Interim financial reporting has become an important topic in accounting. There h

Question

Interim financial reporting has become an important topic in accounting. There has been considerable discussion as to the proper method of reflecting results of operations at interim dates. Accordingly, the Accounting Principles Board issued an opinion clarifying some aspects of interim financial reporting. Discuss generally how revenue should be recognized at interim dates and specifically how revenue should be recognized for industries subject to large seasonal fluctuations in revenue and for long-term contracts using the percentage-of-completion method at annual reporting dates. Discuss generally how product and period costs should be recognized at interim dates. Also discuss how inventory and cost of goods sold may be afforded special accounting treatment at interim dates. Discuss how the provision for income taxes is computed and reflected in interim financial statements.

Explanation / Answer

A)

A company must record the revenue realized during the interim period in the same manner i: e; when earned and realized. It should be recorded in the same accounting period in which it is earned and realized. For recording for the long term projects the company must record the revenue realized as per the percentage of the completion that means if the project life is 3 years and the project completed in first year is 1/3rd then the revenue realized would be 33.33 % of the project price.

B)

The company must record the cost incurred on the production of products and services during the period it was produced and sold that means the revenue is recognized. For the inventory the company must recognize a permanent loss due to an inventory market decline by using the lower of the cost market procedures in the interim period during which the decline occurred. It must recognizes any losses recovered in the period not exceeding the amount of the losses.

C)

At the end of each interim period the company must make an estimate the amount of income taxes to be paid at the end of the period. The appropriate rate on annual income tax should be effectively calculated and should be entirely applied to the yearly income. In calculating the rate company also remove the certain income which are not considered for calculating the income tax such as extra ordinary income which are separately recorded net of income taxes. The company has to estimate its income taxes for each year quarter and based on the income taxes the effective tax rate is estimated. It then compute the income tax based on the effective rate calculated and apply it to the income from continuing operations and is applied on year to date basis.

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