a.

interim cash flow

b.

the interim statement of financial position

c.

interim retained earnings

d.

interim income data

a.

The interim period is viewed as an integral part of the annual accounting period.

b.

The interim period is viewed as a distinct, independent accounting period.

c.

Interim net income should be determined by using the same principles as those for the annual accounting period.

d.

Net income should be computed on the cash basis except for sales, cost of goods sold, and depreciation.

a.

cost of goods sold is calculated on a historical cost basis only

b.

the interim cost of goods sold includes the replacement cost of temporarily liquidated inventory

c.

cost of goods sold is not adjusted for any changes due to liquidation of LIFO inventory

d.

any of the effects of liquidation are deferred until year end

a.

A $37,500 loss recognized in the first quarter and no recovery recognized in the second quarter.

b.

A $150,000 loss recognized in the first quarter and a $90,000 recovery in the second quarter.

c.

A $150,000 loss recognized in the first quarter and a $50,000 recovery in the second quarter.

d.

No loss recognized in the first quarter and no recovery recognized in the second quarter.

a.

Under a standard cost system, unplanned or unanticipated variances should be recognized in the quarter in which they occur.

b.

Under the LIFO method, recognition of layer liquidations, thought to be temporary, are postponed by using replacement cost in the calculation of interim cost of goods sold.

c.

Under the lower of cost or market determination of ending inventory, a gain may not be recognized in an interim period.

d.

All of these statements are true.

a.

$37,500 and $37,500

b.

$50,000 and $50,000

c.

$0 and $0

d.

$100,000 and $0

a.

an allocation of a portion of an annual bonus would be made as an interim adjustment

b.

any adjustments for inventory shrinkage would be deferred to year end

c.

the allowance for uncollectible accounts receivable will be revised at year end

d.

None of the above are true

a.

Tax rate changes should not be accounted for retroactively.

b.

The effective tax rate for the entire year should be estimated.

c.

The effective tax rate should reflect anticipated tax credits.

d.

The estimated tax rate should reflect extraordinary items.

Current

Effective

Quarter

  Period

Tax Rate

First

$40,000

25%

Second

(25,000)

25%

Third

50,000

30%

a.

$3,750

b.

$15,000

c.

$15,750

d.

$20,000

a.

include unusual but not infrequent gains.

b.

are treated the same as ordinary items when calculating the effective tax rate.

c.

are always treated as a total group when calculating the effective rate for the quarter.

d.

are always excluded from interim reporting.

a.

If a company reports year-to-date financial information for the current year, it also must report the last twelve month-to-date information.

b.

Under some circumstances, a company can restate the financial information of an earlier current-year quarter.

c.

Tax benefits arising from earlier interim periods in the current year can be carried forward to the current interim period to offset tax expense.

d.

The total of all nonordinary losses in the current quarter multiplied by the effective tax rate equals the amount of tax expense to be allocated among those losses.

a.

applying the estimated effective tax rate against the amount of the extraordinary item

b.

the difference between the gross tax calculated on continuing operations and the gross tax on income from all sources, before tax credits are applied.

c.

the difference between the estimated net tax calculated on the projected annual income from continuing operations and the estimated net tax calculated on projected annual income, including the non-ordinary items, after tax credits have been considered

d.

none of the above.

a.

The tax benefit is recognized in the period in which it occurs using the estimated effective rate.

b.

The tax benefit is recognized in the period in which it occurs using the average tax rate for all income.

c.

The tax benefit is allocated over the current and remaining periods using the estimated effective rate.

d.

The tax benefit is recognized only if, more likely than not, the loss may be offset against income.

a.

The cumulative effect should be recognized in the quarter in which the decision to change is made.

b.

Regardless of the quarter of change, the recognition is deferred until year end.

c.

All prior interim periods are retrospectively restated.

d.

Interim periods prior to the period of change are not restated.

a.

basic and diluted earnings per share

b.

contingent items

c.

changes in accounting estimates

d.

all of the above

a.

