CHAPTER 36

Operating Segment Reporting

Essay Questions

Q36-1. Consolidation presents the account balances of a business combination without

regard for the individual component companies 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.

Q36-2. 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.

Q36-3. For reportable business segments, a considerable amount of information must be

disclosed including the following:
a. Revenues
b. Operating profit or loss
c. Identifiable assets
d. Aggregate amount of depreciation, depletion, and amortization expense
e. Capital expenditures
f. Equity in the net income from an investment in the net assets of
unconsolidated subsidiaries and other equity investees
g. Types of products and services produced
h. Accounting policies relevant to the segment information
i. Amount of intersegment sales or transfers as well as the basis of accounting
being used
j. Reconciliation of revenues, profits and losses, and identifiable assets with
consolidated totals
k. Method of allocation used for common costs
l. Any effect created by a change in accounting principle
m. Explanation of any unusual or infrequently occurring items included in
operating profits and losses
36-2 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Q36-4. The Revenue Test: A segment is considered significant if its revenues amount to
10 percent or more of the combined revenues of all business segments.
Revenues (for this test) include all operations revenues and intersegment
transfers except for interest income on intersegment loans and advances (unless
the segment is principally of a financial nature).

The Operating Profit or Loss Test: A segment is considered significant if its

operating profit or loss is 10 percent or more of the greater (in absolute terms) of
the combined operating profits of all profitable segments or the combined
operating losses of all segments reporting a loss. All directly traceable expenses
are subtracted in determining operating profit and loss figures along with an
allocation of common costs incurred by the company.

The Identifiable Assets Test: A segment is considered significant if its

identifiable assets comprise 10 percent or more of the combined identifiable
assets of all business segments.

A business segment need only meet any one of the above tests to be considered
of significant size to warrant separate disclosure.

All of the segments of a company that do not meet any of these three tests should
be combined and disclosed as an aggregate figure along with the disaggregated
information for the reportable segments.

Q36-5. To determine a business segment’s operating profit or loss, operating expenses

are merely subtracted from revenues. The operating expenses should include all
directly traceable expenses as well as a portion of any common operating
expenses incurred for the segments by the corporation as a whole. Common
expenses should be allocated to the individual segments on some logical basis.

Q36-6. Corporation operating expenses that are not directly traceable to a single segment
should be assigned to the segments on a logical basis. Allocation bases such as
square footage, cubic footage, total revenues, employee hours, etc. can be used
depending upon the nature of the expense. For convenience, many expenses are
often assigned based on sales or sales less traceable costs. General corporation
expenses which are unrelated to the segments should not be allocated to them.

Q36-7. According to PAS 14, “identifiable assets of a business segment are those
tangible and intangible enterprise assets that are used by the business segment,
including (i) assets that are used exclusively by that business segment and (ii) an
allocated portion of assets used jointly by two or more business segments.
Assets used jointly by two or more segments shall be allocated among the
industry segments on a reasonable basis.”
 Operating Segment Reporting 36-3

Q36-8. Both the revenue test and the identifiable assets test are based on a 10 percent
criterion. In each case, segment totals are determined to arrive at a figure for the
enterprise as a whole. Each segment balance is then compared to this
accumulated total based on a 10 percent standard for required disclosure.

Q36-9. To ensure that sufficient business segments are being disclosed, PAS 14
established an additional reporting requirement: the business segments being
separately disclosed must generate at least 75 percent of the total sales made to
unaffiliated customers. If this standard is not met, enough additional segments
must be disclosed to reach this level although they failed to meet even one of the
three tests of significance.

Q36-10. Only two tests are applied in determining significant geographic segments: a
revenue test (which does not include any intersegment transfers) and an
identifiable assets test. Once again, only one test need be met for a segment to
be considered of significant size to warrant disclosure. Both tests are based on a
10 percent criterion.

Q36-11. The volume of a company’s export sales must be separately presented if it

constitutes 10 percent or more of the total sales made to unaffiliated customers.

