CHAPTER 24 19.

Fraudulent financial reporting is intentional or reckless conduct, whether act or omission, that
results in materially misleading financial statements.
FULL DISCLOSURE IN FINANCIAL REPORTING
TRUE-FALSE—Conceptual 20. Influences in a company’s internal environment may relate to industry conditions, poor internal
1. FASB standards directly affect financial statements, notes to the financial statements, and control systems, or legal and regulatory considerations.
management’s discussion and analysis.

2. The SEC requires that companies report to it certain substantive information that is not found in True-False Answers—Conceptual
their annual reports. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. F 16. T
3. Accounting policies are the specific accounting principles and methods a company uses and
2. T 7. F 12. T 17. F
considers most appropriate to present fairly its financial statements.
3. T 8. T 13. F 18. T
4. In order to make adequate disclosure of related party transactions, companies should report the 4. 9. 14. 19.
F F T T
legal form, rather than the economic substance, of these transactions.
5. F 10. T 15. F 20. F
5. If the loss on an account receivable results from a customer’s bankruptcy after the balance sheet
date, the company only discloses this information in the notes to the financial statements. MULTIPLE CHOICE—Conceptual
21. Which of the following should be disclosed in a Summary of Significant Accounting Policies?
6. FASB Statement 131 requires that general purpose financial statements include selected a. Types of executory contracts
information on a single basis of segmentation. b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
7. The FASB requires allocations of joint, common, or company-wide costs for external reporting d. Depreciation method followed
purposes.

8. If 10 percent or more of company revenue is derived from a single customer, the company must 22. An example of an inventory accounting policy that should be disclosed in a Summary of
disclose the total amount of revenue from each such customer by segment. Significant Accounting Policies is the
a. amount of income resulting from the involuntary liquidation of LIFO.
9. Companies should report accounting transactions as they occur, and expense recognition should b. major backlogs of inventory orders.
not change with the period of time covered under the integral approach. c. method used for pricing inventory.
d. composition of inventory into raw materials, work-in-process, and finished goods.
10. Companies should generally use the same accounting principles for interim reports and for
annual reports.
23. Errors and irregularities are defined as intentional distortions of facts.
11. Companies report extraordinary items in interim reports by prorating them over the four quarters. Errors Irregularities
12. To compute the year-to-date tax, companies apply the estimated annual effective tax rate to the a. Yes Yes
year-to-date ordinary income at the end of each interim period. b. Yes No
c. No Yes
13. In most situations, an auditor issues a qualified opinion or disclaims an opinion. d. No No
14. A qualified opinion is issued when the exception to the standard opinion is not of sufficient S
24. The full disclosure principle, as adopted by the accounting profession, is best described by which
magnitude to invalidate the statements as a whole. of the following?
a. All information related to an entity's business and operating objectives is required to be
15. Management’s discussion and analysis section covers three financial aspects of an enterprise’s
disclosed in the financial statements.
business-liquidity, profitability, and solvency. b. Information about each account balance appearing in the financial statements is to be
included in the notes to the financial statements.
16. The MD&A section must provide information about the effects of inflation and changing prices, if
c. Enough information should be disclosed in the financial statements so a person wishing to
they are material to financial statement trends. invest in the stock of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an informed
17. A financial projection is a set of prospective financial statements that present a company’s
reader.
expected financial position and results of operations.
S
25. The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is
18. The difference between a financial forecast and a financial projection is that a forecast provides
important to financial statement readers in determining
information on what is expected to happen, while a projection provides information on what might a. net income for the year.
take place. b. whether accounting policies are consistently applied from year to year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.
S
26. If a business entity entered into certain related party transactions, it would be required to disclose c. cost of goods sold.
all of the following information except the d. depreciation and amortization expense.
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties and the terms involved. 34. The profession requires disaggregated information in the following ways:
c. dollar amount of the transactions for each of the periods for which an income state-ment is a. products or services.
presented. b. geographic areas.
d. amounts due from or to related parties as of the date of each balance sheet presented. c. major customers.
P
d. all of these.
27. Events that occur after the December 31, 2008 balance sheet date (but before the balance sheet
is issued) and provide additional evidence about conditions that existed at the balance sheet date S
35. In presenting segment information, which of the following items must be reconciled to the entity's
and affect the realizability of accounts receivable should be consolidated financial statements?
a. discussed only in the MD&A (Management's Discussion and Analysis) section of the annual
report. Operating Identifiable
b. disclosed only in the Notes to the Financial Statements. Revenues Profit (Loss) Assets
c. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008. a. Yes Yes Yes
d. used to record an adjustment directly to the Retained Earnings account b. No Yes Yes
c. Yes No Yes
28. Which of the following post-balance-sheet events would generally require disclosure, but no d. Yes Yes No
adjustment of the financial statements?
S
a. Retirement of the company president 36. APB Opinion No. 28 indicates that
b. Settlement of litigation when the event that gave rise to the litigation occurred prior to the a. all companies that issue an annual report should issue interim financial reports.
balance sheet date. b. the discrete view is the most appropriate approach to take in preparing interim financial
c. Employee strikes reports.
d. Issue of a large amount of capital stock c. the three basic financial statements should be presented each time an interim period is
reported upon.
29. Which of the following subsequent events (post-balance-sheet events) would require adjustment d. the same accounting principles used for the annual report should be employed for interim
of the accounts before issuance of the financial statements? reports.
P
a. Loss of plant as a result of fire 37. Donnegan Manufacturing Company employs a standard cost system. A planned volume variance
b. Changes in the quoted market prices of securities held as an investment in the first quarter of 2008, which is expected to be absorbed by the end of the fiscal year,
c. Loss on an uncollectible account receivable resulting from a customer’s major flood loss ordinarily should
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end. a. be deferred at the end of the first quarter, regardless of whether it is favorable or
unfavorable.
30. Revenue of a segment includes b. never be deferred beyond the quarter in which it occurs.
a. only sales to unaffiliated customers. c. be deferred at the end of the first quarter if it is favorable; unfavorable variances are to be
b. sales to unaffiliated customers and intersegment sales. recognized in the period incurred.
c. sales to unaffiliated customers and interest revenue. d. be deferred at the end of the first quarter if it is unfavorable; favorable variances are to be
d. sales to unaffiliated customers and other revenue and gains. recognized in the period incurred.