Results are not restated.

b.

is split between the tax expense calculated on restated quarter one income from continuing operations and the discontinued segment by subtracting the tax expenses calculated on the restated first quarter income from the original tax expense calculated for the first quarter, before the decision was made.

c.

is used to determine the incremental tax effect.

d.

is used to calculate the effective tax rate for the discontinued segment.

a.

horizontal integration.

b.

vertical integration.

c.

diversification.

d.

consolidation.

a.

similarities regarding profit margins

b.

whether the nature of the products and services is similar

c.

whether there is a similar amount of intracompany sales

d.

whether there is a similar number of employees

a.

revenue of the segment

b.

the assets of the segment

c.

the number of foreign offices

d.

the absolute amount of its profit or loss

a.

Consistency, , the number of reportable segments this period, must be the same as last period.

b.

Usually the number of segments should not exceed 10.

c.

At least 75% of the combined revenue of sales to unaffiliated firms should be traceable to reportable segments.

d.

None of the above is a limitation.

a.

only including profitable segments.

b.

comparing the absolute value of a segment’s profit or loss to 10% of all segments cumulative profit or cumulative loss, whichever is higher.

c.

comparing the absolute value of a segment’s profit or loss to 10% of all segments combined profits and losses.

d.

comparing the profit or loss of a segment to 10% of all segment external revenue.

a.

horizontally-integrated company.

b.

vertically-integrated company.

c.

diversified company.

d.

conglomerate.

a.

focuses on how management organizes information for internal decision making.

b.

requires that the company’s chief executive officer decide what segments will be reported.

c.

separates the costs of management from the costs of operations to determine segment profit or loss.

d.

is required only in the United States.

Consolidated net income

$  1,000,000

Operating income before taxes

1,500,000

Net operating income of all segments

1,350,000

Total consolidated revenue

8,000,000

Total revenue of all segments,

excluding intersegments sales

7,000,000

Total intersegment sales

1,200,000

Consolidated total assets

50,000,000

Total assets of all segments

45,000,000

a.

$700,000

b.

$800,000

c.

$820,000

d.

The answer cannot be determined from the information given.

a.

$100,000

b.

$135,000

c.

$150,000

d.

The answer cannot be determined from the information given.

a.

$4,500,000

b.

$5,000,000

c.

$37,500,000

d.

The answer cannot be determined from the information given.

a.

$37,500,000 in assets.

b.

$6,000,000 in revenues.

c.

$1,125,000 in operating income before taxes.

d.

The answer cannot be determined from the information given.

a.

If it qualifies, the federal government is considered a single major customer.

b.

The total amount of the sales to each major customer must be disclosed.

c.

The names of the major customers must be disclosed.

d.

The identity of the segments making the sales must be disclosed.

a.

No more than ten segments may be reported.

b.

The name of each major customer does not have to be disclosed.

c.

Even if there is only one reportable segment, the company must report revenues from external customers for each product or service or each group of related products or services.

d.

Segmental information must be included in interim reporting.

a.

Combined external segment revenues for reportable segments exceed 75% of internal and external segment revenues.

b.

Total internal and external segment revenue exceeds 75% of total consolidated revenue.

c.

Total external segment revenue of the reportable segments exceeds 75% of consolidated revenue.

d.

Total segment assets of the reportable segments exceeds 75% of total consolidated assets.

300 units × $25/unit

$  7,500

250 units × $28/unit

$  7,000

550 units × $20/unit

$11,000

300 units × ($30-$20)/unit

$  3,000

$28,500

a.

An expired insurance policy was replaced by a $12,000, 12-month policy.

b.

Morgan sold marketable securities at a $10,000 gain.

c.

Research and development costs of $15,000, which were expected to benefit the company over the next 12 months, were incurred.

d.

On the first day of the quarter, Morgan signed a one-year, $100,000 bank note carrying an 8% interest rate.

e.

Used equipment with a book value of $36,000 was sold for $18,000.

a.

Insurance expense: $1,000 × 3 = $3,000 or $12,000 ÷ 4 = $3,000

b.

Gain recognized in current quarter: $10,000

c.

Research and development expenses: $15,000 × 1/4 = $3,750

d.

Interest expense accrued: 100,000 × .08 × 1/4 = $2,000

e.