Q36-12 After the company decides on the segments for possible disclosure, a
quantitative test is made to determine whether the segment is significant enough
to warrant actual disclosure. A segment is identified as a reportable segment if it
satisfies one or more of the following tests.
(a) Its revenue (including both sales to external customers and intersegment
sales or transfers) is 10% or more of the combined revenue (sales to
external customers and intersegment sales or transfers) of all the
company’s operating segments.
(b) The absolute amount of its operating profit or operating loss is 10% or
more of the greater, in absolute amount, of
1. the combined operating profit of all operating segments that did
not incur an operating loss, or
2. the combined loss of all operating segments that did incur loss.
(c) Its identifiable assets are 10% or more of the combined identifiable
assets of all segments.
2. the combined loss of all operating segments th
loss.
36-4 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
In applying these tests, two additional factors must be considered. First, segment
data must explain a significant portion of the company’s business. Specifically,
the segmented results must equal or exceed 75% of the combined sales to
unaffiliated customers for the entire company. This test prevents a company from
providing limited information on only a few segments and lumping all the rest
into one category.

Second, the profession recognized that reporting too many segments may
overwhelm users with detailed information. The PASB decided that 10 is a
reasonable upper limit for the number of segments that a company must disclose.

Q36-13 PFRS requires that a company report:

(a) General information about its operating segments.
(b) Segment profit and loss and related information.
(c) Segment assets and liabilities.
(d) Reconciliations (reconciliations of total revenues, income before income
taxes, and total assets and liabilities).
(e) Information about products and services and geographic areas.

Q36-14 An operating segment is a component of an enterprise:

(a) That engages in business activities from which it earns revenues and
incurs expenses.
(b) Whose operating results are regularly reviewed by the company’s chief
operating decision maker to assess segment performance and allocate
resources to the segment?
(c) For which discrete financial information is available that is generated
by or based on the internal financial reporting system.

Information about two operating segments can be aggregated only if the segments
have the same basic characteristics related to the: (1) nature of the products and
services provided, (2) nature of the production process, (3) type or class of
customer, (4) methods of product or service distribution, and (5) nature of the
regulatory environment.

Q36-15 One of the major reasons for not providing segment information is that
competitors will then be able to determine the profitable segments and enter that
product line themselves. If this occurs and the other company is successful, then
the present shareholders of Ligaya Inc. may suffer. This question should
illustrate to the student that the answers are not always black and white.
Disclosure of segments undoubtedly provides some needed information, but
some disclosures are confidential.
 Operating Segment Reporting 36-5

Exercises

E36-1. Memorandum

To: Maria dela Cruz

From: I.M. Student
Subject: Major Customers according to PAS 14

Since Filipinas Company revenues total P109,500,000, revenue from any

single customer equal to or greater than 10% of this amount, or P10,950,000, is
a major customer in accordance with PAS 14. Filipinas must disclose this fact,
including the total amount of revenues from each such customer. Since Cebu,
Inc. and Davao Company are both subsidiaries of Vismin Company, all three
companies are summed to determine whether they represent a major customer.
Given the above guidelines, there are three major customers.

Manila Company (revenues, P16,000,000),

Vismin Company (revenues, P13,000,000 [P8,000,000 + P4,000,000 +
P1,000,000]), and
Philippine government (revenues, P14,000,000)

Filipinas must report that it has three major customers, and that sales to each
are P16,000,000, P14,000,000 and P13,000,000 respectively. Filipinas does
not have to disclose the identity of the major customers.

Since no single foreign government accounts for revenue greater than

P10,950,000, separate disclosure is not required.

A sample disclosure for Filipinas Company financial statements would be as

follows:
Major Customers
The Company has three major customers which represent revenues of
P43,000,000 of the Company’s total revenues. The three customers generate
revenues to Filipinas of P16,000,000; P14,000,000 and P13,000,000,
respectively.

E36-2. Requirement 1
36-6 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Since all the groups within the Health care products divisions are considered
operating segments, each must be considered as a potentially reportable
segment. Each group and the other two divisions must be examined as to
whether they meet the quantitative thresholds to require separate disclosure.

