CA 24.3 (Continued)
Situation 3
The fact that a company chooses to self-insure the contingency of injury to others caused by its vehicles
is not enough of a basis to accrue a loss contingency that has not occurred at the date of the financial
statements. An accrual or “reserve” cannot be made for the amount of insurance premium that would
CA 24.4
1. The financial statements should be adjusted for the expected loss pertaining to the remaining
receivable of £240,000. Such adjustment should reduce accounts receivable to their realizable
value as of December 31, 2018.
4. This case is a difficult problem. If this event is of the second type which provides evidence with
respect to conditions that did not exist at December 31, 2018, then appropriate disclosures should
indicate that:
5. Adjust the inventory figure as of December 31, 2018, as required by a market price of £2 instead
of £1.40, applying the lower-of-cost-or-net realizable value principle. The actual quotation was a
transitory error and no purchases had been made at this quotation.
CA 24.5
To: Anthony Reese, Accountant
From: Student
Date: Current date
Subject: Determination of reportable segments for Winsor Corp.
I have analyzed the segment information which you gave me and determined that the funeral, the
cemetery, and the real estate segments must be reported separately. The remaining three—the
limousine, floral, and dried whey segments—can be combined under the category of other.
Second, a segment is considered significant enough to be reported separately if its absolute operating
profit or operating loss is 10% or more of the greater, in absolute amount of: (a) the combined operating
profit of all segments without an operating loss or (b) the combined operating loss of all segments that
incurred a loss. Combined operating profit for all profitable segments totals $96,000. Both the funeral and
the cemetery segments have operating profits exceeding 10% of total profits whereas the real estate
segment’s operating loss in absolute amount is greater than 10 percent of total profits. Thus, all three
must be separately reported.
Third, a segment must be reported separately if its identifiable assets are greater than or equal to
10 percent of the combined identifiable assets for all segments. Again, the funeral, the cemetery, and
CA 24.6
(a) 1. The company should report its quarterly results as if each interim period is discrete.
2. Under the discrete approach the amounts should be reported as the company’s revenue
and expenses as follows on its quarterly report prepared for the first quarter of the 2018–
2019 fiscal year:
Sales Revenue ……………………………………………………………………………… ¥60,000,000
(b) The financial information to be disclosed to its shareholders in its quarterly reports as a minimum
include:
1. Statement that the same accounting policies and methods of computation are followed in
the interim financial statements as compared with the most recent annual financial
statements or, if those policies or methods have been changed, a description of the nature
and effect of the change.
2. Explanatory comments about the seasonality or cyclicality of interim operations.
3. The nature and amount of items affecting assets, liabilities, equity, net income, or cash
CA 24.7
(a) Acceptable. The use of estimated gross profit rates to determine the cost of goods sold is accept–
able for interim reporting purposes as long as the method and rates utilized are reasonable. The
company should disclose the method employed and any significant adjustments which result
from reconciliations with annual physical inventory.
(d) Not acceptable. Gains on the sale of investments would not be deferred if they occurred at year–
end. Consequently, they should not be deferred to future interim periods but should be reported
in the quarter the gain was realized.
CA 24.8
(a) Arguments for requiring published forecasts:
1. Investment decisions are based on future expectations; therefore, information about the
future would facilitate better decisions.
(b) The purpose of a safe harbor rule is to provide protection to an enterprise that presents an
erroneous projection as long as the projections were prepared on a reasonable basis and were
disclosed in good faith. An enterprise’s concern with the safe harbor rule is that a jury’s definition
of reasonable might be at some variance from a company’s or, for that matter, the SEC’s.
(c) An enterprise’s concerns about preparing a forecast are as follows:
1. No one can foretell the future. Therefore forecasts, while conveying an impression of precision
about the future, will inevitably be wrong.
LO: 4, Bloom: AP, Difficulty: Moderate, Time: 25–30, AACSB: Ethics, Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 24.9
(a) The controller notes that the financial vice president is misrepresenting the financial condition of
the company by suggesting that the company has become more efficient when, in fact, the
improved ratio is gained through manipulation of estimates. The controller, however, hesitates
because estimating does not follow precise, clear-cut rules. The dilemma exists because Lilly is
asked to weigh the benefits that may accrue to the company if its profit margin on sales appears
much improved against the accountant’s normal requirement to present financial information
fairly (that is, in a manner that is consistent with previous reporting).
CA 24.10
(a) The ethical issues involved are profitability, long-term versus short-term performance, and integrity
of financial reporting.
