Concepts for Analysis 24-7 (Essay) The following article appeared in the Wall St

Question

Concepts for Analysis 24-7 (Essay)

The following article appeared in the Wall Street Journal.

WASHINGTON — The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports.

An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit.

Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.

What does financial reporting for segments of a business enterprise involve?

Identify the reasons for requiring financial data to be reported by segments.

Identify the possible disadvantages of requiring financial data to be reported by segments.

Identify the accounting difficulties inherent in segment reporting.

Concepts for Analysis 24-7 (Essay)

The following article appeared in the Wall Street Journal.

WASHINGTON — The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports.

An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit.

Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.

Explanation / Answer

Part 1:

Segment reporting for a business enterprise involve identification of the different products manufactured by an organization. Accordingly, the revenue and expenditures associated with the identified products shall be shown separately in the financial statements to provide segment reporting of an organization. Often an organization apart from operational segment which is based on the products manufactured by an organization might also report the geographical segment. Geographical segment include identification of different geographical locations in which it conducts its operations. Accordingly, it should report revenue and expenditures in such geographical segments.     

Part 2:

The reasons are as following:

Part 3:

Possible disadvantages are as following:

Part 4:

Inherent difficulties are as following:

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