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Financial Reporting and Analysis (7th Ed.)
Appendix B Solutions
Essentials of Financial Statement Analysis
Exercises
EB-1 Determining reportable segments (LO B-1)
(AICPA adapted)
ASC 280 provides quantitative guidelines for reporting segments. A
company must report separate segment information if either
1. Segment revenue equals or exceeds 10% of total revenue from
internal and external customers, or
2. Segment assets equal or exceed 10% of total segment assets.
The Hardware sales segment exceeds both the 10% of revenue and
assets thresholds.
The Consulting segment exceeds the 10% of revenue threshold.
The Financing segment exceeds the 10% of assets threshold.
Lannister would not have to disclose separate information for the Hardware
service and Rising technology segments.
EB-2 Determining reportable segments (LO B-1)
(AICPA adapted)
ASC 280 provides quantitative guidelines for reporting segments. A
company must report separate segment information if the absolute value of
operating profit or loss equals or exceeds 10% of the maximum of either:
1. the total segment operating profit for those segments with profits, or
2. the absolute value of the total segment operating loss for those
segments with losses.
The first step is to compute the total income or total loss to be used for the
10% threshold. Mannix would compute the threshold as follows:
Segment
s with
income
Segment
s with
losses
B-1
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Appliances $357
Healthcare 233
Transportation $ (57)
Financial
Services 46
Other stuff (124)
Total $636 $(181)
The maximum value here is $636. Any segment with operating profit or loss
(in absolute terms) greater than or equal to $63.6 (10% of $636) would be a
reportable segment. In this case, Mannix would report separate information
for Appliances, Healthcare, and Other stuff.
EB-3 Aggregating operating segments (LO B-1)
To aggregate segments, the segments must be similar with regard to all of
the following:
1. Product and service,
2. Production process,
3. Type or class of customer,
4. Product and service distribution methods, and
5. Regulatory environment.
The Television stations and the Merchandise sales segments cannot be
aggregated because items 1-4 are not the same. The Television
entertainment production and the Movie entertainment production
segments might be aggregated. The product and service and production
process are similar. However, the initial customer and distribution methods
are different for the two segments. In one case, the initial customer is
television stations, but in the second case, the initial customer is movie
theaters. The accountant may have to evaluate what percentage of
revenue comes from the initial customer as a percentage of total revenue.
In any event, the accountant must use professional judgment to determine
whether the two segments can be combined.
Financial Reporting and Analysis (7th Ed.)
Appendix B Solutions
Essentials of Financial Statement Analysis
B-2
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McGraw-Hill Education.
Problems
PB-1 Determining reportable segments
Requirement 1:
U.S. GAAP requires companies to provide segment information to
Requirement 2:
U.S GAAP requires a management approach where the information
is disclosed in the same manner that it is organized internally for
“making operating decisions and assessing performance.” The
standards define an operating segment as a component of a public
Requirement 3:
First, Bogart would aggregate operating segments where possible.
The problem states that the Flynn and Cagney segments have
similar economic characteristics, products, processes, customers,
B-3
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All amounts are in millions of dollars.
Second, we determine whether any of the segments meet the
quantitative thresholds. Segments are reportable when they
represent 10% or more of revenue, 10% or more of operating profit or
loss (absolute value), or 10% or more of assets. For each
B-4
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McGraw-Hill Education.
The calculations show that the 10% revenue, operating profit, and
asset percentages are exceeded for the Grant and Flynn-Cagney
segments. Only one of the comparisons needs to exceed the
Based on the above calculations, Grant, Kelly, and Flynn-Cagney are
reportable segments. The three segments comprise 91.9% (48.3% +
Financial Reporting and Analysis (7th Ed.)
Appendix B Solutions
Essentials of Financial Statement Analysis
Cases
CB-1. IBM: Analyzing reportable segment disclosures (LO B-2)
All amounts are in millions of U.S. dollars. All amounts are 2012
unless indicated otherwise.
Requirement 1:
FASB ASC 280 – Segment Reporting requires companies to disclose
financial information for each operating segment of their business.
Operating segments for purposes of this disclosure must be the same
segments as those that are evaluated internally by senior management for
Requirement 2:
Global Technology Services has the most external revenue ($40,236) and
Global Financing has the least ($2,013). The percent of Segment external
B-5
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McGraw-Hill Education.
Requirement 3:
Software has the most Pre-tax income ($10,810) and Systems and
Technology has the least ($1,227). The percent of Segment Pre-tax income
Requirement 4:
Software had the highest growth in revenue (1.8%) and Systems and
Requirement 5:
Global technology services had the highest growth in Pre-tax income
Requirement 6:
Global financing had the highest Pre-tax income margin (49.9%) and
B-6
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McGraw-Hill Education.
Requirement 7:
Analysts may use the information to predict growth in earnings for next
year, evaluate how well IBM is managing different segments, or determine
if the mix within segments of income and revenue is changing. The analysis
in Requirements 3 through 6 suggest that the Systems and Technology
Requirement 8:
The Global Financing segment’s balance sheet and income statement are
similar to those of a bank. Most of its assets are financial assets and its
Requirement 9:
Note that most of IBM’s revenue comes from outside the U.S. Therefore,
analysts must consider the effects of currency rate changes and economic
Requirement 10 – How would a stronger U.S. dollar affect IBM’s future
reported revenue?
Given that only 34.7% of IBM’s revenue is in the U.S., we would expect
consolidated revenue and profit to decrease substantially because of the
increasing strength of the dollar. Because the ratio of US$ per unit of
CB-2. Walt Disney Company: Analyzing reportable segment
disclosures (LO B-2)
Requirement 1 - Significance of CEO review
B-7
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McGraw-Hill Education.
FASB ASC 280 – Segment Reporting requires companies to disclose
financial information for each operating segment of their business.
Operating segments for purposes of this disclosure must be the same
Requirement 2 - Most and least external revenue
Percent of
Total
Media Networks (most) $23,264 44.3%
Requirement 3 - Most and least segment operating
income
Percent of
Total
Media Networks (most) $7,793 53.1%
Requirement 4 - Highest and lowest growth in revenue
Segment 2015 2014
Growt
h
Media Networks $23,264 $21,152 10.0%
Parks and Resorts 16,162 15,099 7.0%
Studio Entertainment
-21.5
B-8
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Intersegment (528) (289)
-82.6
%
4,499 3,985 12.9% Highest
1,174 1,299 -9.6% Lowest
Total consolidated revenues $52,465 $48,813 7.5%
Requirement 5 - Highest and lowest growth in operating income
2015 2014 Growth
Growth=2015 amount/2014 amount less 1
Segment
Media Networks $7,793 $7,321 6.4% Lowest
Total segment operating income $14,681 $13,005 12.9%
Income before income taxes $13,868 $12,246 13.2%
Requirement 6 - Highest and lowest operating income margin
Income Revenue
Margi
n
Margin=operating income/revenue
Segment
Media Networks $ 7,793 $23,264 33.5%
Total segment operating income $ 14,681 $52,465 28.0%
Requirement 7 - Analyst use
B-9
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Analysts may use the information to predict growth in earnings, evaluate how
well Disney is managing different segments, or determine if the mix within
segments of income and revenue is changing. An analyst would want to make
growth forecasts based on the expected mix of revenue. The analysis in
Requirement 8 - Percentage of revenue earned in the U.S.
Percent=locality/total Percent
United States and Canada $40,320 76.9%
Europe 6,507 12.4%
Requirement 9 - Percentage of revenue earned in the U.S.
Consumers in the rest of the world probably still like Frozen, Star
Wars, and Winnie the Pooh. However, the dollar increased in value
B-10
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