38. In considering interim financial reporting, how does the profession conclude that such reporting
31. An operating segment is a reportable segment if should be viewed?
a. its operating profit is 10% or more of the combined operating profit of profitable segments. a. As a "special" type of reporting that need not follow generally accepted accounting
b. its operating loss is 10% or more of the combined operating losses of segments that incurred principles.
an operating loss. b. As useful only if activity is evenly spread throughout the year so that estimates are
c. the absolute amount of its operating profit or loss is 10% or more of the company's combined unnecessary.
operating profit or loss. c. As reporting for a basic accounting period.
d. none of these. d. As reporting for an integral part of an annual period.

39. Accounting principles are modified for the following at interim dates.
32. A segment of a business enterprise is to be reported separately when the revenues of the
segment exceed 10 percent of the Revenue Losses
a. total combined revenues of all segments reporting profits. a. Yes Yes
b. total revenues of all the enterprise's industry segments. b. Yes No
c. total export and foreign sales. c. No Yes
d. combined net income of all segments reporting profits. d. No No

40. The following methods of estimating inventory can be used at interim dates for inventory pricing.
33. All of the following information about each operating segment must be reported except May they also be used at year end?
a. unusual items.
b. interest revenue. Gross Profit Method Retail Inventory Method
 a. No No b. an assessment of the company's ability to be successful in the future.
b. No Yes c. given one or more hypothetical assumptions, an entity's expected financial position, results
c. Yes No of operations, and cash flows.
d. Yes Yes d. an assessment of the company's ability to be successful in the future under a number of
different assumptions.
41. A company that uses the last-in, first-out (LIFO) method of inventory pricing finds at an interim
reporting date that there has been a partial liquidation of the base period inventory level. The *48. Cash, short-term investments, and net receivables are the numerator for
decline is considered temporary and the partial liquidation is expected to be replaced prior to year
end. The amount shown as inventory at the interim reporting date should Acid-Test Ratio Current Ratio
a. be shown at the actual level, and cost of sales for the interim reporting period should include a. Yes No
the expected cost of replacement of the liquidated LIFO base. b. Yes Yes
b. be shown at the actual level, and cost of sales for the interim reporting period should reflect c. No No
the historical cost of the liquidated LIFO base. d No Yes
c. not give effect to the LIFO liquidation, and cost of sales for the interim reporting period *49. Theoretically, in computing the receivables turnover, the numerator should include
should reflect the historical cost of the liquidated LIFO base. a. net sales.
d. be shown at the actual level, and the decrease in inventory level should not be reflected in b. net credit sales.
the cost of sales for the interim reporting period. c. sales.
d. credit sales.
42.Companies should disclose all of the following in interim reports except
a. basic and diluted earnings per share. *50. The rate of return on common stock equity is calculated by dividing
b. changes in accounting principles. a. net income by average common stockholders’ equity.
c. post-balance-sheet events. b. net income less preferred dividends by average common stockholders’ equity.
d. seasonal revenue, cost, or expenses. c. net income by ending common stockholders’ equity.
d. net income less preferred dividends by ending common stockholders’ equity.
43. The required approach for handling extraordinary items in interim reports is to
a. prorate them over all four quarters. *51. The payout ratio is calculated by dividing
b. prorate them over the current and remaining quarters. a. dividends per share by earnings per share.
c. charge or credit the loss or gain in the quarter that it occurs. b. cash dividends by net income plus preferred dividends.
d. disclose them only in the notes. c. cash dividends by market price per share.
d. cash dividends by net income less preferred dividends.
S
44. If the financial statements examined by an auditor lead the auditor to issue an opinion that
contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, *52. Which of the following ratios measures long-term solvency?
the opinion is said to be a. Acid-test ratio
a. unqualified. b. Receivables turnover
b. qualified. c. Debt to total assets
c. adverse. d. Current ratio
d. exceptional.
*53. The calculation of the number of times interest is earned involves dividing
P
45. The MD&A section of an enterprise's annual report is to cover the following three items: a. net income by annual interest expense.
a. income statement, balance sheet, and statement of owners' equity. b. net income plus income taxes by annual interest expense.
b. income statement, balance sheet, and statement of cash flows. c. net income plus income taxes and interest expense by annual interest expense.
c. liquidity, capital resources, and results of operations. d. none of these.
d. changes in the stock price, mergers, and acquisitions.
*54. When should an average amount be used for the numerator or denominator?
S
46. Which of the following best characterizes the difference between a financial forecast and a a. When the numerator is a balance sheet item or items
financial projection? b. When the denominator is a balance sheet item or items
a. Forecasts include a complete set of financial statements, while projections include only c. When a ratio consists of an income statement item and a balance sheet item
summary financial data. d. When the numerator is an income statement item or items
b. A forecast is normally for a full year or more and a projection presents data for less than a
year. *55. The basic limitations associated with ratio analysis include
c. A forecast attempts to provide information on what is expected to happen, whereas a a. the lack of comparability among firms in a given industry.
projection may provide information on what is not necessarily expected to happen. b. the use of estimated items in accounting.
d. A forecast includes data which can be verified about future expectations, while the data in c. the use of historical costs in accounting.
a projection is not susceptible to verification. d. all of these.

