Ch12 - CHAPTER 12 UNDERSTANDING THE ISSUES 1. Viewing an...

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Unformatted text preview: CHAPTER 12 UNDERSTANDING THE ISSUES 1. Viewing an interim period as an integral part of a larger annual period has several benefits. The al- location of expense under this viewpoint provides in- formation that allows for more meaningful and in- sightful 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. Examples of this include spe- cial accounting for temporary inventory liquidations and temporary unfavorable variances. If special ac- counting 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 addi- tion to year-to-date pretax income/loss, such amounts must be projected for the balance of the year. Statutory tax rates are applied to these annual amounts after considering the presence of possible annual permanent differences between book and tax income. The resulting taxes must also be reduced by possible tax credits. The applicability of the above factors becomes more complex in situations where there is an estimated annual pretax loss. This situ- ation requires the consideration of possible tax loss and/or tax credit carrybacks and carryforwards. 3. Corporate tax rates are progressive, and there- fore, more income results in higher tax brackets. This raises the question as to which category of nonordinary income caused the tax bracket to in- crease. Rather than specifically identifying a particu- lar category of nonordinary income as being re- sponsible, an incremental approach is employed. This approach basically considers each nonordinary item separately. However, the sum of the tax ex- penses or benefits traceable to each separate com- ponent normally does not equal the total tax effect of considering all such items in total. Therefore, the process of ratable allocation is necessary in order to make sure that the sum of the parts equals the whole. 4. There are a number of reasons why the total operating profit of the reportable segments does not normally equal the consolidated 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 interseg- ment transactions whose effect would be included in operating profits of reportable segments but elimin- ated from consolidated amounts. Third, not all ele- ments of consolidated income are allocated to re- portable segments. This is traceable to the fact that not all elements are used by the chief operating de- cision maker in evaluating segment performance and/or because allocation is not possible on a reas- onable basis. Finally, the accounting employed from a management approach perspective may be differ- ent from the requirement to use GAAP in the meas- urement of consolidated amounts....
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Ch12 - CHAPTER 12 UNDERSTANDING THE ISSUES 1. Viewing an...

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