The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.
The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.
a) J. D. Long Company takes a physical inventory at year-end for annual financial statement purposes. Inventory and cost of sales reported in the interim quarterly statements are based on estimated gross profit rates, because a physical inventory would result in a cessation of operations. Long Company does have reliable perpetual inventory records.
It is acceptable under GAAP.
FASB is a private-sector body tasked with establishing and improving financial accounting standards. The SEC is in charge of establishing accounting rules and standards, but it has mainly left the FASB to develop its own.
For interim reporting purposes, using gross profit rates to estimate the cost of products sold is appropriate as long as the technique and rates used are fair. The approach used and any major revisions resulting from reconciliations with yearly physical inventory should be disclosed.
What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported.
a) Collection of a note written off in a prior period.
b) Issuance of a large preferred stock offering.
c) Acquisition of a company in a different industry.
e) Destruction of a major plant in a flood.
f) Death of the company’s chief executive officer (CEO).
g) Additional wage costs associated with settlement of a four-week strike.
h) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.
Change in the product mix from consumer goods to industrial goods.
(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.
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