47. A financial forecast per professional pronouncements presents to the best of the responsible
party's knowledge and belief,
a. an entity's expected financial position, results of operations, and cash flows.
Multiple Choice Answers—Conceptual c. $560,000 $1,400,000 $ -0- $ -0-
d. $490,000 $490,000 $490,000 $490,000
Item Ans Item Ans Item Ans Item Ans Item Ans Ite Ans Ite Ans
59. An inventory loss from market decline of $1,600,000 occurred in May 2008, after its March 31,
21. d. 26. b. 31. d. 36. d. 41. a. m
46. c. m
*51. d.
2008 quarterly report was issued. None of this loss was recovered by the end of the year. How
22. c 27. c 32. b 37. a 42. c 47. a *52. c should this loss be reflected in the company's quarterly income statements?
Three Months Ended
23. c 28. d 33. c 38. d 43. c *48. a *53. c 3/31/08 6/30/08 9/30/08 12/31/08
a. $ -0- $ -0- $ -0- $1,600,000
24. d 29. d 34. d 39. d 44. b *49. b *54 c
b. $ -0- $533,333 $533,333 $533,333
c. $ -0- $1,600,000 $ -0- $ -0-
25. b 30. b 35. a 40. b 45. c *50. b *55. d
d. $400,000 $400,000 $400,000 $400,000

Use the following information for questions 60 through 63.

Solutions to those multiple choice questions for which the answer is “none of these:”
Information for Morales Corp. is given below:
31. The absolute amount of its profit or loss is 10% or more of the greater, in absolute amount, of (a)
the combined profit of all operating segments that did not incur a loss, or (b) the combined loss of Morales Corp.
all operating segments that did incur a loss. Balance Sheet
December 31, 2008

