8 CHAPTER SEGMENT AND INTERIM REPORTING

8 CHAPTER SEGMENT AND INTERIM REPORTING - 8 CHAPTER SEGMENT...

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Answers to Questions 1. Consolidation presents the account balances of a business combination without regard for the individual component companies that comprise the organization. Thus, no distinction can be drawn as to the financial position or operations of the separate enterprises that form the corporate structure. Without a method by which to identify the various individual operations, financial analysis cannot be well refined. The word disaggregated refers to a whole that has been broken apart. Thus, disaggregated financial information is the data of a reporting unit that has been broken down into components so that the separate parts can be identified and studied. If significant, SFAS 14 required disaggregated disclosure to describe four different aspects of a company s operations: industry segments, foreign and domestic operations, export sales, and sales to major customers. A dominant industry segment was one that made up more than 90 percent of a company s revenues, operating profit, and identifiable assets. SFAS 14's flexibility in defining industry segments opened the possibility for companies to define segments in such a way that a dominant industry segment would result. Companies with dominant industry segments were not required to provide segment disclosures, thereby limiting the potential usefulness to analysts. According to SFAS 131, the objective of segment reporting is to provide information to help users of financial statements: a. better understand the enterprise s performance, b. better assess its prospects for future net cash flows, and c. make more informed judgments about the enterprise as a whole. Defining segments on the basis of a company s organizational structure will remove much of the flexibility and subjectivity associated with defining industry segments under SFAS 14. In addition, the incremental cost of providing segment information externally should be minimal because that information is already generated for internal use. Analysts should benefit from this approach because it reflects the risks and opportunities considered important by management and allows the analyst to see the company the way it is viewed by management. This should enhance the analyst s ability to predict management actions that can significantly affect future cash flows. SFAS 131 defines an operating segment to be a component of an enterprise: a. that engages in business activities from which it earns revenues and incurs expenses, b. whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions, and c. for which discrete financial information is available. Two criteria must be considered in this situation to determine an enterprise s operating segment. If more than one set of organizational units exists, but there is only one set for which segment managers are held responsible, that set constitutes the
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This note was uploaded on 01/13/2011 for the course ACCT 400 taught by Professor Thomaschoikokkun during the Winter '10 term at Acton School of Business.

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8 CHAPTER SEGMENT AND INTERIM REPORTING - 8 CHAPTER SEGMENT...

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