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Advanced Accounting 13th Edition Hoyle Solutions Manual
Advanced Accounting 13th Edition Hoyle Solutions Manual
Manual
CHAPTER 8
SEGMENT AND INTERIM REPORTING
Chapter Outline
I. FASB Accounting Standards Codification Topic 280, Segment Reporting (FASB ASC 280),
provides current guidance on segment reporting.
A. ASC 280 follows a management approach in which segments are based on the way
that management disaggregates the enterprise for making operating decisions; these
are referred to as operating segments.
B. Operating segments are components of an enterprise which meet three criteria.
1. Engage in business activities and earn revenues and incur expenses.
2. Operating results are regularly reviewed by the chief operating decision-maker to
assess performance and make resource allocation decisions.
3. Discrete financial information is available from the internal reporting system.
C. Once operating segments have been identified, three quantitative threshold tests are
then applied to identify segments of sufficient size to warrant separate disclosure. Any
segment meeting even one of these tests is separately reportable.
1. Revenue test—segment revenues, both external and intersegment, are 10 percent
or more of the combined revenue, external and intersegment, of all reported
operating segments.
2. Profit or loss test—segment profit or loss is 10 percent or more of the greater (in
absolute terms) of the combined reported profit of all profitable segments or the
combined reported loss of all segments incurring a loss.
3. Asset test—segment assets are 10 percent or more of the combined assets of all
operating segments.
D. Several general restrictions on the presentation of operating segments exist.
1. Separately reported operating segments must generate at least 75 percent of total
(consolidated) sales made by the company to outside parties.
2. Ten is suggested as the maximum number of operating segments that should be
separately disclosed. If more than ten are reportable, the company should consider
combining some operating segments.
E. Information to be disclosed by operating segment.
1. General information about the operating segment including factors used to identify
operating segments and the types of products and services from which each
segment derives its revenues.
2. Segment profit or loss and the following components of profit or loss.
a. Revenues from external customers.
b. Revenues from transactions with other operating segments.
c. Interest revenue and interest expense (reported separately).
d. Depreciation, depletion, and amortization expense.
e. Other significant noncash items included in segment profit or loss.
f. Unusual items.
g. Income tax expense or benefit.
3. Total segment assets and the following related items.
a. Investment in equity method affiliates.
b. Expenditures for additions to long-lived assets.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
III. International Financial Reporting Standards (IFRS) also provide guidance with respect to
segment reporting.
A. IFRS 8, “Operating Segments,” is based on U.S. GAAP. Major differences between
IFRS 8 and U.S. GAAP are:
1. IFRS 8 requires disclosure of total assets and total liabilities by operating segment if
these are regularly reported to the chief operating decision maker. U.S. GAAP
requires disclosure of segment assets but does not require disclosure of segment
liabilities.
2. IFRS 8 specifically includes intangibles in the scope of “non-current assets” to be
disclosed by geographic area. Authoritative accounting literature (FASB ASC)
indicates that “long-lived assets” to be disclosed by geographic area excludes
intangibles.
3. U.S. GAAP requires an entity with a matrix form of organization to determine
operating segments based on products and services. IFRS 8 allows such an entity
to determine operating segments based on either products and services or
geographic areas.
IV. To provide investors and creditors with more timely information than is provided by an
annual report, the U.S. Securities and Exchange Commission (SEC) requires publicly
traded companies to provide financial statements on an interim (quarterly) basis.
A. Quarterly statements need not be audited.
V. FASB Accounting Standards Codification Topic 270, Interim Reporting (FASB ASC 270)
requires companies to treat interim periods as integral parts of an annual period rather than
as discrete accounting periods in their own right.
A. Generally, interim statements should be prepared following the same accounting
principles and practices used in the annual statements.
B. However, several items require special treatment for the interim statements to better
reflect the expected annual amounts.
1. Revenues are recognized for interim periods in the same way as they are on an
annual basis.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
2. Interim statements should not reflect the effect of a LIFO liquidation if the units of
beginning inventory sold are expected to be replaced by year-end; inventory
should not be written down to a lower market value if the market value is expected
to recover above the inventory's cost by year-end; and planned variances under a
standard cost system should not be reflected in interim statements if they are
expected to be absorbed by year-end.
