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Chapter 24: Question 7CA_d (page 1455)

Washington鈥擳he 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 鈥渟ubjective task鈥� that 鈥渢o a considerable extent, depends on the judgment of management,鈥� 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

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay

2017 Industry

2015

2016

2017

Averages

Current ratio

2.09

2.27

2.51

2.24

Quick ratio

1.15

1.12

1.19

1.22

Inventory turnover

2.40

2.18

2.02

3.50

Net sales to stockholders鈥� equity

2.71

2.80

2.99

2.85

Return on common stockholders鈥� equity

0.14

0.15

0.17

0.11

Total liabilities to stockholders鈥� equity

1.41

1.37

1.44

0.95

Millay is being reviewed by several entities whose interests vary, and the company鈥檚 financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay鈥檚 financial position.

Archibald MacLeish Bank. The bank is processing Millay鈥檚 application for a new 5-year term note. Archibald MacLeish has been Millay鈥檚 banker for several years but must reevaluate the company鈥檚 financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren鈥檚 clients.

Working Capital Management Committee. This is a committee of Millay鈥檚 management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company鈥檚 working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

b) For each of the four entities, identify two financial ratios, from the ratios presented above that would be most valuable as a basis for its decision regarding Millay.

(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鈥檚 motives, hesitates to suggest to Tercek that the company鈥檚 improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. Should Lilly, the controller, remain silent? Give reasons.

Answer each of the questions in the following unrelated situations.

c) A company has current assets of \(90,000 (of which \)40,000 is inventory and prepaid items) and current liabilities of \(40,000. What is the current ratio? What is the acid-test ratio? If the company borrows \)15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be?

Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2018.

A

B

C

D

E

Sales revenue

\(40,000

\)75,000

\(580,000

\)35,000

\(55,000

Cost of goods sold

19,000

50,000

270,000

19,000

30,000

Operating expenses

10,000

40,000

235,000

12,000

18,000

Total expenses

29,000

90,000

505,000

31,000

48,000

Operating profit (loss)

\)11,000

\((15,000)

\)75,000

\(4,000

\)7,000

Identifiable assets

\(35,000

\)80,000

\(500,000

\)65,000

\(50,000

Sales of segments B and C included intersegment sales of \)20,000 and $100,000, respectively.

Instructions

(a) Determine which of the segments are reportable based on the:

  1. Revenue test.

Foley Corporation has seven industry segments with total revenues as follows.

Penley \(600 Cheng \)225

Konami 650 Takuhi 200

KSC 250 Molina 700

Red Moon 275

Based only on the revenues test, which industry segments are reportable?
See all solutions

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