Chapter 8

A company has three operating segments with the following amounts of profit or loss: Segment A, profit of $1,000; Segment B, profit of $2,500; Segment C, loss of $4,000. The quantitative threshold for determining a significant operating segment under the profit or loss test is

$400.

ABC Company reports sales revenue of $1,000,000 in its consolidated income statement. The aggregate amount of sales revenue that must be disclosed by individual operating segments is

$750,000

A company has three operating segments with a combined profit of $900 and one operating segment with a loss of $200. The quantitative threshold for determining a significant operating segment under the profit or loss test is

90

With respect to reporting long-lived assets by geographic area,

IFRS specifically indicates that intangible assets are included in long-lived assets but U.S. GAAP does not.

Under U.S. GAAP, segments are identified based upon

a management approach.

To determine whether an operating segment is significant enough to require separate reporting an entity must apply

a revenue test. an asset test. a profit or loss test.

When an entity has a matrix organization, U.S. GAAP requires operating segments to be based on products and services rather than geographic areas. In this situation, IFRS

allows operating segments to be based on either products and services or geographic areas.

The three quantitative threshold tests for identify separately reportable operating segments are (1) a revenue test, (2) a profit or loss test, and (3) a(n) test.

asset

A potential benefit from having information about individual foreign countries in which an entity operates rather than information about broad geographic areas is that a financial statement user can

better assess the risks associated with an entity's foreign operations.

In accordance with authoritative guidance, an enterprise must provide a reconciliation between the total of reportable segments' profit or loss and

consolidated income before tax.

In accordance with authoritative guidance, an enterprise must reconcile the total of segments' revenues with

consolidated revenues.

For each separately reportable operating segment, an enterprise must report

depreciation expense.

The management approach to determining an enteprise's segments focuses on the manner in which management

disaggregates the enterprise for making operating decisions.

In determining whether an entity has a material amount of long-lived assets in a foreign country, authoritative literature

does not establish a quantitative threshold for determining materiality.

A company with international activities must disclose revenues and long-lived assets located in the country and in all foreign countries in total.

domestic

An objective of segment reporting is to provide information about the different

economic environments in which an enterprise operates.

A company should estimate its annual tax rate in calculating income tax at the end of each interim period.

effective

Revenues from customers and long-lived assets must be disclosed for the domestic country and for all foreign countries in total.

external

In determining whether business activities and environments are similar, and therefore individual operating segments may be combined, management must evaluate

five criteria, and segments must be similar on all five criteria to be combined.

A cost that is incurred in the second quarter of the year but which benefits all four quarters of the year should be recognized as an expense

in all four quarters of the year.

In accounting for expenses that occur unevenly throughout the year, such as an annual bonus, the FASB requires interim periods to be treated as parts of the annual period.

integral

An operating segment is significant based on the asset test if

its assets are 10% or more of the combined assets of all operating segments.

Treating an interim period as an integral portion of the annual period (rather than as a discrete accounting period) results involatility in quarterly earnings

less

approach is used to determine an enterprise's operating segments.

management

Operating segments that do not meet any of the quantitative thresholds:

may be combined if they share a majority of the aggregation criteria

ABC Company owns four restaurants that serve breakfast sandwiches in four different cities. The economic environment in the four cities is similar, but each restaurant meets the definition of an operating segment. ABC Company

may combine the four restaurants into one reportable segment.

ABC Company has only one operating segment but conducts business in the U.S. and Mexico. ABC Company

must disclose revenues from its Mexican business, if the amount is material.

A company has eight operating segments, five of which pass one or more quantitative thresholds to be considered separately reportable. The five separately reportable operating segments have 70 percent of total company consolidated sales to outside customers. The company

must separately report additional segments until the total combined sales of reported segments is at least 75 percent of consolidated sales.

The number of quantitative threshold tests an operating segment must meet to be identified as a reportable segment is

one

The chief operating decision maker (CODM) at ABC company receives monthly earnings reports from each of the company's operating divisions that include measures of gross profit, operating income, EBITDA, and income before tax.The CODM uses operating income to evaluate each segment's performance and make resource allocation decisions. The measure of profit or loss to be reported by segment is

operating income.

Even if an enterprise has only one operating segment, it still must report information about its and services.

products

For each separately reportable operating segment, an enterprise must report

profit or loss. revenues from intersegment sales. total assets. revenues from sales to external customers.

Treating an interim period as an integral part of an annual period results in expenses paid in one interim period that relate to the entire year being recognized as expense

proportionately over all interim periods of the year.

As opposed to treating interim periods as discrete accounting periods in their own right, one advantage of treating interim periods as integral parts of the annual period is that this treatment

results in less volatility in quarterly earnings.

An enterprise must provide disclosures for each foreign country in which it has a material amount of

revenues from external customers. long-lived assets.