Loss recognized in current quarter: $36,000 – $18,00 = $18,000

$1-$100,000

15%

$100,000-200,000

22%

$200,000-460,000

28% + 5% surtax

$460,000 and above

30%

Estimated annual tax:

$100,000 × .15

$15,000

  100,000 × .22

22,000

    75,000 × .33

   24,750

$61,750

Tax credit

(12,250)

     Total tax

$49,500

Effective rate = $49,500 ÷ $275,000 = 18%

First-quarter tax expense = $65,000 × .18 = $11,700

$1-$100,000

15%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Income subject to tax:

     Projected income

$375,000

     Permanent difference: tax-exempt municipal securities income

(45,000)

     Permanent difference: non-deductible meals and entertainment

    31,250

        Income Subject to Tax

$361,250

Estimated annual tax:

$100,000  .15

$15,000

  100,000  .22

22,000

  161,250  .28

  45,150

$82,150

Tax credit

(22,500)

Net tax

$59,650

Effective rate: $59,650 ÷ $375,000 =

First-quarter tax expense  $85,000    $13,515

a.

Sales were $750,000.

b.

Cost of goods sold was $502,500.

c.

Total depreciation expense was $75,000 (part of selling and administrative expenses). As of the beginning of the first quarter, Aanstad began using straight-line depreciation. Had they used the old accelerated method, the current depreciation would have been $80,000.

d.

Other selling and administrative expenses were $30,000 excluding advertising expense. The two quarters of advertising were prepaid at $18,000 at the start of the first quarter.

e.

The cost of goods sold includes a favorable volume variance of $100,000. The volume variance is expected to be offset by the slow activity anticipated in the fourth quarter.

f.

Aanstad’s estimated effective tax rate is 25%.

g.

Aanstad’s retained earnings at the end of the fourth quarter, 20X0 was $234,000.

Aanstad Inc.

Income Statement

For the First Quarter 20X1

Sales

$750,000

Cost of goods sold

(502,500)

Gross profit

$247,500

Selling and administrative expenses*

(114,000)

Income from operations before taxes

$133,500

Income tax expense

    33,375

Net income

$  100,125

  *$75,000 + $30,000 + $9,000 = $114,000

Aanstad Inc.

Statement of Retained Earnings

For the First Quarter 20X1

Retained earnings at the end of quarter 4, 20X0

$234,000

Net income

100,125

Retained earnings at the end of quarter 1, 20X1

$334,125

a.

Sales were $14,680,000.

b.

Expenses related directly to the sales were $10,600,000, of which $9,500,000 related to the cost of goods sold.

c.

Good Time, Inc. employs the LIFO method for inventory valuation and has liquidated a portion of its beginning inventory. The liquidation was in the amount of $600,000, which is included in the cost of goods sold of $9,500,000, and the cost to replace this inventory will be $1,400,000.

d.

Other transactions during the first quarter were as follows:

(1)

Research and development costs were incurred in the amount of $4,000,000 and are expected to benefit equally the next 3 years.

(2)

Advertising costs were $75,000, of which one-third related to the first-quarter sales.

(3)

There was a gain on the early extinguishment of debt in the amount of $1,115,000.

Good Time, Inc.

Income Statement

For the 3-Month Period Ended March 31, 20X1

Sales

$14,680,000

Cost of goods sold

  10,300,0001

Gross profit

$  4,380,000

Expenses:

     Selling

$1,100,000

     Research

1,000,000

     Advertising

       25,000

    2,125,000

Income from continuing operations before

     income taxes and extraordinary items

$  2,255,000

Provision for income taxes

       902,000

Income from continuing operations

     before extraordinary items

$  1,353,000

Extraordinary gain on early extinguishment

     of debt (less applicable income taxes

     of $446,000)

       669,000

Net income

$  2,022,000

Earnings Per Share:

Income before extraordinary gain

$

Gain on early extinguishment of debt

Net income

$

1($9,500,000 – $600,000 + $1,400,000)

$1-$100,000

15%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Gross Tax Schedule:

Non-Ord

Qtr1   

Qtr2   

       Loss

Qtr2-All

YTD Actual Income

$  55,000   

$140,000   

Projected Remainder

  135,000   

  165,000   

Projected Annual Income

$190,000   

$305,000   

$(140,000)

