Reporting of Results of Operations Flashcards
What is the management approach?
This is simply a business segment analysis by which a segment represents any group of activities(ie. revenue and expenses) regularly evaluated by an entity’s chief executive decision makers(ie. management) as a single unit.
When must a public company report information about operating segments?
Public companies must always report information about significant portions of their businesses called reportable operating segment. If an operating segment contributes to at least 10% of a company’s revenue, assets or profits, the segment is reportable. It’s always required to meet the 10% threshold to be reportable.
What is the purpose of discontinued operations?
This is simply when a company decides to sell/dispose a component of it’d business. By doing so the company separates the results of the component’s operations on a separate line for discontinued operations on the income statement in order to alert financial statement users that this portion of the business will not be part of the long term ongoing operations.
What are examples of discontinued operations that are strategic shifts?
- Discontinuing operations in a major geographical region.
- Discontinuing a major product line.
- Disposing of a significant investment accounted for under the equity method.
- Disposing of other major parts of an entity.
When is inventory written down to market value in interim periods?
Inventory is written down to market value in interim periods under the LIFO and retail inventory methods, if a decline in prices is not expected to reverse before year end. If the market prices increase prior to year end, a recovery of the inventory loss may be recognized. The recovery is limited to the previously recognized losses from write downs.
What are interim financial reporting?
This refers to financial statements prepared for a period of less than one year(eg. quarterly). These reports are typically prepared simply because users such as creditors and investors frequently need the up-to-date financial information often to help them in decision making.
What are the characteristics of interim financial statements?
The characteristics of interim financials are the following:
- Generally follows same accounting principles as prior annual F/S.
- Timeliness emphasized over reliability
- Generally unaudited (may be reviewed)
- Accounting principle changes applied retrospectively.
When do you determine whether an operating segment is reportable or not?
In order to check whether it’s reportable or not, it needs to meet only one of the following three 10% tests.
- Revenue Test - segment’s revenue must be greater than or equal to 10% of the combined company’s total revenue. (note - this only includes sales revenue, not revenue from other sources)
- Assets - segment’s assets must be greater than or equal to 10% of the company’s identifiable assets & exclude goodwill.
- Profit - segment’s port must be greater than or equal to 10% of the company’s combined profit/loss.
How is interest expense treated?
Interest expense is simply the cost of borrowing funds via lending arrangements(ie. loans) such as notes payable. Typically, interest is an expense and is reported on the income statement. The only time an interest expense is report on the BS is when the interest incurred finance an asset for a company’s own use is capitalized(ie. becomes part of the asset’s cost)
What is a component of business defined by?
A component of business is defined by cash flows that can be clearly distinguished from the rest of the entity. A sale of a component is considered a discontinued operation if losing the entity would be a strategic shift in the entity’s operations & financial results.
What is an entity required to disclose when reporting entity’s financial instruments?
An entity is required to disclose the asset and liability fair values of its financial instruments in its financial statements when it is practicable to estimate those values, or if the aggregated fair values are material to the entity.
How do you solve for the interim period income tax expense?
(Cumulative taxable income X Estimated annual effective tax rate) - Previously recognized income tax expense.
What is the break down of interim financial reporting?
Revenues - these are recognized in the period earned and realized.
Expenses - these are matched to period based on when expense is incurred. (This is allocated to all period - property taxes, depreciation, income taxes). (Report in specific period - inventory losses, discounted operations, major expenses).
Change in accounting principle - retrospective application.
How do you calculate comprehensive income?
Comprehensive Income = Net Income + OCI
How do you calculate discontinued operation gain/loss?
Income/loss from operations + Gain/loss from sale.