For each individual foreign country in which an entity has a material amount, it must report

revenues from transactions with external customers.

A toy manufacturing company makes more than one-half of its annual sales in the fourth quarter of the year when customers place orders for the holiday season. In accordance with FASB ASC 270, the company must disclose the nature of its business operations.

seasonal

An entity must explain that way it measures

segment assets. segment profit or loss.

Authoritative literature suggests that the maximum number of operating segments that should be reported separately is

ten

An operating segment is significant based on the profit or loss test if its profit or loss is 10% or more of

the larger of the combined profit of all profitable segments or the combined loss of all segments reporting a loss.

If an entity has a major customer it must disclose

the operating segment that generates revenues from that customer. the amount (or percentage) of revenue generated from that customer.

Under the management approach the determination of segments is based on

the organization structure of an entity.

To determine whether individual operating segments that are otherwise separately reportable may be combined, management must consider

the type of customer served by each segment. the nature of the production process used by each segment. the distribution methods employed by each segment.. the nature of the regulatory environment of each segment. the nature of the products provided by each segment.

Authoritative literature requires an entity to disclose revenues from external transactions from each of its products and services

unless it is impracticable to do so. even if it has only one operating segment. when its operating segments are not based on products and services.

Users of financial statements benefit from information reported by segment because it helps them better understand an enterprise's

performance

A company makes an accounting change in the third quarter of the current year. That change must be applied to the first and second quarters of the year.

retrospectively

The denominator in applying the revenue test to determine whether an operating segment is significant should include

revenues from sales to other segments. revenues from sales to outside customers.

The objective of reporting is to provide information about an enterprise's different business activities and operating environments.

segment

Companies must disclose differences in measuring

segment profit or loss and consolidated income before tax. segment assets and consolidated assets.

ABC Company has two industry segments (auto parts and heavy equipment) and three geographic segments (Europe, Asia, and North America). The company's chief operating decision maker receives monthly statements from segment managers detailing the company's performance in both industry segments as well as the three geographic segments (5 monthly reports in total). For purposes of complying with segment reporting requirements, ABC Company must define its reportable operating segments as

the auto parts and heavy equipment segments.

For each separately reportable operating segment, an enterprise must disclose

total assets.

An enterprise must disclose unusual items included in segment profit or loss only if

unusual items are included in the profit or loss measure regularly reviewed by the chief operating decision maker.

ABC Company's operating segments use a cash basis of accounting to determine the amount of pension expense included in the measure of segment operating income reported to corporate headquarters. Adjustments are made at corporate headquarters to convert segment pension expense from a cash basis to an accrual basis for inclusion in the company's U.S. GAAP consolidated financial statements. In accordance with authoritative guidance, ABC Company must report segment profit or loss for each operating segment

using pension expense determined on a cash basis.

An operating segment is significant if its assets are percent or more of the combined assets of all operating segments.

10

ABC Company has three segments that had the following amounts of profit or loss in the current year: 10,000 profit, 30,000 profit, and 5,000 loss. What is the amount of profit or loss that a segment must have to meet the profit or loss test?

4,000

A difference between IFRS and U.S. GAAP with respect to reporting by operating segment is

IFRS requires disclosure of segment liabilities but U.S. GAAP does not.

True or false: Gross profit in the first quarter of the year should not reflect the effect of a LIFO liquidation if the company does not expect the LIFO liquidation to continue until the end of the year.

True

Segment reporting is intended to help users of financial statements better assess

an enterprise's future cash flow prospects.

To recognize income tax expense at the end of each interim period a company must estimate what it believes its effective tax rate will be.

annual

An entity has reported a sufficient number of operating segments separately when

at least 75% of consolidated revenue has been reported by individual segments.

Financial statements in quarterly reports are not required to be to allow them to be issued as soon as possible.

audited

In the third quarter of the current year, a company decides to change its accounting method related to inventory. The company is able to calculate the impact that the new method would have had on the first and second quarter financial statements if the new method had been adopted at the beginning of the year. The company should use the new accounting method

beginning in the third quarter of the current year and restate amounts reported in the first and second quarters for the accounting method change.

Segment reporting provides information about the different

business activities in which an enterprise engages.

White Company's actuator operating unit manufactures actuators that it sells only to other operating units within the company. The actuator operating unit

can be designated as an operating segment.

An entity must disclose any difference between how it measures profit or loss by segment and how it measures

consolidated income before income taxes.

In interim reports companies are not required to disclose

cost of goods sold.

In applying the profit or loss test to determine whether an operating segment is separately reportable, authoritative literature

does not prescribe any specific measure of profit or loss to use in applying the test.

In determining individual foreign countries in which an enterprise generates a material amount of revenues, authoritative guidance

does not provide a quantitative threshold for determining a material foreign country.