$165,000

Gross Tax*

34,800   

66,400   

29,300

Tax Credits

   (15,500)

   (15,500)

   (15,500)

Net Tax

19,300   

50,900   

13,800

Effective Tax Rate

*Gross Tax Calculation:

Qtr1:

100,000 × .15

15,000

  90,000 × .22

19,800

34,800

Qtr2:

100,000 × .15

15,000

100,000 × .22

22,000

105,000 × .28

29,400

66,400

Qtr2-All:

100,000 × .15

15,000

  65,000 × .22

14,300

29,300

Tax Summary Schedule:

Effective

              Income   

Tax

              Tax Expense       

Qtr

YTD

        Rate

YTD

Prior

Qtr

Continuing:

   Qtr1

55,000

55,000

5,610

0

5,610

   Qtr2

85,000

140,000

23,380

5,610

17,770

Non-Ord Item:

   Qtr2

(140,000)

(140,000)

**    

(37,100)

0

(37,100)

** Incremental tax effect of the below the line item is calculated by taking the difference between the net tax calculated on continuing operations and the net tax calculated on all sources:

Net Tax-Continuing Operations

$50,900

Net Tax-Income from All Sources

  13,800

Incremental Benefit of the loss

$37,100

Actual Income

Projected Remainder

Qtr1

20,000

85,000

Qtr2

55,000

65,000

$1-$100,000

15%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Pre-tax income

Tax Expense (Benefit)

Period

Inc Type

Current

YTD

Effective%

YTD

Previous

Current

Q1

ordinary

   25,000

   25,000

   2,896

            –

   2,896

Q2

ordinary

   55,000

   80,000

10,704

     2,896

   7,808

Q1-R

ordinary

   20,000

   20,000

   2,020

            –

   2,020

Q2-R

ordinary

   55,000

   75,000

   9,803

     2,019

   7,784

EFFECTIVE TAX RATE:

Q1

Q2

Q1-R

Q2-R

previous

            –

   25,000

            –

    20,000

current

   25,000

   55,000

   20,000

    55,000

YTD act

   25,000

   80,000

   20,000

    75,000

Projected

   95,000

   65,000

   85,000

    65,000

Taxable

120,000

145,000

105,000

  140,000

Gross tax*

   19,400

   24,900

   16,100

    23,800

Credits

    (5,500)

    (5,500)

    (5,500)

     (5,500)

Net tax

   13,900

   19,400

   10,600

    18,300

Effec %

Gross tax calculations:

Q1

(100,000×15%)+(20,000×22%)

Q2

(100,000×15%)+(45,000×22%)

Q1-R

(100,000×15%)+(5,000×22%)

Q2-R

(100,000×15%)+(40,000×22%)

Pre-tax income

Tax Expense (Benefit)

Period

Inc Type

Current

YTD

Effective%

YTD

Previous

Current

Q1

ordinary

   30,000

   30,000

   7,083

            –

   7,083

Q1-R

ordinary

   35,000

   35,000

   8,351

            –

   8,351

CECAP*

   50,000

   50,000

12,500

            –

12,500

Q2

ordinary

   20,000

   55,000

13,123

     8,351

   4,772

EFFECTIVE TAX RATE:

Q1

Q1-R

Q2

Q1

30,000

   35,000

   35,000

Q2

          –

            –

   20,000

YTD act

30,000

   35,000

   55,000

Projected Total

90,000

110,000

110,000

exempt

  (5,000)

    (5,000)

    (5,000)

Taxable income

85,000

105,000

105,000

statutory rate

Tax

21,250

   26,250

   26,250

Effective rate

Case A   

Case B   

Case C   

Case D   

Year-to-date income (loss)

$  80,000   

$(20,000)

$(30,000)

$(120,000)

Projected income (loss)

     for the balance of the

     year

120,000   

60,000   

130,000   

60,000   

Permanent tax differences

     (tax-free income)

10,000   

10,000   

Estimated annual tax

      credits

7,000   

2,000   

Prior 2 years’ income (loss)

N/A   

(30,000)

N/A   

20,000   

Prior 2 years’ tax rate

N/A   

35%

N/A   

35%

Is projected income “more

likely than not”?

