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to accompany Advanced Accounting, 11th edition by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-1
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Operating Segments
According to GAAP, companies that have publicly traded debt or equity instruments must report on their business segments. Reporting is based on the structure used by management to make decisions or evaluate performance. For example, if the companys internal reporting and evaluation system is geographically based, the segment reporting is geographically based. if the internal reporting and evaluation system is product-line based, the segment reporting is product-lineCopyright based. 2012 Pearson Education,
Inc. Publishing as Prentice Hall 15-5
Combining Segments
Segments with similar economic characteristics may be combined. Products and services Production processes Classes of customers Distribution systems Regulatory environment, if applicable
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2: THRESHOLD TESTS
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Reportable Segments
Operating segments are reportable and material if any one of the three threshold tests are met 1. 10% Revenue test 2. 10% Asset test 3. 10% Profit or loss test Segments not meeting any of the three tests are combined into one "all other" category. One additional test to see if a sufficient number of segments have been identified 1. 75% External revenue test
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-9
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A segment is reportable if its total revenue 10% of combined segment revenue. Threshold = 10%(1,500) = $150 Transportation ($360) and Oil refining ($885) are reportable segments.
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-11
A segment is reportable if its identifiable assets 10% of combined segment assets. Threshold = 10%(3,000) = $300 Transportation, Oil refining, and Financing are reportable segments.
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-13
A reportable segment's |profit or loss| 10% of the greater of |combined profits or combined losses|. $270 is greater than $100. Threshold = 10%(270) = $27. Transportation, Oil refining, and Finance are reportable segments.
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-15
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4: SEGMENT DISCLOSURES
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Reconciliations
Reconciliation schedules should be provided to explain the difference between segment amounts and consolidated totals for:
1. Reportable segment revenue to consolidated revenue Intersegment revenues 2. Reportable segment profit and loss to consolidated income before taxes Intersegment revenues, expenses, and common or allocated costs
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-24
Reconciliations (cont.)
3. Reportable segment assets to consolidated assets Corporate assets 4. If other significant information is disclosed, reconcile the segment amounts with consolidated amounts for each item
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-25
6: ENTERPRISE-WIDE DISCLOSURES
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Additional Disclosures
Additional enterprise-wide disclosures are required if not already reported with segment information 1. Products and services Revenues by product/product line, service 2. Geographic information Revenues and fixed assets Domestic and foreign And if >10%, the specific country must be disclosed 3. Major customers Customer revenues > 10% Total Revenues Segment which has those revenues Not required: customer identity Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall 15-27
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GAAP has concluded that an interim period is an integral part of the whole, and should be based on the same accounting principles and practices used in the annual financial statements.
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-29
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If expected annual taxable income = $120,000 Taxes= $22,250 + .39(120,000 100,000)= $30,050 Effective tax rate = 30,050 / 120,000 = 25.042% The 25.042% rate is used for all four quarters.
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-33
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Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall 15-37