2014 FASB Update Intermediate Accounting (15th Edition) Edit editionThis problem has been solved:Solutions for Chapter 24
Looking for the textbook?- CH1
- CH2
- CH3
- CH4
- CH5
- CH6
- CH7
- CH8
- CH9
- CH10
- CH11
- CH12
- CH13
- CH14
- CH15
- CH16
- CH17
- CH18
- CH19
- CH20
- CH21
- CH22
- CH23
- CH24
- 1AAP
- 1BE
- 1CA
- 1CAC
- 1E
- 1EB
- 1FRP
- 1FSA
- 1ICA
- 1ITQ
- 1P
- 1PB
- 1PR
- 1Q
- 2BE
- 2CA
- 2E
- 2EB
- 2ICA
- 2ITQ
- 2P
- 2PB
- 2Q
- 3BE
- 3CA
- 3E
- 3EB
- 3ICA
- 3ITQ
- 3P
- 3PB
- 3Q
- 4BE
- 4CA
- 4E
- 4EB
- 4ICA
- 4ITQ
- 4P
- 4PB
- 4Q
- 5BE
- 5CA
- 5E
- 5EB
- 5ICA
- 5ITQ
- 5P
- 5PB
- 5Q
- 6BE
- 6CA
- 6E
- 6EB
- 6ICA
- 6Q
- 7BE
- 7CA
- 7ICA
- 7Q
- 8BE
- 8CA
- 8ICA
- 8Q
- 9BE
- 9CA
- 9ICA
- 9Q
- 10CA
- 10ICA
- 10Q
- 11CA
- 11ICA
- 11Q
- 12CA
- 12Q
- 13CA
- 13Q
- 14Q
- 15Q
- 16Q
- 17Q
- 18Q
- 19Q
- 20Q
- 21Q
- 22Q
- 23Q
- 24Q
- 25Q
- 26Q
- 27Q
- 28Q
Part: 1
Quarterly reports for the year 2014 are as follows:
| Particulars | Amount(Q1) | Amount(Q2) | Amount(Q3) | Amount(Q4) |
| Sales revenue | 320,000 | 600,000 | 2,200,000 | 480,000 |
| Manufacturing cost | ||||
| Variable | (32,000) | (60,000) | (220,000) | (48,000) |
| Fixed | (64,000) | (120,000) | (440,000) | (96,000) |
| 224,000 | 420,000 | 1,540,000 | 336,000 | |
| Non-manufacturing cost | ||||
| Variable | (28,000) | (52,500) | (192,500) | (42,000) |
| Fixed | (96,000) | (180,000) | (660,000) | (144,000) |
| Net income | 100,000 | 187,500 | 687,500 | 150,000 |
Part: 2
Calculation of profit margin on sales as per integral approach is as follows:
| Particulars | Amount(Q1) | Amount(Q2) | Amount(Q3) | Amount(Q4) |
| Sales revenue | 320,000 | 600,000 | 2,200,000 | 480,000 |
| Net income | 100,000 | 187,500 | 687,500 | 150,000 |
| Profit margin on sales | 31.25% | 31.25% | 31.25% | 31.25% |
Calculation of profit margin on sales as per discrete approach is as follows:
| Particulars | Amount(Q1) | Amount(Q2) | Amount(Q3) | Amount(Q4) |
| Sales revenue | 320,000 | 600,000 | 2,200,000 | 480,000 |
| Manufacturing cost | ||||
| Variable | (32,000) | (60,000) | (220,000) | (48,000) |
| Fixed | (64,000) | (120,000) | (440,000) | (96,000) |
| 224,000 | 420,000 | 1,540,000 | 336,000 | |
| Non-manufacturing cost | ||||
| Variable | (28,000) | (52,500) | (192,500) | (42,000) |
| Fixed | (270,000) | (270,000) | (270,000) | (270,000) |
| Net income | (74,000) | 97,500 | 1,077,500 | 24,000 |
| Profit margin on sales | Nil | 16.25% | 48.97% | 5% |
The given question is an example depicting seasonality problem. Seasonality occurs when most of the company sale occurs in one short period of the year while certain costs are fairly, evenly spread throughout the year.
As clearly seen above after applying the discrete approach the profit margin on sales is uneven while in integral approach the profit margin is constant at 31.25%.
An Investor who reads report made on discrete approach might be misled since if he uses the first quarters result he may assume the company to be loss making and after the third quarters result occurs the investor may become even more confused. As it shows huge profit at 48.97%.
Part: 3
According to the integral approach the interim report is an integral part of the annual report and these deferrals and accruals should take into consideration what will happen for the entire year. In this approach, companies should assign estimated expenses to parts of a year on the basis of sales volume or some other activity basis.
Corresponding textbook