(b) Form should not dictate substance. The bonds should be issued when the company needs the
*CA 24.11
FINANCIAL REPORTING PROBLEM
(a) The specific items M&S discusses in Note 1 are basis of preparation;
new accounting standards adopted by the Group; New accounting
standards in issue but not yet effective; accounting convention; basis
of consolidation; subsidiaries; revenue; supplier income; dividends;
(b) M&S reported segments for its UK and International. International was
segmented into owned stores and franchised stores. Revenue was
COMPARATIVE ANALYSIS CASE
Puma versus adidas
(a) 1. Puma commented on the following list of items in its note on
accounting policies:
Note 2 – Significant Consolidation, Accounting and Valuation
Principles
• Consolidation principles
• Group consolidated companies
• Non-current investments
• Property, plant and equipment
• Goodwill
• Other intangible assets
• Impairment of assets
• Holdings in associated companies
• Product development
• Financial results
• Income taxes
• Deferred taxes
COMPARATIVE ANALYSIS CASE (Continued)
2. adidas commented on the following list of items in its note on
accounting policies:
Note 2 – Summary of significant accounting policies
• Principles of consolidation
• Principles of measurement
• Leases
• Goodwill
• Intangible assets (except goodwill)
• Research and development
• Financial assets
• Borrowings and other liabilities
• Other provisions and accrued liabilities
(b) Puma has four geographic segments – EMEA (Europe, Middle East,
and Africa), Americas (North and Latin America), Asia/Pacific, and
Central units/consolidation. adidas segments are divided
COMPARATIVE ANALYSIS CASE (Continued)
(c) Both companies received unqualified audit opinions. That is, their
*FINANCIAL STATEMENT ANALYSIS CASE
RNA INC.
(a) The calculation of selected financial ratios for RNA for the fiscal year
2019 is as follows:
Current ratio
=
Current assets
€9,900
€6,300
Acid-test ratio
=
Short-term Net
Cash + Investments + Receivables
Current liabilities
=
€3,900
€6,300
=
.62
Times interest earned
=
=
=
8.84
Profit margin on sales
=
Net income
Net sales
=
€4,260
€30,500
=
13.97%
*FINANCIAL STATEMENT ANALYSIS CASE (Continued)
Asset turnover
=
=
€30,500
=
1.85 times
Inventory turnover
=
Cost of goods sold
Average inventory
=
€17,600
(€6,000 + €5,400) ÷ 2
=
3.09 times
(b) The analytical use of each of the six ratios presented above and what
investors can learn about RNA’s financial stability and operating
efficiency are presented below.
Current ratio
• Measures the ability to meet short-term obligations using short-
Acid-test ratio
• Measures the ability to meet short-term debt using the most liquid
*FINANCIAL STATEMENT ANALYSIS CASE (Continued)
Times interest earned
• Measures the ability to meet interest commitments from current
Profit margin on sales
• Measures the net income generated by each dollar of sales. It pro–
Total asset turnover
• Measures the efficiency of resource use; i.e., the ability to generate
Inventory turnover
• Measures how quickly inventory is sold, as well as how effectively
*FINANCIAL STATEMENT ANALYSIS CASE (Continued)
(c) Limitations of ratio analysis include:
• Difficulty making comparisons among firms in the same industry
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(1) Integral Approach
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Sales
£320,000
£600,000
£2,200,000
£480,000
Variable manufacturing costs
32,000
60,000
220,000
48,000
Fixed manufacturing costs
64,000
120,000
440,000
96,000
Net income
(2) Discrete Approach
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Sales
£320,000
£600,000
£2,200,000
£480,000
Variable manufacturing costs
32,000
60,000
220,000
48,000
Fixed manufacturing costs
64,000
440,000
96,000
Net income (Loss)
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
ANALYSIS
Profit margin on sales = Net income ÷ sales
(1) Integral approach:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Net income (Loss)
£100,000
£187,500
£687,500
£150,000
Sales
480,000
Profit margin on sales
(2) Discrete approach:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Net income (Loss)
£ (74,000)
£97,500
£1,077,500
£24,000
Sales
320,000
600,000
2,200,000
480,000
Profit margin on sales
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
PRINCIPLES
IFRS requires companies to follow the discrete approach. However, compa-
nies should use the same accounting policies for interim reports and for
annual reports.
The concept underlying the integral approach is that an individual quarter
RESEARCH CASE
(a) According to IAS 1, paragraph 117, “An entity shall disclose in the
summary of significant accounting policies:
(1) the measurement basis (or bases) used in preparing the financial
(b) (1) A few examples taken from IAS 1:
• Paragraph 118: It is important for an entity to inform users of the
measurement basis or bases used in the financial statements
• Paragraph 124: Some of the disclosures made in accordance
with paragraph 122 are required by other IFRSs. For example,
IAS 27 requires an entity to disclose the reasons why the entity’s
ownership interest does not constitute control, in respect of an
GAAP CONCEPTS AND APPLICATION
24.1 Following are the key similarities and differences between U.S.
GAAP and IFRS related to disclosures.
Similarities
• U.S. GAAP and IFRS have similar standards on post-statement of
financial position (subsequent) events. That is, under both sets of
standards, events that occurred after the statement of financial
position date, and which provide additional evidence of
conditions that existed at the statement of financial position date,
required.
• Neither U.S. GAAP nor IFRS require interim reports. Rather, the
U.S. SEC and securities exchanges outside the United States
establish the roles. In the United States, interim reports generally
are provided on a quarterly basis; outside the United States, six
month interim reports are common.
Differences
• Due to the narrower range of judgements allowed in more rules-
based U.S. GAAP, more disclosures generally are less expansive
GAAP CONCEPTS AND APPLICATION (Continued)
• As indicated in the About the Numbers section below, U.S. GAAP
uses the date when financial statements are “issued” when
determining the reporting of subsequent events. Subsequent (or
24.2 While U.S. GAAP has a preference for the integral approach, IFRS
leans toward the discrete approach to interim reports. Thus, if an