Assets Equities
MULTIPLE CHOICE—Computational
Cash $ 100,000 Accounts payable $ 210,000
Accounts receivable (net) 650,000 Federal income tax payable 63,000
56. Presented below are four segments that have been identified by Gregg Productions: Inventories 813,000 Miscellaneous accrued
Total Revenue Operating payables 75,000
Segments (Unaffiliated) Profit (Loss) Identifiable Assets Plant and equipment, Bonds payable (10%, due
A $255,000 $30,000 $900,000 2012) 625,000
B 600,000 (55,000) 800,000 net of depreciation 661,000 Preferred stock ($100 par, 6%
C 225,000 4,000 450,000 Patents 87,000 cumulative nonparticipating) 250,000
D 90,000 6,000 225,000 Other intangible assets 25,000 Common stock (no par, 20,000
Total Assets $2,336,000 shares authorized, issued
For which of the segments would information have to be disclosed in accordance with and outstanding) 375,000
professional pronouncements? Retained earnings 813,000
a. Segments A, B, C, and D Treasury stock—500 shares
b. Segments A, B, and C of preferred (75,000)
c. Segments A and B Total Equities $2,336,000
d. Segments A and D
Morales Corp.
57. In January 2008, Otto, Inc. estimated that its year-end bonus to executives would be $720,000 Income Statement
for 2008. The actual amount paid for the year-end bonus for 2007 was $660,000. The estimate Year Ended December 31, 2008
for 2008 is subject to year-end adjustment. What amount, if any, of expense should be reflected
in Otto's quarterly income statement for the three months ended March 31, 2008? Net sales $3,000,000
a. $ -0-. Cost of goods sold 2,000,000
b. $165,000. Gross profit 1,000,000
c. $180,000. Operating expenses (including bond interest expense) 500,000
d. $720,000. Income before income taxes 500,000
Income tax 150,000
58. On January 15, 2008, Seeley Company paid property taxes on its factory building for the calendar Net income $ 350,000
year 2008 in the amount of $560,000. In the first week of April 2008, Seeley made unanticipated
major repairs to its plant equipment at a cost of $1,400,000. These repairs will benefit operations Additional information:
for the remainder of the calendar year. How should these expenses be reflected in Seeley's There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory
quarterly income statements? accounts are unchanged from January 1, 2008, and there were no changes in the Bonds Payable, Preferred
Stock, or Common Stock accounts during 2008. Assume that preferred dividends for the current year have
Three Months Ended
not been declared.
3/31/08 6/30/08 9/30/08 12/31/08
a. $140,000 $606,667 $606,667 $606,667
b. $140,000 $1,540,000 $140,000$140,000
 *60. At December 31, 2008, the current ratio was Additional information:
a. 750 ÷ 210. Depreciation included in cost of goods sold and operating expenses is $305,000. On May 1, 2008, 15,000
b. 2,225 ÷ 273. shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not
c. 1,563 ÷ 273. declared during 2008.
d. 1,563 ÷ 348.
*64. The receivables turnover for 2008 is
*61. The number of times interest was earned during 2008 was a. 3,200 ÷ 400.
a. 350 ÷ 62.5. b. 2,100 ÷ 400.
b. 500 ÷ 62.5. c. 3,200 ÷ 350.
c. 562 ÷ 62.5. d. 2,100 ÷ 350.
d. 437 ÷ 62.5.
*65. The inventory turnover for 2008 is
*62. At December 31, 2008, the book value per share of common stock was a. 3,200 ÷ 650.
a. $55.66. b. 2,100 ÷ 650.
b. $58.16. c. 3,200 ÷ 600.
c. $59.41. d. 2,100 ÷ 600.
d. $58.65.
*66. The profit margin on sales for 2008 is
*63. The rate of return for 2008 based on the year-end common stockholders' equity was a. 1,100 ÷ 3,200.
a. 350 ÷ 1,173. b. 375 ÷ 3,200.
b. 350 ÷ 1,188. c. 1,100 ÷ 2,100.
c. 335 ÷ 1,173. d. 375 ÷ 2,100.
d. 335 ÷ 1,188.
*67. The rate of return on common stock equity for 2008 is
Use the following information for questions 64 through 69. a. 375 ÷ 1,800.
b. 375 ÷ 2,000.
The following data are provided: c. 325 ÷ 1,800.
December d. 325 ÷ 2,000.
31
*68. The book value per share of common stock at 12/31/08 is
2008 2007 a. 1,950 ÷ 60.
Cash $ 375,000 $ b. 1,940 ÷ 60.
250,000 c. 1,950 ÷ 55.
Accounts receivable d. 2,000 ÷ 55.
(net) 400,000 300,000
Inventories 650,000 550 *69. At December 31, 2008, the acid-test ratio was
,000 a. 775 ÷ 325.
Plant assets b. 775 ÷ 540.
(net) 2,000,000 1,625,000 c. 1,050 ÷ 400.
Accounts d. 1,425 ÷ 325.
payable 275,000 200,000
Taxes *70. Presented below is information related to Ramsey Company.
payable 50,000 25,000
Bonds Current Assets
payable 350,000 350,000 Cash $ 8,000
10% Preferred stock, $50 Short-term investments 150,000
par 500,000 500,000 Accounts receivable 122,000
Common stock, $10 Inventories 220,000
par 600,000 450,000 Prepaid expenses 60,000
Paid-in Total current assets $560,000
capital 400,000 325,000
Retained Total current liabilities are $200,000. What is the acid-test ratio?
earnings 1,000,000 875,000 a. 2.8 to 1.
Net credit sales 3,200,000 b. 2.5 to 1.
Cost of goods sold 2,100,000 c. 1.4 to 1.
Operating expenses 725,000 d. 0.8 to 1.
Net income 375,000
 *71. Lopez Company's net accounts receivable were $600,000 at December 31, 2007 and $660,000 In its segment information for 2008, how many reportable segments does Reese have?
at December 31, 2008. Net cash sales for 2008 were $390,000. The accounts receivable turnover a. Three
for 2008 was 7.0. What were Lopez's total net sales for 2008? b. Four
a. $2,730,000. c. Five
b. $4,410,000. d. Six
c. $4,800,000.
d. $4,020,000. 76. The following information pertains to Maris Corp. and its divisions for the year ended December
31, 2008.
*72. During 2008, Noble, Incorporated purchased $3,200,000 of inventory. The cost of goods sold for
2008 was $3,600,000 and the ending inventory at December 31, 2008, was $400,000. What was Sales to unaffiliated customers $2,500,000
the inventory turnover for 2008? Intersegment sales of products similar to those sold to
a. 5.3. unaffiliated customers 750,000
b. 8.0. Interest earned on loans to other operating segments 50,000
c. 6.0. Maris and all of its divisions are engaged solely in manufacturing operations. Maris has a
d. 9.0. reportable segment if that segment's revenue exceeds
a. $330,000.
Multiple Choice Answers—Computational b. $325,000.
c. $255,000.
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
d. $250,000.
56. b 59. c *62. d *65. d *68. a *71. c
77. Advertising costs may be accrued or deferred to provide an appropriate expense in each period
57. c *60. d *63. c *66. b *69. a *72. c
for
58. a *61. c *64. c *67. c *70. c Interim Year-end
Financial Reporting Financial Reporting
a. Yes No
b. Yes Yes
MULTIPLE CHOICE—CPA Adapted c. No No
d. No Yes
73. Which of the following facts concerning plant assets should be included in the summary of
significant accounting policies? 78. Lane Corp. has estimated that total depreciation expense for the year ending December 31, 2008
will amount to $300,000, and that 2008 year-end bonuses to employees will total $600,000. In
Depreciation Method Composition Lane's interim income statement for the six months ended June 30, 2008, what is the total amount
a. No Yes of expense relating to these two items that should be reported?
b. Yes Yes a. $0.
c. Yes No b. $150,000.
d. No No c. $450,000.
d. $900,000.
74. Parr, Inc. is a multidivisional corporation which has both intersegment sales and sales to
unaffiliated customers. Parr should report segment financial information for each division meeting 79. Eddy Corp. had the following transactions during the quarter ended March 31, 2008:
which of the following criteria?
a. Segment profit or loss is 10% or more of consolidated profit or loss. Loss from hurricane damage $350,000
b. Segment profit or loss is 10% or more of combined profit or loss of all company segments. Payment of fire insurance premium for calendar year 2008 500,000
c. Segment revenue is 10% or more of combined revenue of all the company segments.
d. Segment revenue is 10% or more of consolidated revenue. What amount should be included in Eddy's income statement for the quarter ended March 31,
2008?
75. Reese Corp. and its divisions are engaged solely in manufacturing operations. The following data Extraordinary Loss Insurance Expense
(consistent with prior years' data) pertain to the industries in which operations were conducted a. $350,000 $500,000
for the year ended December 31, 2008. b. $350,000 $125,000
Assets c. $87,500 $125,000
Industry Revenue Profit 12/31/08 d. $0 $500,000
A $ 8,000,000 $1,320,000 $16,000,000
B 6,400,000 1,120,000 14,000,000 80. For interim financial reporting, an extraordinary gain occurring in the second quarter should be
C 4,800,000 960,000 10,000,000 a. recognized ratably over the last three quarters.
D 2,400,000 440,000 5,200,000 b. recognized ratably over all four quarters with the first quarter being restated.
E 3,400,000 540,000 5,600,000 c. recognized in the second quarter.
F 1,200,000 180,000 2,400,000 d. disclosed by note only in the second quarter.
$26,200,000 $4,560,000 $53,200,000
 *81. How is the average inventory used in the calculation of each of the following?
$350,000 – (.06 × $250,000)
Acid-Test (Quick) Ratio Inventory Turnover Ratio *63. c ——————————————————— = 335 ÷ 1,173.
a. Numerator Numerator $375,000 + [$813,000 – (.06  $250,000)]
b. Numerator Denominator
c. Not Used Denominator $3,200,000
d. Not Used Numerator *64. c ———————————— = 3,200 ÷ 350.
($300,000 + $400,000) ÷ 2
*82. Which of the following ratios is(are) useful in assessing a company's ability to meet current
maturing or short-term obligations? $2,100,000
*65. d ———————————— = 2,100 ÷ 600.
Acid-Test Ratio Debt to Total Assets Ratio ($650,000 + $550,000) ÷ 2
a. No No
b. No Yes *66 b $375,000 ÷ $3,200,000 = 375 ÷ 3,200.
c. Yes Yes
d. Yes No $375,000 – ($500,000 ×.10)
*67. c ———————————————————————————————————
*83. Which of the following ratios should be used in evaluating the effectiveness with which the [($600,000 + $400,000 + $1,000,000 – $50,000) + ($450,000 + $325,000 +
company uses its assets? $875,000)] ÷ 2