N/A   

No   

Yes   

Yes   

Deferred tax liabilities

     expected to reverse

     in next 20 years

N/A   

N/A   

N/A   

3,000   

Current statutory tax rate

40%

40%

40%

40%

Case A   

Case B   

Case C   

Case D   

Year-to-date income (loss)

$  80,000   

$(20,000)

$ (30,000)

$(120,000)   

Projected income (loss) for

     the balance of the year

  120,000   

   60,000   

  130,000   

      60,000    

Projected annual income

$200,000   

$ 40,000   

$100,000   

$  (60,000)   

Permanent difference

   (10,000)

       —        

   (10,000)

         —         

Taxable  income

$190,000   

$ 40,000   

$  90,000   

$  (60,000)   

Tax (benefit) at statutory

     rate (40%)

$76,000   

$16,000   

$36,000   

$(24,000)   

Tax credits

   (7,000)

    (2,000)   

Net tax expense (benefit)

$69,000   

$16,000   

$36,000   

$(26,000)   

Benefit limited to

N/A   

01

N/A   

(10,000)2

Estimated effective tax rate

0%

1

The YTD loss cannot be offset by projected income that is not “more likely than ; No carryback income is available for offset.

2

When the YTD loss exceeds the annual loss, the tax benefit and effective tax rate must be based on the YTD loss.

$20,000 (prior 2 years) × 35% + $3,000 (deferred tax credits) = $10,000.

   Income (Loss)   

Type of

Current

Year to

Effective

Quarter

Income

  Period

    Date

Tax Rate

First

Continuing Operation

$   30,000

$   30,000

First, Restated

Continuing Operation

100,000

100,000

Discontinued Operation

(70,000)

(70,000)

—       

Second

Continuing Operation

40,000

140,000

Discontinued Operation

(35,000)

(105,000)

Loss on Disposal

(48,000)5

(48,000)

Tax Expense (Benefit)

Type of

Year

Previously

Current

Quarter

Income

to Date

  Reported

  Period

First

Continuing Operation

$    5,832

$         0

$   5,832

First, Restated

Continuing Operation

23,610

0

23,610

Discontinued Operation

(17,778)3

0

(17,778)

Second

Continuing Operation

31,892

23,610

8,282

Discontinued Operation

(26,250)

(17,778)

(8,472)

Loss on Disposal

(12,000)

0

(12,000)

Total Income

Excluding

All Non-

Ordinary

Total

Nonordinary

ordinary

  Income

Income

     Losses

Items (net)

Pretax Income

$135,000

$120,000

$170,000

Tax Expense

  (benefit)

28,300

24,100

38,100

4,200

(A)

(B)

(C)

A  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        35,000 × .28

    9,800

$28,300

B  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        20,000 × .28

    5,600

$24,100

C  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        70,000 × .28

  19,600

$38,100

D = Tax on all nonordinary items (net) ($24,100 – $28,300) = $(4,200)

Incremental tax expense (benefit) traceable to:

D

All nonordinary items: ($24,100 – $28,300) = ($4,200)

(Step 1: B – A)

E

All nonordinary losses: ($24,100 – $38,100) = ($14,000)

(Step 2: B – C)

F

All nonordinary gains: ($4,200) – ($14,000) = $9,800

(Step 3: D – E)

Case A

Income (loss) for quarters 1 through 4 is ($50,000), $30,000, $40,000, and $40,000, respectively. Future projected income for the year is uncertain at the end of quarters 1 and 2. Annual income at the end of quarter 3 is estimated to be $20,000. No carryback benefit exists, and any future annual benefit is uncertain.

Case B

Assume the same facts as in Case A. However, at the end of quarters 1 through 3, annual income is estimated to be $40,000.