3. Costs incurred in one interim period but associated with activities or benefits of
multiple interim periods (such as advertising and executive bonuses) should be
allocated across interim periods on a reasonable basis through accruals and
deferrals.
4. Income tax related to ordinary income should be computed at an estimated annual
effective tax rate.
VI. FASB ASC 270 provides guidance for reporting changes in accounting principles made in
interim periods.
A. Unless impracticable to do so, an accounting change is applied retrospectively, that is,
prior period financial statements are restated as if the new accounting principle had
always been used.
B. When an accounting change is made in other than the first interim period, information
for the interim periods prior to the change should be reported by retrospectively
applying the new accounting principle to these pre-change interim periods.
C. If retrospective application of the new accounting principle to interim periods prior to
the change of change is impracticable, the accounting change is not allowed to be
made in an interim period but may be made only at the beginning of the next fiscal
year.
VII. Many companies provide summary financial statements and notes in their interim reports.
A. U.S. GAAP imposes minimum disclosure requirements for interim reports.
1. Sales, income tax, cumulative effect of accounting change, and net income.
2. Earnings per share.
3. Seasonal revenues and expenses.
4. Significant changes in estimates or provisions for income taxes.
5. Disposal of a business segment and unusual items.
6. Contingent items.
7. Changes in accounting principles or estimates.
8. Significant changes in financial position.
B. Disclosure of balance sheet and cash flow information is encouraged but not required.
If not included in the interim report, significant changes in the following must be
disclosed:
1. Cash and cash equivalents.
2. Net working capital.
3. Long-term liabilities.
4. Stockholders' equity.
VIII. Four items of information must also be disclosed by operating segments in interim financial
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
In his well-publicized “The Numbers Game” speech delivered in September 1998, former SEC
chairman Arthur Levitt cited “materiality” as one of five gimmicks used by companies to manage
earnings. Although his remarks were not specifically directed toward the issue of geographic
segment reporting, the intent was to warn corporate America that materiality should not be used
as an excuse for inappropriate accounting.
To make the point even more salient, ASC 250-10-S99 (SAB Topic 1.M, Assessing Materiality,
originally issued by the SEC as Staff Accounting Bulletin (SAB) 99, “Materiality”), warns financial
statement preparers that reliance on a simple numerical rule of thumb, such as 5% of net
income, is not sufficient. And in paragraph QC 11 of Statement of Financial Accounting
Concepts (SFAC) 8, the FASB stated the essence of the materiality aspect of relevance as
follows:
Further, ASC 250-10-S99 reminds companies that both quantitative and qualitative factors
should be considered in determining materiality. With respect to segment reporting, ASC 250-
10-S99 states:
“The materiality of a misstatement may turn on where it appears in the financial statements.
For example, a misstatement may involve a segment of the registrant's operations. In that
instance, in assessing materiality of a misstatement to the financial statements taken as a
whole, registrants and their auditors should consider not only the size of the misstatement
but also the significance of the segment information to the financial statements taken as a
whole. “A misstatement of the revenue and operating profit of a relatively small segment
that is represented by management to be important to the future profitability of the entity" is
more likely to be material to investors than a misstatement in a segment that management
has not identified as especially important. In assessing the materiality of misstatements in
segment information - as with materiality generally - situations may arise in practice where
the auditor will conclude that a matter relating to segment information is qualitatively
material even though, in his or her judgment, it is quantitatively immaterial to the financial
statements taken as a whole.
Thus, in addition to quantitative factors, such as the relative percentage of total revenues
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
There are competing arguments for the FASB establishing a significance test for determining
material foreign countries. On one hand, such a quantitative materiality test flies in the face of
the warning provided in ASC 250-10-S99 and SFAC 8. For example, a “10% of total revenue or
long-lived asset test” might give companies an excuse to avoid reporting individual countries
that would be material for qualitative reasons. Assume that from one year to the next a
company increases its revenues in China from 2% of total revenues to 6% of total revenues.
Although 6% of total revenues would not meet a 10% test, the relatively large increase in total
revenues generated in China could be material in that it could affect an investor’s assessment of
the company’s future prospects. This company might be reluctant to disclose information about
its revenues in China because of potential competitive harm.