Receivables Turnover Payout Ratio = 325 ÷ 1,800.

a. Yes Yes
b. No No $600,000 + $400,000 + ($1,000,000 – $50,000)
*68. a ————————————————————— = 1,950 ÷ 60
c. Yes No 60,000
d. No Yes
$375,000 + $400,000
Multiple Choice Answers—CPA Adapted *69. a —————————— = 775 ÷ 325.
$275,000 + $50,000
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
73. c 75. b 77. b 79. b *81. c *83. c $8,000 + $150,000 + $122,000
*70. c —————————————— = 1.40 to 1.
74. c 76. b 78. c 80. c *82. d $200,000

(X – $390,000)
DERIVATIONS — Computational *71. c ———————————— = 7.0, X = $4,800,000.
($600,000 + $660,000)  2
No. Answer Derivation
56. b Revenue test: Total revenue = $1,170,000 × 10% = $117,000.
Operating profit test: $55,000 × 10% = $5,500. *72. c $3,600,000 + $400,000 – $3,200,000 = $800,000.
Asset test: Total assets = $2,375,000 × 10% = $237,500.
$3,600,000
57. c $720,000 ÷ 4 = $180,000. ———————————— = 6.
($800,000 + $400,000) ÷ 2
58. a $560,000 ÷ 4 = $140,000. 73. c Conceptual.
$1,400,000 ÷ 3 = $266,667 + $140,000 = $606,667.
74. c Conceptual.
59. c Conceptual.
75. b Revenue test: $26,200,000 × 10% = $2,620,000
Profit test: $4,560,000 × 10% = $456,000
($100,000 + $650,000 + $813,000) 1,563 Asset test: $53,200,000 × 10% = $5,320,000
*60. d ———————————————— = ———
($210,000 + $63,000 + $75,000) 348 A, B, C, E.