Case C

Quarterly income (loss) levels were $15,000, ($35,000), ($75,000), and $25,000. A yearly operating loss of $70,000 was anticipated throughout the year. Prior years’ income of $28,000 is available for carryback. The same tax rates were relevant to the carryback period

Income (Loss)

Tax

Tax Expense (Benefit)

Case

Quarter

Current

Year to Date

Rate

Year to Date

Current

1

2

3

4

        Tax Expense

           Income (Loss)   

            (Benefit)    

Year

Tax

Year

Case

Quarter

Current

to Date

Rate

to Date

Current

A

1

$(50,000)

$(50,000)

0

0

0

2

30,000

(20,000)

0

0

0

3

40,000

20,000

15%

3,000

3,000

4

40,000

60,000

10,000

7,000

B

1

(50,000)

(50,000)

15%

(7,500)

(7,500)

2

30,000

(20,000)

15%

(3,000)

4,500

3

40,000

20,000

15%

3,000

6,000

4

40,000

60,000

10,000

7,000

C

1

15,000

15,000

6%a

900

900

2

(35,000)

(20,000)

6%

(1,200)

(2,100)

3

(75,000)

(95,000)

b

(4,200)

(3,000)

4

25,000

(70,000)

6%

(4,200)

0

bBecause the YTD loss of $95,000 is greater than the annual loss of $70,000, the YTD tax benefit must be based on the YTD loss.

Quarter

Continuing

Operations

Discontinued

Segment

First

$33,000

Second

40,200

Third

62,000

$(6,500)

Fourth

71,500

1,200

a.

The first two quarters include results of operations of the discontinued segment. The segment reported first and second quarter pretax losses of $8,000 and $12,000, respectively.

b.

The estimated annual income tax rate in the first and second quarters was 35%. Because of the decision to discontinue, the revised annual effective tax rate was determined to be 40%.

           Income (Loss)       

Current

Year

Effective

Quarter

Type of Income

  Period

to Date

Tax Rate

First

Continuing Operation

$33,000

$  33,000

35%

First-Restated

Continuing Operation

41,000

41,000

40%

Discontinued Operation

(8,000)

(8,000)

40%

Second

Continuing Operation

40,200

73,200

35%

Second-Restated

Continuing Operation

52,200

93,200

40%

Discontinued Operation

(12,000)

(20,000)

40%

Third

Continuing Operation

62,000

155,200

40%

Discontinued Operation

(6,500)

(26,500)

40%

Fourth

Continuing Operation

71,500

226,700

40%

Discontinued Operation

1,200

(25,300)

40%

   Tax Expense (Benefit)

Year

Previously

Current

Quarter

Type of Income

To Date

  Reported

  Period

First

Continuing Operation

$11,550

$        0

$11,550

First-Restated

Continuing Operation

16,400

0

16,400

Discontinued Operation

(4,850)

0

(4,850)

Second

Continuing Operation

25,620

11,550

14,070

Second-Restated

Continuing Operation

37,280

16,400

20,880

Discontinued Operation

(11,660)

(4,850)

(6,810)

Third

Continuing Operation

62,080

37,280

24,800

Discontinued Operation

(10,600)

(11,660)

1,060

Fourth

Continuing Operation

90,680

62,080

28,600

Discontinued Operation

(10,120)

(10,600)

480

Segment

Operating

Profit (Loss)

1

$ 100,000   

2

500,000

3

400,000

4

(295,000)

5

(600,000)

6

(100,000)

7

(105,000)

Total segments reporting a profit:

     1

$   100,000

     2

500,000

     3

     400,000

        Total

$1,000,000

Total segments reporting a loss:

     4

(295,000)

     5

(600,000)

     6

(100,000)

     7

     (105,000)

        Total

$(1,100,000)

The greater absolute value is the total of the (loss) segments.

10% × 1,100,000 = 110,000

Any segment reporting a profit exceeding $110,000 or a loss exceeding ($110,000) would be reported.

Reportable segments: 2, 3, 4, 5

Revenues (in thousands)

Unaffiliated

Intersegment

Profit

Segments:

   Customers

            Sales

Total

(Loss)

Assets

     US

$   800

$    0

$   800

$200

$   300

     Canada

450

150

600

150

200

     Chile

600

60

660

240

350

     Spain

280

0

280

(30)

180

     France

     300

  100

     400

(110)

       90

$2,430

$310

$2,740

$ 450

$1,120

Corporate-level

     700

      0

     700

   100

  1,000

Total

$3,130

$310

$3,440

$ 550

$2,120

Revenue test:

$2,430   

Unaffiliated sales

     310   

Intersegment sales

$2,740   

Combined revenue

×    10%

$   274   

Revenue minimum

All segments exceed revenue minimum.

