth of sales. Because the 75% test is not met, one of
the segments that did not qualify as a reportable segment under the previous tests must be
included as a reportable segment.

14-6 Cost of Goods Sold

Computation Quarter Cumulative
1. Sold 200,000 units @ $20 $4,000,000
Write down of ending inventory of 308,000
units to market (308,000 × [$20 – 17]) 924,000 4,924,000 4,924,000

2. Sold 60,000 units @ $17 1,020,000

Less write down recovery on ending
inventory of 248,000 (248,000 × [$18 - $17]) 248,000 772,000 5,696,000

3. Sold 85,000 units @ $18 1,530,000

Write down of ending inventory of 163,000
units to market (163,000 × [$18 - $13]) 815,000 2,345,000 8,041,000

4. Sold 61,000 units @ $13 793,000

Less write down recovery on ending inventory
of 102,000 (102,000 × [$18 - $13]) 510,000 283,000 8,324,000

Verification
Units Sold During Year FIFO Cost per Unit Amount
406,000 × $20 $8,120,000
Add: Write down of ending inventory to the lower of cost or market
(102,000 × [$20 - $18]) 204,000
Total cost of goods sold for the year $8,324,000
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-15

14-7
First Quarter
Estimated Annual Earnings $2,700,000
Add: Environmental Violation Penalties 45,000
2,745,000
Deduct: Dividend Income Exclusion 320,000
Estimated Taxable Income $2,425,000

Estimated Annual Income Tax Payable ($2,425,000 × 0.40) 970,000

Estimated Effective Combined Annual Tax Rate ($970,000 / $2,700,000) 35.9%

Income Tax Expense 287,200

Income Tax Payable ($800,000 × 0.359) 287,200

Second Quarter
Estimated Annual Earnings $2,830,000
Less: Net Permanent Differences ($320,000 - $45,000) 275,000
Estimated Taxable Income $2,555,000

Estimated Annual Income Tax Payable (2,555,000 × 0.40) 1,022,000

Estimated Effective Combined Annual Tax Rate ($1,022,000/$2,830,000) 36.1%

Cumulative Income to Date ($800,000 + $1,020,000) $1,820,000

Estimated Income Tax Rate: 0.361
Cumulative Tax Provision Needed 657,020
Tax Provision in 1st Quarter 287,200
Tax Provision in 2nd Quarter $ 369,820

Income Tax Expense 369,820

Income Tax Payable 369,820

Short Answer
1. A reportable segment is a segment that has passed one of three 10% tests (combined revenues, reported
profit/loss and assets) or has been identified as being reportable through other criteria (i.e. aggregation).

The information reported includes information about (a) segment operating profit/loss; (b) segment
assets, and (c) bases for measurement. In addition, a reconciliation of segment amounts to the
consolidated amounts for revenue, profit/loss, assets and other significant items is presented.
Enterprisewide disclosures regarding products or services, geographic areas, and major customers are
also made.

2. Problems associated with interim reporting include the seasonal nature of many industries’ operations
that can cause wide fluctuations in revenues, expenses and net income from one interim period to
another. In addition, the short time period available to determine interim results and the added cost of
determining accurate figures for accruals and deferrals result in the use of a variety of estimation
techniques, some of which proved to be highly inaccurate.

GAAP (APB Opinion No. 28) supports the integral view for interim reporting. The APB stated that each
interim period should be viewed primarily as an integral part of an annual period.
14-16 Test Bank to accompany Jeter and Chaney Advanced Accounting

Short Answer Questions from the Textbook

1. Segmented financial reports would have the most significance for a highly diversified company
because the industries in which the company operates may have widely different rates of
profitability, degrees of risk, and opportunities for growth. Thus, investors need information
about these operating segments in order to make informed decisions.
2. Financial statement users need information about segments of a firm to aid in evaluating
prospective investments. Different industries may have different rates of profitability,
opportunities for growth, and types of risk. Segmented financial data aid the investor in
determining the uncertainties surrounding the timing and amount of expected future cash flows
and, therefore, aid in assessing the related risk of an investment.
3. Operating segment. A component of an enterprise that may earn revenues and incur expenses,
about which separate financial information is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing performance.