On the other hand, one could argue that if the FASB were to establish a relatively low disclosure
threshold of, say, “5% of total revenues,” that many countries that financial statement users
would deem to be of significance would be disclosed regardless of whether they are deemed
material for quantitative or for qualitative reasons. However, it could also result in disclosures
being provided that are not material, i.e., capable of influencing decisions made by financial
statement users.
In any event, establishing a materiality threshold would be inconsistent with the FASB’s
conclusion in SFAC 8 that it “cannot predetermine what could be material in a particular
situation.”
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
Answers to Questions
1. Consolidation presents the account balances of a business combination without regard for
the individual component units 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.
2. 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.
3. According to the FASB, 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.
7. The Revenue Test. An operating segment is separately reportable if its total revenues
amount to 10 percent or more of the combined total revenues of all operating segments.
The Profit or Loss Test. An operating segment is separately reportable if its profit or loss is
10 percent or more of the greater (in absolute terms) of the combined profits of all profitable
segments or the combined losses of all segments reporting a loss.
The Asset Test. An operating segment is separately reportable if its assets comprise 10
percent or more of combined assets of all operating segments.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
b. Segment profit or loss and each of the following if it is included in the measure of
segment profit or loss reviewed by, or it is otherwise regularly provided to, the chief
operating decision maker:
• Revenues from external customers.
• Revenues from transactions with other operating segments.
• Interest revenue and interest expense (reported separately); net interest revenue
may be reported for finance segments if this measure is used internally for
evaluation.
• Depreciation, depletion, and amortization expenses.
• Other significant noncash items included in segment profit or loss.
• Unusual items.
• Income tax expense or benefit.
• Equity in the net income of investees accounted for by the equity method.
c. Total segment assets and the following related items:
• Investment in equity method affiliates.
• Expenditures for additions to long-lived assets.
9. If operating segments are not based upon products or services, or a company has only one
operating segment, then revenues from sales to unaffiliated customers must be disclosed
for each of the company’s products and services.
10. Information must be provided for the domestic country, for all foreign countries in which the
company generates revenue or holds assets, and for each foreign country in which the
company generates a material amount of revenues or has a material amount of assets.
11. Two items of information must be reported for the domestic country, for all foreign countries
in total, and for each foreign country in which the company has material operations: (1)
revenues from external customers, and (2) long-lived assets.
12. The minimum number of countries to be reported separately is one: the domestic country.
If no single foreign country is material, then all foreign countries would be combined and
two lines of information would be reported; one for the United States and one for all foreign
countries. U.S. GAAP does not provide any guidelines related to the maximum number of
countries to be reported.
13. The existence of a major customer and the related amount of revenues must be disclosed
when sales to a single customer are 10 percent or more of consolidated sales.
14. U.S. GAAP requires disclosure of a measure of segment assets, but does not require
disclosure of a measure of segment liabilities. IFRS 8 requires disclosure of total assets
and total liabilities by segment if such a measure is regularly provided to the chief operating
decision maker
15. U.S. publicly traded companies are required to prepare quarterly financial reports to provide
investors and creditors with relevant information on a more timely basis than is provided by
an annual report.
16. Companies are required to follow an "integral" approach in which each interim period is
considered to be an integral part of an annual accounting period, rather than a "discrete"
accounting period in its own right. For several items, the integral approach requires
deviation from the general rule that the same accounting principles used in preparing
annual statements should also be used in preparing interim statements.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
17. Cost of goods sold should be adjusted in the interim period to reflect the cost at which the
liquidated inventory is expected to be replaced, thus avoiding the effect of the LIFO
liquidation on interim period income.
18. Income tax expense related to interim period income is determined by estimating the
effective tax rate for the entire year. That rate is then applied to the cumulative pre-tax
income earned to date to determine the cumulative income tax to be recognized to date.
The amount of income tax recognized in the current interim period is the difference
between the cumulative income tax to be recognized to date and the income tax
recognized in prior interim periods.
19. When an accounting change occurs in other than the first interim period, information for the
pre-change interim periods should be reported based on retrospective application of the
new accounting principle. If retrospective application of the new accounting principle to
pre-change interim periods is not practicable, the accounting change may be made only at
the beginning of the next fiscal year.
21. Four items of segment information are required to be included in interim reports: revenues
from external customers, intersegment revenues, segment profit or loss, and total assets if
there has been a material change in assets from the last annual report.