A company with a December 31 year-end plans to pays its president a bonus at the end of December. The bonus will be based on the current year's year-to-date income at the time the bonus is paid. The company should

estimate the amount of bonus to be paid in December and recognize 1/4 of this amount as expense in the first quarter of the year.

Companies must disclose the seasonal nature of their business operations when they

experience a spike in sales volume in one specific quarter each year.

ABC Company has five operating segments. Two operating segments meet three quantitative threshold tests for separate reporting, two segments meet only one test, and one segment meets zero tests. The number of operating segments for which ABC Company must provide separate disclosures is

four

Operating segments that are individually significant and otherwise separately reportable may be combined if they

have essentially the same business activities in essentially the same business environments.

An enterprise must report the amount of sales revenue generated

in all foreign countries in total. in its home country.

In accordance with FASB ASC 270, for interim reporting an annual bonus should be recognized as expense

in each of the four quarters of the year on a prorated basis.

The chief operating decision maker at XYZ Company uses segment income before tax to make operating decisions about segments of the business. Accordingly, for each operating segment, XYZ Company must report

income before tax.

The criteria that must be met for a component of an enterprise to be identified as an operating segment are that it

is regularly reviewed by the chief operating decision maker. generates revenues and incurs expenses. has discrete financial information available.

For all foreign countries in total, an entity must disclose

long-lived assets. external revenues.

A company using LIFO to account for inventory sells more units of product in the first quarter of the year than it produces, which results in a LIFO liquidation. However, by the end of the year, the company expects there to be no LIFO liquidation. In preparing its first quarter financial statements the company should

make an adjustment to cost of goods sold to offset the effect of the LIFO liquidation.

A company must report revenues from transactions with external customers for each country in which it has a amount of external revenues.

material

ABC Company has four operating segments (1, 2, 3, and 4). Segments 3 and 4 do not meet any of the quantitative thresholds for separate reporting, and they share a majority of the criteria for aggregation. ABC Company

may combine segments 3 and 4 into an "all other" segment.

An entity's operating segments measure pension expense on a cash basis (i.e., the amount of cash contributed to the pension fund), whereas, in preparing consolidated financial statements, the entity must measure pension expense on an accrual basis in accordance with GAAP. In this situation, the amount of pension expense used in reporting segment profit or loss must be

measured on a cash basis.

In interim reports, operating segment information

must be provided for revenues (external and intersegment), and segment profit or loss.

When an interim period is treated as an integral portion of an entire year, bonuses paid to key employees in December are recognized as expense

on a proportionate basis in each of the four quarters of the year.

If business units are organized along both product lines and geographic areas in a matrix form of organization and segment managers exist for both types of business units,

only those units defined along product lines may be designated as operating segments.

A component of an enterprise that recognizes revenues and expenses, is regularly reviewed by the chief operating decision maker, and has discrete financial information is a(n) segment.

operating

An operating segment is significant if its total revenues are percent or more of the combined total revenues of all reported operating segments.

10

An entity must disclose that it has a major customer when

10% or more of consolidated revenues are generated from that customer.

Some companies are organized and provide segment disclosures on the basis of geographic areas only. An example of such a company is

Apple

The chief operating decision maker of BBB Company reviews EBITDA for each operating segment on a monthly basis. BBB Company must disclose which of the following for each of its operating segments?

EBITDA.

A company that operates in only one segment and therefore does not provide segment information does not need to provide information about its foreign operations.

False

A foreign country in which an entity generates 10% of consolidated revenues is, by definition, a material country.

False

True or false: The practical limit to the number of separately reportable operating segments is five (5).

True

Some companies are organized and provide segment disclosures on the basis of geographic areas only. An example of such a company is

McDonald's

A component of an enterprise can be an operating segment even if all of its revenues are generated from intra-entity transactions, that is, from transactions with other segments within the entity.

True

A segment is separately reportable if its total revenues (both internal and external) are equal to at least 10% of an entity's combined revenue of all reported operating segments (both internal and external).

True

True or false: A potential benefit from having information about individual foreign countries in which an entity operates rather than information about broad geographic areas is that a financial statement user can better assess the risks associated with the entity's foreign operations.

True

A company has three segments with the following amounts of assets: Segment 1, tangible assets of $1,000 and intangible assets of $200; Segment 2, tangible assets of $4,000 and intangible assets of $500; Segment 3, tangible assets of $500 and investments of $100. The quantitative threshold for a significant operating segment under the asset test is

$630.

A company has three operating segments with combined profits of $150 million and one operating segment with a net loss of $200 million. The quantitative threshold for a significant operating segment is

$20 million.

A company has six operating segments with combined total revenues of $500 million. An operating segment is separately reportable if its revenues exceed

$50 million.