$500,000 + ($625,000  .10) 562.5 76. b ($2,500,000 + $750,000) × 10% = $325,000.

*61. c ————————————— = ———
$625,000  .10 62.5 77. b Conceptual.

78. c ($300,000 + $600,000) ÷ 2 = $450,000.

$375,000 + [$813,000 – (.06 × $250,000)]
*62. d ——————————————————— = $58.65. 79. b Extraordinary loss = $350,000
20,000
 Insurance expense = $500,000 ÷ 4 = $125,000. Ex. 24-86—Segment reporting.

80. c Conceptual. Helton Company's condensed income statement is presented below:

Revenues
*81. c Conceptual. $1,000,000
Expenses
*82. d Conceptual. Cost of goods sold $400,000
Operating and administrative expenses 200,000
*83. c Conceptual. Depreciation expense
40,000 640,000
EXERCISES Income before
taxes 360,000
Ex. 24-84—Notes to financial statements. Income tax
An article in Dun's Review made the following comments: expenses
108,000
"Every other year, say, companies should print the notes in big type Net
and the base figures in smaller ones." income $ 252,000
Earnings per share (100,000
Instructions shares) $2.52
(a) Are notes considered as part of the financial statements and what basic purpose do they serve?
The following data is compiled relative to Helton's operating segments:
(b) What are the general types of notes?
Percent Identified with
Solution 24-84 Segment
(a) Notes are an integral part of the financial statements of a business enterprise. Notes are the Hotels Grains
accountant's means of more fully disclosing data relevant to the interpretation of the statements. Candy
Information pertinent to specific financial statement items can be explained in qualitative terms, and Revenues 42% 50%
supplementary data of a quantitative nature can be provided to expand on the information in the 8%
financial statements. Restrictions imposed by financial arrangements or basic contractual Cost of goods
agreements can be explained in notes. sold 48 49
3
(b) The more common types of notes disclose such items as the following: (1) accounting methods Operating and administrative
used, (2) contingent assets or liabilities, (3) examination of creditor claims, (4) claims of equity expense 35 50
holders, and (5) executory commitments. 15
Depreciation
expense 46 42
Ex. 24-85—Segment reporting. 12

FASB Statement No. 131, “Reporting Disaggregated Information about a Business Enterprise” requires the Included in the amounts allocated to each segment on the above percentages are the following expenses
reporting of disaggregated financial data about the different types of business activities in which an which relate to general corporate activities:
enterprise engages.
Operating
Instructions Segment
Identify 4 of the 6 items of disaggregated information the FASB requires that an enterprise report. Hotels Grains
Candy Totals
Operating and administrative
expense $12,000 $9,000
Solution 24-85 $3,000 $24,000
The FASB requires that an enterprise report the following disaggregated information: Depreciation
1. General information about its operating segments. expense 3,500 4,000
2. Segment profit and loss and related information. 2,500 10,000
3. Segment’s total assets.
4. Reconciliation of the total of operating segments’ profits and losses to its income before income taxes. Instructions
5. Information about products and services and geographic areas. (a) Prepare a schedule showing the amounts distributed to each segment.
6. Total amount of revenues derived from major customers. (b) Based only on the above information, which segments must be reported and why?
Solution 24-86
Solution 24-87
(a) Operating Segment
Hotels Grains (a) The major accounting issues related to interim reporting are the treatment of (1) extraordinary items,
Candy Totals (2) annually determined items such as income taxes, pension costs, executive compensation based
Revenues on annual net income, and (3) the problem of seasonality.
(1) $420,000 $500,000 $80,000 $1,000,0
00 (b) The basic question with income taxes is whether in the preparation of interim income statements the
Expenses— provision for taxes should reflect the anticipated effective tax rate for the year or be computed on
Cost of goods sold the basis of actual results for that interim period. APB Opinion No. 28 recommends that at the end
(1) 192,000 196,000 12,000 400,000 of each interim period the company should make its best estimate of the effective tax rate expected
Operating and admin. expense to be applicable for the full fiscal year. The rate so determined should be used in providing for
(2) 58,000 91,000 27,000 176,000 income taxes on a current year-to-date basis.
Depreciation expense (3) 14,900 12,800 FASB Interpretation No. 18 requires that the estimated annual effective tax rate be applied to the
2,300 30,000 year-to-date "ordinary" income at the end of each interim period to compute the year-to-date tax.
Total expenses 264,900 299,800 Further, the interim period tax related to ordinary income shall be the difference between the amount
41,300 606,000 so computed and the amounts reported for previous interim periods of the fiscal period.
Operating
profit $155,100 $200,200 $38,700 $ (c) The prediction models are probably unsuccessful because accountants have not treated the
394,000 problem of seasonality correctly in their interim reports. The problem with the conventional approach
is that fixed nonmanufacturing costs are not charged in proportion to sales. Rather, these costs are
(1) Total times segment percentage. charged as incurred, or spread evenly over the four quarters. As a result, it is extremely difficult to
make accurate predictions because some artificial concepts are used for matching purposes.
(2) Hotels = ($200,000 × 35%) – $12,000 = $58,000 Ex. 24-88—Inventory and cost of goods sold at interim dates.
Grains = ($200,000 × 50%) – $9,000 = $91,000 Discuss how inventory and cost of goods sold may be afforded special accounting treatment at interim
Candy = ($200,000 × 15%) – $3,000 = $27,000 dates.
Solution 24-86 (cont.)
(3) Hotels = ($40,000 × 46%) – $3,500 = $14,900
Grains = ($40,000 × 42%) – $4,000 = $12,800 Solution 24-88
Candy = ($40,000 × 12%) – $2,500 = $2,300 The following exceptions are appropriate at interim reporting dates:
(b) Two segments, Hotels and Grains, must be reported because they satisfy the revenue test; that is, a. Companies may use the gross profit method for interim inventory pricing.
the segment's revenues are 10% or more of the combined revenues of all operating segments. In b. When LIFO inventories are liquidated at an interim date and are expected to be replaced by year
addition, the Hotels and the Grains segments meet the 10% of the operating profit test. end, cost of goods sold should be based on expected replacement cost of the liquidated LIFO base
rather than historical cost.
c. Inventory market declines should not be deferred beyond the interim period unless they are
Ex. 24-87—Interim reports. temporary and no loss is expected for the fiscal period. Recoveries of such losses on the same
inventory in later interim periods shall be recognized as gains.
A few years ago, a publishing company in the fourth quarter had a net profit figure that exceeded sales for
that quarter. Such a situation as this suggests that some difficult accounting issues are involved in interim d. Planned variances under a standard cost system which are expected to be absorbed by year end
reporting. may be deferred.

