15_Fischer10e_SM_Ch12_final - CHAPTER 12 UNDERSTANDING THE...

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CHAPTER 12 UNDERSTANDING THE ISSUES 1. Viewing an interim period as an integral part of a larger annual period has several benefits. The allocation of expense under this viewpoint provides information that al- lows for more meaningful and insightful predictions of annual results. Furthermore, the effect of certain interim conditions that are not expected to exist at year-end may be given special accounting treatment. Ex- amples of this include special accounting for temporary inventory liquidations and temporary unfavorable variances. If special accounting treatment were not available, projections of annual amounts would be distorted. 2. A number of factors are necessary in order to determine the estimated effective annual tax rate. First of all, the rate should reflect conditions to be experienced for the entire year. Therefore, in addition to year-to-date pretax income/loss, such amounts must be projected for the balance of the year. Stat- utory tax rates are applied to these annual amounts after considering the presence of possible annual permanent differences between book and tax income. The result- ing taxes must also be reduced by possible tax credits. The applicability of the above factors becomes more complex in situ- ations where there is an estimated annual pretax loss. This situation requires the con- sideration of possible tax loss and/or tax credit carrybacks and carryforwards. 3. Several factors may explain this situation. If the third-quarter loss were greater than the pretax income in the first two quarters plus the forecasted pretax income for the fourth quarter, then some of the benefit traceable to the loss may not be recognized. However, if this were the case, one would consider any known pretax income in the carry- back period and any “more likely than not” pretax income in the carryforward periods. If the pretax income in these periods were not sufficient to absorb the remaining pretax loss, then some of the third-quarter pretax loss would not recognize a benefit. In order to fully recognize the benefit asso- ciated with an interim period pretax loss, there must be some combination of the fol- lowing: sufficient pretax income in other quarters of the current year, sufficient pretax income in the carryback period, and/or sufficient “more likely than not” pretax income in the carryforward period. 4. There are a number of reasons why the total operating profit of the reportable seg- ments does not normally equal the consol- idated operating profit. First of all, not all operating segments are reportable and yet such amounts are included in consolidated amounts. Second, there are a number of intersegment transactions whose effect would be included in operating profits of reportable segments but eliminated from consolidated amounts. Third, not all ele- ments of consolidated income are allocated to reportable segments. This is traceable to the fact that not all elements are used by the chief operating decision maker in
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15_Fischer10e_SM_Ch12_final - CHAPTER 12 UNDERSTANDING THE...

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