Reportable segment. A segment considered to be significant to an enterprise’s operations;

specifically, one that has passed one of three 10% tests or has been identified as being
reportable through other criteria (aggregation, for example).
4. A segment is an operating segment if it possesses the following characteristics. It engages in
business activities that may earn revenues and incur expenses (including transactions with other
components of the entity). The entity’s chief operating decision maker (may be one individual
or a group of executives) regularly reviews the component’s operating results to assess its
performance and make decisions about resources to be allocated to it. Discrete financial
information is available.

An operating segment is a significant segment if it meets one or more of the following tests:
a) Its combined external and internal revenue is 10% or more of the combined external and
internal revenue of all reportable segments.

b)The absolute amount of its reported profit or loss is 10% or more of the greater absolute
amount of:
- the combined reported profit of all operating segments not reporting a loss.
- the combined reported loss of all operating segments that reported a loss.
c) Its assets are 10% or more of the combined assets of all operating segments.
5. (a) Product or service disclosures: revenues from external customers for each product or
service or group of products or services, on the same basis as the general-purpose financial
statements. This disclosure is not required if the reportable segments are structured around
products or services.
(b) Geographic area disclosures: revenues from external customers and long-lived assets for
the firm’s country of domicile and for all other countries in total, also on the same basis as the
general purpose financial statements; and revenues from external customers and long-lived
assets for each foreign country or group of foreign countries, if material, along with the basis
for allocating revenues (location of customer, where shipped, etc.). These disclosures are
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-17

generally not required if the company’s reportable segments have been organized around
geographic area.
(c) Major customer disclosures: information about major customers for each customer
representing 10% or more of total enterprise revenues, including the amount of revenues and
the segment(s) to which the revenue is traceable. A group of customers under common control
is treated as a single customer, as are the various agencies of a government.
6. SFAS No. 131 requires that segmental disclosures be included in interim reports. The extent of
the disclosures depends upon whether the firm presents a complete set of financial statements
for the interim period, or condensed financial statements. If the firm presents a complete set of
statements, the interim disclosures are the same as presented above for reportable segments. If
condensed statements are presented for interim periods, they should include the following for
each reportable segment: revenues, including intersegment sales; profit or loss; disclosures of
any changes in measurement bases for segmentation or components of profit or loss since the
most recent annual report; any material changes in assets since the most recent annual report;
and a reconciliation of income from continuing operations for the consolidated entity and for
the total of the reportable segments.
7. Although the normal segment information disclosures need not be made, the financial
statements should identify the industry in which the major portion of the firm’s operations takes
place.
8. The following items are disclosed only if they are included in the measures reviewed by the
chief operating decision maker: revenues from external customers, revenues from other
segments, interest revenue and expense, depreciation, depletion, and amortization expense,
income tax expense, equity income from investments, extraordinary items, other unusual items,
and other significant noncash items.
9. Information about the reportable segments of a firm may be included in its financial statements
in any of the following ways:
a. Within the body of the financial statements, with appropriate explanatory disclosures in the
footnotes to the financial statements.
b. Entirely in the footnotes to the financial statements.
c. In a separate schedule that is included as an integral part of the financial statements.
10. The types of information that must be disclosed for each foreign country or geographic area
(and for domestic operations) are:
a. Revenue, with separate disclosure of sales to nonaffliliates and intracompany sales or
transfers, along with the basis of accounting for intracompany sales and transfers and the
nature and effect of any change in method.
b. Operating profit or loss, or some other measure of profitability. A common measure of
profitability must be used for all countries and/or geographic areas presented.
c. Identifiable assets, using the same procedures for presenting operating segment
information.
11. Foreign operations are defined as those located outside the United States (or other “home
country”) that produce revenue from sales to unaffiliated customers or from intra-enterprise
14-18 Test Bank to accompany Jeter and Chaney Advanced Accounting

sales or transfers between countries or geographic areas. Foreign operations do not, however,
include unconsolidated subsidiaries and investees. If operations are conducted in two or more
foreign countries or geographic areas, information must be presented separately for each
significant foreign country or geographic area and in the aggregate for all other foreign
operations. Where the operations of some foreign countries are grouped into geographic areas,
the groupings should be made on the basis of a consideration of (1) proximity, (2) economic
affinity, (3) similarities of business environments, and (4) the nature, scale, and degree of
interrelationship of the operations in the various countries.

