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Chapter 24: 6IFRS (page 1467)

What are interim reports? Why is a complete set of financial statements often not provided with interim data? What are the accounting problems related to the presentation of interim data?

Short Answer

Expert verified

Interim data are not reported for a short period. Problems of opportunity cost and fixed cost allotment arise in the presentation of interim data.

Step by step solution

01

Meaning Interim Reports

Interim reporting's primary goal is to give information that will assist investors, creditors, and other users in making informed investment decisions. It comprises not just financial statements but also additional ways of expressing information that is directly or indirectly related to the accounting system's information, such as information about an enterprise's resources, commitments, earnings, and so on.

02

Explaining the reason for a complete set of financial statements often not provided with interim data

A full set of interim financial statements is rarely provided since this information isn't considered critical during a short period of time; the income number, on the other hand, is far more relevant to interim reporting.

03

Explaining the accounting problems related to the presentation of interim data

The accounting issues related to the introduction of interim information are as takes after:

  1. The difficulty of apportioning costs, such as income taxes, pensions, etc., to the proper quarter.
  2. Problems with fixed cost allotment.

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Most popular questions from this chapter

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.

Instructions

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.

b) Rockford Company is planning to report one-fourth of its pension expense each quarter.

The following comment appeared in the financial press: “Inadequate financial disclosure, particularly with respect to how management views the future and its role in the marketplace, has always been a stone in the shoe. After all, if you don’t know how a company views the future, how can you judge the worth of its corporate strategy?” What are some arguments for reporting earnings forecasts?

An annual report of Ford Motor Corporation states, “Net income a share is computed based upon the average number of shares of capital stock of all classes outstanding. Additional shares of common stock may be issued or delivered in the future on conversion of outstanding convertible debentures, exercise of outstanding employee stock options, and for payment of defined supplemental compensation. Had such additional shares been outstanding, net income a share would have been reduced by 10¢ in the current year and 3¢ in the previous year. . . . As a result of capital stock transactions by the company during the current year (primarily the purchase of Class A Stock from Ford Foundation), net income a share was increased by 6¢.” What information is provided by this note?

What is the relationship of the asset turnover to the return on assets?

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay

2017 Industry

2015

2016

2017

Averages

Current ratio

2.09

2.27

2.51

2.24

Quick ratio

1.15

1.12

1.19

1.22

Inventory turnover

2.40

2.18

2.02

3.50

Net sales to stockholders’ equity

2.71

2.80

2.99

2.85

Return on common stockholders’ equity

0.14

0.15

0.17

0.11

Total liabilities to stockholders’ equity

1.41

1.37

1.44

0.95

Millay is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay’s financial position.

Archibald MacLeish Bank. The bank is processing Millay’s application for a new 5-year term note. Archibald MacLeish has been Millay’s banker for several years but must reevaluate the company’s financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren’s clients.

Working Capital Management Committee. This is a committee of Millay’s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company’s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

b) For each of the four entities, identify two financial ratios, from the ratios presented above that would be most valuable as a basis for its decision regarding Millay.

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