Instructions
(a) What are the major accounting problems related to interim reports? Ex. 24-89—Forecasts.
(b) What problem exists with income taxes in interim reports and how does APB Opinion No. 28 Recent proposals by investors and others have suggested that corporations include financial forecasts in
recommend that taxes should be reported? What does FASB Interpretation No. 18 require? their annual reports. It further has been suggested that the CPA attest to those forecasts.
(c) Many academicians have attempted to predict the year's net income after the first quarter's income Instructions
is reported. These attempts are generally unsuccessful, no matter how sophisticated the prediction (a) What arguments are advanced to support the publication of such forecasts?
model. What might be the reason for this inability to predict? (b) What arguments are advanced that oppose the publication of such forecasts?
Solution 24-89 Finally, all segments, whether deemed reportable or not, must be viewed from the standpoint of
interperiod comparability because the primary purpose of presenting segment information is to aid
(a) The basic argument for the publication of financial forecasts in corporate annual reports is to provide the financial statement reader.
the investor with additional information about the future activities of the company upon which to base
investment decisions. A second argument is that some investors have access to the forecast data 2. Statement of Financial Accounting Standards No. 131 states that enough operating segments must
currently; it would be more equitable if all investors had access to such information. The attestation be separately reported so that the total of revenues from sales to unaffiliated customers for the
by the CPA to such forecast data would provide the forecast data with reliability and permit the reportable segments equals or exceeds 75 percent of the combined sales to unaffiliated customers
investor to have confidence in the forecast. A third argument is that circumstances now change so for the entire enterprise. If applying the prescribed tests does not yield the required percentage of
rapidly that historical information is no longer adequate for prediction. revenues described above, additional segments must be reported on until the 75 percent test is met.
(b) One argument raised against the publication of such forecasts is the expectation that management The Financial Accounting Standards Board has stated that if an enterprise has many reportable
would present a conservative forecast in order to "look good" when actual results of the year are in. segments, benefit to the reader may be lost if more than 10 segments are reported. In such a
A second point often considered is the prospect that the forecast would provide competitors with situation, the board suggests combining related reportable segments until the total is ten or fewer.
confidential information thus endangering business strategy and the performance of the firm. Pr. 24-94—Interim reporting.
A third argument is that forecasts are narrow estimates, which makes them difficult to interpret given Interim financial reporting has become an important topic in accounting. There has been considerable
that the future is not a certainty, and as a result investors may be misled by them. discussion as to the proper method of reflecting results of operations at interim dates. Accordingly, the
The attestation by CPAs also can be questioned. There may be a conflict of interest because the Accounting Principles Board issued an opinion clarifying some aspects of interim financial reporting.
forecast in the current year report and the actual results of the next year are both audited by the
CPA. There would be concern that the reported results might be adjusted so that the forecast Instructions
appears to be borne out by the actual results. Additionally, it can be questioned that the CPA has (a) Discuss generally how revenue should be recognized at interim dates and specifically how revenue
the training and qualifications to attest to forecasts. Also, the profession is hesitant to attest to should be recognized for industries subject to large seasonal fluctuations in revenue and for long-
forecasts until the problem of additional exposure to liability is clarified. term contracts using the percentage-of-completion method at annual reporting dates.