22. Under IAS 34, an annual bonus paid in the fourth quarter of the year would be recognized
fully in that quarter. There would be no accrual of an estimated bonus expense in the first
three quarters of the year. Under U.S. GAAP, the annual bonus would be estimated at the
beginning of the year and a portion of the estimated bonus would be accrued as expense in
each of the first three quarters.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
Answers to Problems
1. D
2. C
3. A
4. C
5. B
6. D
7. C
8. A
9. B
10. B
11. A
12. C
13. C With regard to major customers, U.S. GAAP (FASB ASC 280) only requires
disclosure of the total amount of revenues from each such customer and
the identity of the operating segment or segments reporting the revenues.
14. D
15. D
16. A
17. C
18. D
19. C If there has been a material change from the last annual report, total
assets, but not individual assets, for each operating segment must be
disclosed.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
20. B Under U.S. GAAP, the company should report property tax expense of
$25,000 in each quarter of the year. Under IFRS, the company should
report the entire property tax expense of $100,000 in the second quarter of
the year.
Total operating losses of $580,000 (B and D) are larger than total operating
profits of $400,000 (A, C, E and F). Thus, based on the 10 percent
criterion, any segment with a profit or loss of $58,000 or more must be
separately disclosed. Other than E, each segment meets this threshold.
Five segments pass any one of the tests and are reportable: U, V, W, X, Y
Revenue Test
Combined segment revenues $35,000,000
10% criterion x 10%
Minimum $ 3,500,000
Segments meeting test—U, V, W
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
24. (continued)
Asset Test
Combined segment assets $43,000,000
10% criterion x 10%
Minimum $ 4,300,000
25. D
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
31. C (Journal entry for property tax expense recognized in interim period)
32. B (Determine COGS in interim period under LIFO with LIFO liquidation)
33. D
34. (10 minutes) (Apply the Profit or Loss Test to Determine Reportable Operating
Segments)
Any segment with an absolute amount of profit or loss greater than or equal
to $110,000 (10% x $1,100,000) is separately reportable. Based on this test,
Autos, Trucks and SUVs must be reported separately.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
35. (25 minutes) (Apply the Three Tests Necessary to Determine Reportable
Operating Segments)
The plastics, metals, paper, and finance segments meet at least one of the
three tests and therefore are reportable.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
37. (25 minutes) (Apply the three tests necessary to determine reportable
operating segments and determine whether a sufficient number of segments
is reported)
This test is based on the greater (in absolute amount) of total profit from
profitable segments or total loss from segments with a loss. In this case,
any segment with profit or loss greater than or equal to $29,200 (10% x
$292,000) is separately reportable.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
Only Italy meets the revenue materiality test, and no foreign country meets
the long-lived asset test. Italy’s revenues must be reported separately from
the other foreign countries. But all of foreign countries can be combined
for reporting long-lived assets.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
39. (20 minutes) (Allocate costs incurred in one quarter that benefit the entire year
and determine income tax expense
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
39. (continued)
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
40. (15 minutes) (Treatment of accounting change made in other than first interim
period)
2016 2017
Net income in the second quarter of 2017 is $4,560 [$20,000 – 9,000 – 3,400 =
$7,600 – 3,040 (40%) = $4,560].
The accounting change is reflected in the second quarter of 2017, with year-
to-date information, and comparative information for similar periods in 2016
as follows:
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
This assignment requires the student to select a company and find the note
on operating segments in that company’s annual report. The responses to
this assignment will depend upon the company selected by the student for
analysis.