Profit/Loss test

Profit

Loss

     US

$200

     Canada

150

     Chile

240

     Spain

$  30

     France

  110

$590

$140

Minimum for profit or loss  $590 × 10%  $59

All segments except for Spain exceed the minimum profit or loss criterion.

Asset test

$1,120 × 10% = $112 minimum level

All segments except France meet minimum asset criterion.

75% Test

Revenue-Unaffiliated

     US

$   800

     Canada

450

     Chile

600

     Spain

280

     France

     300

$2,430

75% Total Corporate Revenue: 75% × $3,130 = $2,348

Reportable segments represent a significant portion of business

General and

Revenue from

Administrative

Total

Segment

    All Sources

Cost of Sales

         Expenses

Assets

     1

$17,450,000

$15,200,000

$  4,500,000

$  55,000,000

     2

25,200,000

20,000,000

4,000,000

80,000,000

     3

9,150,000

7,000,000

1,500,000

28,250,000

     4

780,000

300,000

100,000

4,750,000

     5

11,500,000

8,900,000

4,250,000

25,500,000

     6

6,800,000

3,400,000

2,000,000

12,000,000

     7

    2,100,000

    1,000,000

       900,000

    10,000,000

Total

$72,980,000

$55,800,000

$17,250,000

$215,500,000

Revenue minimum:

$  72,980,000 × 10%

=

$  7,298,000

Asset minimum:

$215,500,000 × 10%

=

$21,550,000

Passed

Passed

Passed

Profit/Loss

Revenue

Asset

Segment

Operating Profit

Operating Loss

     Test?     

    Test?    

  Test? 

     1

$2,250,000

Yes

Yes

Yes

     2

$1,200,000

Yes

Yes

Yes

     3

650,000

Yes

Yes

Yes

     4

380,000

No

No

No

     5

1,650,000

Yes

Yes

Yes

     6

1,400,000

Yes

No

No

     7

     200,000

_______

No

No

No

Total

$3,830,000

$3,900,000

×     10%

Profit/Loss Minimum

$   390,000

1.

The nature of the products and services

2.

The nature of the production process

3.

The type or class of customer for their products and services

4.

The method used to distribute their products or provide their services

5.

The nature of the regulatory environment, if any

a.

Management believes that since its firm does not have a perpetual inventory system, it would be too costly to take a physical inventory. Consequently, management has suggested to the accounting department that they estimate ending inventory.

b.

Since the LIFO inventory base was liquidated in the first quarter, management has recommended that the accounting department switch to FIFO valuation of inventory.

c.

Since the first quarter is a slow period for a manufacturing firm, management has suggested that the unfavorable volume variances from the firm’s standard cost system be deferred until year end.

a.

Gross profit and other sound methods of estimating inventory are permitted.

b.

Changing inventory methods must be justified. Switches are rare. Liquidation of a base layer of inventory generally is not an acceptable reason for a change. However, if the liquidation is temporary, replacement cost can be used to determine the cost of goods sold.

c.

Variances that are planned and expected to be absorbed by year end may be deferred at interim reporting dates.

a.

Research and Development

b.

Inventory

c.

Annual Bonuses

d.

Unfavorable Materials Usage Variance

a.

Research and Development: This account, under normal fiscal-year policies, would normally be expensed in the current period. For interim purposes, the account balance may be allocated among those interim periods of the current year that benefit.

b.

Inventory: This account is handled as the normal year-end account, except for certain variations. Specifically, the inventory may be valued by the gross profit method, and a write-down of inventory to lower of cost or market can be recovered in later interim periods if the market recovers. This option extends only until year end. Also, there may be an allowance for LIFO replacement.

c.

Annual Bonuses: A portion of estimated annual bonuses must be allocated to each interim period of the current year. Failure to recognize such bonuses on an interim basis would reduce the predictive value of the interim data.

d.

Unfavorable Materials Usage Variance: The treatment of this account is based on whether it is expected to be absorbed by year end. If a usage variance has arisen in an interim period and is expected to be reflected in annual statements, the variance should be recognized in the interim period in which it occurs.