Segment Reporting - Segment Reporting Group 5: Jingya Wu...

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Unformatted text preview: Segment Reporting Group 5: Jingya Wu Jing An Segment Definition A part or activity of an organization about which manager would like cost, revenue, or profit data Examples: A Sales Territory A Service Center An Individual Store Quick Mart Segment Segments can be categorized by Geo graphic Region..... S u p e r io r F o o d s C o r p o r a tio n $ 5 0 0 , 0 0 0 ,0 0 0 E ast $ 7 5 ,0 0 0 ,0 0 0 O re g o n $ 4 5 ,0 0 0 ,0 0 0 W est $ 3 0 0 ,0 0 0 ,0 0 0 M id w e s t $ 5 5 ,0 0 0 ,0 0 0 S o u th $ 7 0 ,0 0 0 ,0 0 0 W a s h in g to n $ 5 0 ,0 0 0 ,0 0 0 C a lif o r n ia $ 1 2 0 , 0 0 0 ,0 0 0 M o u n t a in S t a t e s $ 8 5 ,0 0 0 ,0 0 0 Segment Or by Products S u p e rio r F o o d s C o r p o r a tio n $ 5 0 0 ,0 0 0 ,0 0 0 C o n v e n ie n c e S to r e s $ 8 0 ,0 0 0 ,0 0 0 S u p e r m a r k e t C h a in A $ 8 5 ,0 0 0 ,0 0 0 S u p e r m a r k e t C h a in s $ 2 8 0 , 0 0 0 ,0 0 0 W h o le s a le D is t r ib u t o r s $ 1 0 0 , 0 0 0 ,0 0 0 D ru g s to re s $ 4 0 ,0 0 0 ,0 0 0 S u p e r m a r k e t C h a in B $ 6 5 ,0 0 0 ,0 0 0 S u p e r m a r k e t C h a in C $ 9 0 ,0 0 0 ,0 0 0 S u p e r m a r k e t C h a in D $ 4 0 ,0 0 0 ,0 0 0 Responsibility Accounting Definition: A management system that aims to develop performance measure s by which segment managers are ev aluated. categories of accounting segm ents: Three Cost Center Profit Center Investment Center Responsibility Accounting Cost Center: Segments whose managers are held resp onsible only for costs but not for revenue or investments. For managers, Minimize cost Provide the level of services or the amount of p roducts demanded by the other parts of the org anization Responsibility Accounting Profit Center Segments whose managers are held resp onsible for both costs and revenues but n ot for investments For managers, Performance is evaluated by comparing actual profit to targeted or budgeted profit. Segment income statement can be used. Responsibility Accounting Investment Center Segments whose managers are held resp onsible for the capital invested as well as t he profits made in the segment. For managers, Initiate investment proposals Make sure the investment pays off Performance is evaluated by return on investm ent (ROI) or residual income measures. Segment Reporting In managerial accounting, Segment reporting is to provide informatio n about each segment's financial perform ance. Importance of Segment Reporting Assess a segment's success in attaining it s goal Evaluate each segment's income, expens es, assets, liabilities, etc. to assess profita Segment Reporting Segment income statements Reveal the profits earned by individual se gments and the contribution of each segm ent to overall corporate profitability Prepared in the contribution format Need to identify the fixed cost Segment Reporting Two Key Terms in segment income st atement Traceable Fixed Cost & Common F Fixed Don't allocate ixed Cost Costs common costs to segments. Common Traceable Segment Reporting Traceable Fixed Cost A fixed cost that is incurred because of th e existence of the segment No computer division manager. No computer division means . . . Segment Reporting Common Fixed Cost A fixed cost that supports the operation of more than one segment but is not traceabl e in whole or in part to any one segment. We still have a company president. No computer division but . . . Segment Reporting Example of Segment Income Stateme Desktop $300,000 150,000 150,000 90,000 60,000 Laptop $200,000 80,000 120,000 80,000 40,000 nt Sales Variable Costs Contribution Margin Traceable FC Division Margin Common Costs Net Operating Income Company $500,000 230,000 270,000 170,000 100,000 25,000 75,000 Segment Reporting Desktop Sales Variable Costs Contribution Margin Traceable FC Product Line Margin Common Costs Divisional Margin $300,000 150,000 150,000 80,000 70,000 10,000 $60,000 Regular $200,000 95,000 105,000 45,000 60,000 All In One $100,000 55,000 55,000 35,000 10,000 Fixed costs directly traced to the Television Division $80,000 + $10,000 = $90,000 The Role Of Activity-Base Costing In the Development Of Segmente d Financial Statements: An Exami nation George O. Gamble, University of Houston John E. Simms, University of St. Thomas Objective To Develop an alternative reporting sc heme for segments by incorporate the activity based costing (ABC) model FASB SFAS No. 14 SFAS No. 14: "Financial Reporting for Segments of a Business" Segment: a component of an enterprise engaged in providing a p roduct or service or a group of related product and services primarily to unaff iliated customer for a profit Industry FASB SFAS No. 14 Reportable Industry Segment: 3 tests to see if segment exists (pass 1 of 3) 10% revenue test 10% profit (loss) test 10% identifiable asset test 1 test to see if sufficient segments have b een identified: 75% combined external revenue FASB SFAS No. 14 Revenue Test: Does a segment's total revenue equal or exce ed 10% of the combined revenue of all the ind ustry segments of the company? Revenue = sales to unaffiliated customers + interse gment sales or transfers Operating segment revenue $360 405 95 140 $1,000 Intersegment revenue $0 480 20 0 $500 Total segment revenue $360 885 115 140 $1,500 Reportable? Yes Yes No No A B C D Total FASB SFAS No. 14 Profit or Loss Test: Does the absolute amount of operating profit or loss fo r each segment equal or exceed 10% of the larger of ... the absolute value of the combined reported profit of all profitable segments OR the absolute value of the combined reported loss of Segment Segment all segments that incurred aoperating loss Reportable? loss? operating profit (100) 200 20 50 270 (100) Yes Yes No Yes A B C D Total FASB SFAS No. 14 Asset Test: Do a segment's identifiable assets equal or ex ceed 10% of the combined identifiable assets of all operating segments of the company? Operating segment's identifiable assets $700 950 180 1,170 $3,000 A B C D Reportable? Yes Yes No Yes Total FASB SFAS No. 14 External Revenue Test The combined sales revenues of the disclosed segments must equal or exceed 75% of total c ompany sales (Intersegment sales are excluded from the total.) Operating segment revenue $360 405 95 140 $1,000 Intersegment revenue $0 480 20 0 $500 Total segment revenue $360 885 115 140 $1,500 Reportable? Yes Yes No No A B C D Total Based on revenue test result, the reportable segment is A and B. Then $360 + 405 > $750 (75% *1000) ... Yes! FASB SFAS No. 14 Disclosure for each reportable segme nt With respect to revenue With respect to assets With respect to profitability Deficiencies of Current Practi ce Does not provide external decision m aker with the type of information need ed to properly evaluate segmented op erations along space and time not draw a distinction between fi nancial and economic balances to many choices in determin ation of reportable segments and the allocation basis for joint costs. Does Provides Activity-based Costing Important points related to cost: Cost are attached to only those products that pa ss through the activity. Untraceable indirect cost are allocated on the ba sis of cost drivers Cost drivers are determined by each activity. Cost drivers represents the demands that outputs mak e on each activity. Additional cost drivers increase precision. The allocation of common costs in ABC is on a basis of output. Relationship between ABC an d Segmental Reporting Segment Reporting For income Statement, it is important to d efine the nature of expenses in dimension of Temporal (Time) Spatial (Space, Segment) Relationship between ABC an d Segmental Reporting Temporal dimension: Distinction between variable and fixed ex penses Need to know the difference between Variable Expenses that are related to and inseparable from the period Joint Expenses that are common with regard to sever al time periods Relationship between ABC an d Segmental Reporting Spatial Dimension: Distinction between direct and common expenses Need to know the difference between Direct expenses that are related and inseparable from the segment Joint expenses that common with respect to several s egments Relationship between ABC an d Segmental Reporting Both ABC and segmental reporting ar e concerned with the accumulation of cost based upon a definition of an acti vity under observation. The concept of multiple cost drivers is important to both ABC and segmental reporting to treat joint cost. use output as an independent va riable and input as a dependent variab le. Both Proposed Segmented Income Statement ...
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This note was uploaded on 03/27/2012 for the course ACC 101 taught by Professor Smith during the Spring '12 term at Missouri State University-Springfield.

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