(b) Discuss generally how product and period costs should be recognized at interim dates. Also discuss
PROBLEMS
how inventory and cost of goods sold may be afforded special accounting treatment at interim dates.
Pr. 24-93—Segment reporting. (c) Discuss how the provision for income taxes is computed and reflected in interim financial statements.
A central issue in reporting on operating segments of a business enterprise is the determination of which
segments are reportable.
Solution 24-94
Instructions
1. What are the tests to determine whether or not an operating segment is reportable? (a) Sales and other revenues should be recognized for interim financial statement purposes in the same
2. What is the test to determine if enough operating segments have been separately reported upon, and manner as revenues are recognized for annual reporting purposes. This means normally at the point
of sale or, in the case of services, at completion of the earnings process.
what is the guideline on the maximum number of operating segments to be shown?
In the case of industries whose sales vary greatly due to the seasonal nature of business, revenues
should still be recognized as earned, but a disclosure should be made of the seasonal nature of the
Solution 24-93 business in the notes.

1. There are three basic tests to be applied to segments of a company to see if they are significant In the case of long-term contracts recognizing earnings on the percentage-of-completion basis, the
enough to be separately reportable. If a segment meets any one of the tests, it is deemed significant current state of completion of the contract should be estimated and revenue recognized at interim
and reportable. dates in the same manner as at the normal year end.

The first test is based upon revenue. If a segment's revenue from sales to unaffiliated customers
and intersegment sales and transfers is equal to 10 percent or more of the enterprise's combined (b) For interim reporting purposes, product costs (costs directly attributable to the production of goods
revenues, the segment is reportable. or services) should be matched with the product and associated revenues in the same manner as
for annual reporting purposes.
The second test is based upon profits or losses. A segment is deemed reportable if the absolute
amount of its profit or loss is 10 percent or more of the greater, in absolute amount, of: Period costs (costs not directly associated with the production of a particular good or service) should
be charged to earnings as incurred or allocated among interim periods based on an estimate of time
The combined profits of all operating segments reporting profits. expired, benefit received, or other activity associated with the particular interim period(s). Also, if a
The combined losses of all operating segments reporting losses. gain or loss occurs during an interim period and is a type that would not be deferred at year end, the
gain or loss should be recognized in full in the interim period in which it occurs. Finally, in allocating
Third, a segment is significant and reportable if the identifiable assets of the segment equal or period costs among interim periods, the basis for allocation must be supportable and may not be
exceed 10 percent of the combined assets of all operating segments within the enterprise. based on merely an arbitrary assignment of costs between interim periods.

Solution 24-94 (cont.)

 The profession allowed for some variances from the normal method of determining cost of goods
sold and valuation of inventories at interim dates in APB Opinion No. 28, but these methods
areallowable only at interim dates and must be fully disclosed in a note to the financial statements.
Some companies use the gross profit method of estimating cost of goods sold and ending
inventory at interim dates instead of taking a complete physical
inventory. This is an allowable procedure at interim dates, but the company must disclose the
method used and any significant variances that subsequently result from reconciliation of the results
obtained using the gross profit method and the results obtained after taking the annual physical
inventory.

At interim dates, companies using the LIFO cost-flow assumption may temporarily have a reduction
in inventory level that results in a liquidation of base period layers of inventory. If this liquidation is
considered temporary and is expected to be replaced prior to year end, the company should charge
cost of goods sold at current prices. The difference between the carrying value of the inventory and
the current replacement cost of the inventory is a current liability for replacement of LIFO base
inventory temporarily depleted. When the temporary liquidation is replaced, inventory is debited for
the original LIFO value and the liability is removed.

Inventory losses from a decline in market value at interim dates should not be deferred but should
be recognized in the period in which they occur. However, if in a subsequent interim period the
market price of the written-down inventory increases, a gain should be recognized for the recovery
up to the amount of the loss previously recognized. If a temporary decline in market value below
cost can reasonably be expected to be recovered prior to year end, no loss should be recognized.

Finally, if a company uses a standard cost system to compute cost of goods sold and to value
inventories, variances from the standard should be deferred instead of being immediately
recognized.

(c) The Board states that the provision for income taxes shown in interim financial statements must be
based upon the effective tax rate expected for the entire annual period for ordinary earnings. The
effective tax rate is, in accordance with previous APB opinions, based on earnings for financial
statement purposes as opposed to taxable income which may consider temporary differences. This
effective tax rate is the combined federal and state(s) income tax rate applied to expected annual
earnings, taking into consideration all anticipated investment tax credits, foreign tax rates,
percentage depletion, capital gains rates, and other available tax planning alternatives. Ordinary
earnings do not include unusual or extraordinary items, discontinued operations, or cumulative
effects of changes in accounting principles, all of which will be separately reported or reported net
of their related tax effect in reports for the interim period or for the fiscal year. The amount shown
as the provision for income taxes at interim dates should be computed on a year-to-date basis. For
example, the provision for income taxes for the second quarter of a company's fiscal year is the
result of applying the expected rate to year-to-date earnings and subtracting the provision recorded
for the first quarter. There are several variables in this computation (expected earnings may change;
tax rates may change), and the year-to-date method of computation provides the only continuous
method of approximating the provision for income taxes at interim dates. However, if the effective
rate or expected annual earnings change between interim periods, the change is not reflected
retroactively but the effect of the change is absorbed in the current interim period.