This assignment requires students to select a company, find the most recent
quarterly report for that company, and then determine whether the company
provides the minimum disclosure required as listed in the text. The
responses to this assignment will depend upon the company selected by the
student for analysis.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
The only geographic area that can be directly compared across these four
pharmaceutical companies is the United States. Bristol-Myers Squibb
provides the least detailed information of the four companies. Only Eli Lilly
and Merck report an individual country (Japan) other than the U.S. Issues
that could be discussed include different quantitative thresholds used by
companies in determining what is a material country, and the fact that
disclosure of geographic areas aggregated above the individual country
level (e.g., E/ME/A, Latin America, Emerging Markets) is not required. One
can assume that Bristol-Myers Squibb does not have a material amount of
revenues or assets in any single country and voluntarily provides
information on a more aggregated, regional basis. The same appears to be
true for Pfizer. Eli Lilly and Merck provide information for a combination of
both individual countries (Japan) and aggregated regional area (Europe,
E/ME/A). Pfizer has perhaps the most different basis for determining
geographic areas, focusing on developed vs. emerging markets.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
With respect to question (a), ASC 280 allows (but does not require) segments
to be combined if they have essentially the same business activities in
essentially the same economic environments. In determining whether
business activities and environments are similar, management must consider
these aggregation criteria:
The facts of this case indicate that the types of customers and method used to
distribute products differ across the four divisions, and each division must
comply with industry-specific regulations. Thus, the Helicopters and Ships
divisions may not be combined into one reportable segment on the basis of
having essentially the same business activities in essentially the same
economic environments.
The Helicopters and Ships divisions still could be combined into a single
Other category if neither division meets any of the quantitative thresholds for
disclosure as a separate segment.
Revenue test: Total segment revenues are $11,171,005; thus, any segment
with more than $1,117,100 in sales is separately reportable.
• Automobiles, Trucks, and Helicopters meet this threshold.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
Asset test: Total segment assets are $9,993,830, thus any segment with assets
greater than $999,383 is separately reportable.
• All four segments, including Ships, meet this threshold.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
2. The disclosures required under ASC 280 could be provided in the following
manner:
Profit or loss:
Total segment operating profit before depreciation and amortization $ 1,627,821
Unallocated amounts:
Depreciation and amortization (507,576)
Interest expense (130,655)
Total consolidated income before income taxes $ 989,590
Assets:
Total segment assets $ 9,993,830
Unallocated corporate headquarters assets 1,008,988
Total consolidated asses $11,002,818
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
Thus, Caplan should disclose the lawsuit in its interim report, but only if the
possible loss is material. FASB ASC 270-10-50-6 provides guidance on this
issue, indicating that the materiality of a contingency should be judged in
relation to annual financial statements.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
1. Assess the seasonal nature of Walmart’s sales and income for the company
as a whole and by operating segment.
The excerpt from Note 16 Quarterly Financial Data shows that Walmart
experienced a significant increase in net sales and income in the quarter
ended January 31 over the previous three quarters of the year. This is not
surprising given that this quarter includes the holiday season.
Operating income for the quarter ended January 31 can be determined for
each segment by subtracting the amounts reported in the three quarterly
reports from the amounts reported in Note 14 Segments.
These results show the seasonal nature of the company’s two largest
segments (Walmart U.S. and Walmart International), with a significantly larger
amount of operating income generated in the quarter ended January 31 than in
the other quarters.
These results indicate that profit margins are highest in the fourth quarter of
the year, the quarter with the largest percentage of total sales.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
These results indicate that Walmart U.S. by far is the most profitable segment
for Walmart Stores, Inc. Although the Walmart International segment has a
reasonable Operating Profit Margin (4.53%), that segment’s Return on Assets
is very low (7.67%) compared to the other segments of Walmart. Return on
Assets must be interpreted with caution, however, because the ending
balance in Total Assets of Continuing Operations is used in the denominator
of the ratio rather than the average amount of Total Assets for the year. The
Walmart International segment’s Return on Assets (7.67%) would be
understated, for example, if a significant portion of Total Assets was acquired
late in the year.
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Chapter 8 - Segment and Interim Reporting – Hoyle, Schaefer, Doupnik, 13e
2. There is no right or wrong answer to this question. Students could argue that
Europe and Latin America would be the areas of the world in which to expand
because profit margin is highest in these areas. There would seem to be more
room to expand in Latin America given that this area has a slightly smaller
percentage of total net revenues than Europe. However, revenue declined in
Latin America from 2013 to 2014, whereas Europe experienced the largest %
increase in revenue over this same period. Whether these changes are likely
to continue in the future would affect the company’s plans to expand in one
region or the other.
Eurasia & Africa and Asia Pacific also have relatively high profit margins. The
company generates the smallest percentage of total revenues in Eurasia &
Africa, so perhaps there is an opportunity for growth in this area.
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Advanced Accounting 13th Edition Hoyle Solutions Manual
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Education.