12. Factors to be considered in grouping foreign operations into geographic areas are (1) proximity,
(2) economic affinity, (3) similarities of business environments, and (4) the nature, scale, and
degree of interrelationship of the operations in the various countries.
13. To provide information about the potential effects of dependency on one or more major
customers, if 10% or more of the revenue of a firm is derived from sales to any single
customer, that fact and the amount of revenue from each such customer must be disclosed.
Also, if 10% or more of the revenue is derived from sales to the federal government, a state
government, a local government or a foreign government, that fact and the amount of revenue
must be disclosed. Disclosure should include the amount of sales to each customer and the
reportable segment making the sales. Customer's names, however, need not be disclosed. These
disclosures are required even if the firm has only one reportable segment.
14. Common costs. Operating expenses incurred by the enterprise for the benefit of more than one
segment.
General corporate expense. An expense incurred for the benefit of the corporation as a whole,
which cannot be reasonably allocated to any segment.
15. The purpose of interim financial reporting is to present timely information for use by external
users of financial statements. Publicly owned companies prepare quarterly reports that must be
filed with the stock exchanges on which their stock is listed, and with the Securities and
Exchange Commission.
16. Accountants who support the view that each interim period should stand alone as a basic
accounting period believe that deferrals, accruals, and estimates at the end of each interim
period should be determined by following essentially the same principles and judgments that
apply to annual periods.
Accountants who view interim periods as integral parts of annual periods believe that deferrals,
accruals, and estimates at the end of each interim period should be affected by judgments made
at the interim date as to results of operations for the balance of the annual period.
17. At the end of each interim period, the company should make its best estimate of the effective
tax rate expected to be applicable for the full fiscal year. The rate determined should be used in
providing for income taxes on a current year-to-date basis, giving effect to expected investment
tax credit, foreign tax rates, percentage depletion, capital gain rates, and other available tax
planning alternatives.
18. Change in estimates should be accounted for in the interim period in which the change is made.
 Chapter 14 Reporting for Segments and for Interim Financial Periods 14-19

19. Minimum disclosure requirements for interim reports are:

(a) Sales or gross revenues, provisions for income taxes, extraordinary items, cumulative
effect of a change in accounting principle, and net income;
(b) Basic and diluted earnings per share;
(c) Seasonal revenue, cost and expenses;
(d) Changes in estimates;
(e) Effect of a disposal of a segment;
(f) Contingencies;
(g) Changes in accounting principles;
(h) Significant changes in financial position.
20. The general rule is that costs and expenses that are associated directly with or allocated to the
products sold or to the services rendered for annual reporting purposes should be treated in a
similar manner for interim reports.

BUSINESS ETHICS SOLUTION

Business ethics solutions are merely suggestions of points to address. The objective is to raise the
students' awareness of the topics, and to invite discussion. In most cases, there is clear room for
disagreement or conflicting viewpoints.

1. Information to be presented for each of a firm’s reportable segments:

 General information
 Information about segment operating profit or loss
 Information about segment assets
 Information about the bases for measurement
 Reconciliation (IAS 14 vs. SFAS 131) of segment amounts and consolidated amounts
for revenue, profit or loss, assets, and significant other items.
 Interim disclosures
 Enterprise-wide disclosures
1. Product or service disclosures
2. Geographic area disclosures
3. Major customer disclosures

2. Since the management currently measures profit and losses and asset allocation by restaurant
concept, an abrupt change to presenting the segment information by geographical location only
could be viewed as unethical. However, this area is one where the standards clearly leave the
door open for subjectivity in interpretation. If management has a motivation for preferring to
keep the information about the poorly performing restaurant private that is not counter to the
objectives of the shareholders and other claim-holders (for example, prefers not to expose that
information to competitors while a restructuring plan is implemented), then there could be
ethical reasons for a shift in disclosure choices. According to SFAS No. 131, firms should
segment their disclosures along the same lines that management uses in decision-making. This
does not appear to be the case here. Thus, the CEO’s decision to present the segment
14-20 Test Bank to accompany Jeter and Chaney Advanced Accounting

information by geographical location seems to be counter to the intent of segmental reporting,

i.e., the unveiling of information that has been merged or buried in the consolidated data.