The revenue test is to report all operating segments with revenues (including
external and internal revenues) greater than 10% of (P10,200 + P500 + P2,000
+ P700) = P1,320.

Pharmaceuticals, Consumer Health Care, and the Food Products division meet
this threshold. (Note that the Food products division does not meet the
threshold if intersegment sales were not considered.)

The profits test is 10% x P2,300 = P230. Pharmaceuticals and Medical

Devices meet the threshold.

The segment assets test is 10% x P21,000 = P2,100. Pharmaceuticals,

Consumer Health Care, and Agricultural Products meet the threshold.

Thus all five operating segments meet one or more of the threshold quantities.
All five are reportable segments.

Requirement 2
Operating Segments Financial Information:

Consume
r health Medical Agricultural Food
(Amounts in 000s) Pharmaceuticals care devices products products Totals
Total segment
revenues P 6,500 P3,000 P1,200 P1,000 P1,700 P13,400
Intersegment
revenues 500 – – – 700 1,200
Depreciation &
amortization 300 100 100 150 100 750
Segment profit 1,800 200 (400) 200 100 1,900
Segment assets 10,000 3,500 1,500 4,000 2,000 21,000
Expenditures for
segment assets 400 200 100 200 200 1,100

Reconciliations
Reconciliations for revenues, income before income taxes, total assets and
other significant items are as follows:

Revenues
Total revenues for reportable segments........................ P13,400
 Operating Segment Reporting 36-7
Other revenues.............................................................. 100
Less: Intersegment revenues........................................ (1,200)
Total company reported revenues................................. P12,300

Profit or loss
Total profit for reportable segments............................. P1,900
Elimination of intersegment profits.............................. (50)
Unallocated amounts:
Other corporate expenses............................................. (350)
Company total income before income taxes................ P1,500

Assets
Total assets for reportable segments............................. P21,000
Other unallocated assets............................................... 1,000
Company total assets.................................................... P22,000

Other significant items

Segment Company
Totals Adjustment Totals
s
Expenditures for assets...................... 1,100 200 1,300
Depreciation and amortization.......... 750 50 800

E36-3. Requirement 1
Initially all operating segments are examined using the quantitative thresholds
to identify reportable segments.

Operating Total Segment Operating Identifiable

segments Revenues Profit (Loss) Assets
A P 620 P 200 P 400
B 100 20 80
C 340 70 300
D 190 (30) 140
E 180 (25) 180
F 70 10 120
G 120 (20) 140
All others 380 (25) 140
Totals P2,000 200 P1,500
36-8 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

Thus, any operating segment with revenues equal to or greater than P200
million is a reportable segment (segments A and C). Any segment with
identifiable assets greater than P150 million is a reportable segment (segments
A, C, and E). The total operating profit for all the segments with operating
profits totals P300 million, thus any segment with an operating profit or loss
equals to or greater than an absolute amount of P30 million is a reportable
segment (Segments A, C, and D). Thus, segments A, C, D, and E are
reportable segments without regard to the aggregation criteria.

Requirement 2
Reportable segments must provide information on separate segments whose
sum of revenue is at least 75 percent of the firm’s total revenue. Segments A,
C, D, and E have revenue of P1,330 million, which is only 66.5% of the total
revenue. If a majority of the aggregation criteria are met by two segments,
they can be aggregated for purposes of identifying reportable segments.
Segments A and B are candidates for combining, but they have only 2 of the 5
criteria in common; thus they cannot be aggregated. Since segments F and G
are similar on four of the five criteria, they meet the majority test and can be
aggregated as a reportable segment as follows:

Segment F + G 190 (10) 300

With F + G considered a reportable segment, the total revenues included in

reportable segments increases to P1,520, of 76% of the total. The 75 percent
requirement has been met.

Requirement 3
If any major customer contributes 10 percent or more to a firm’s revenues, this
fact must be disclosed, including the total amount of revenues from each such
customer, and the segment or segments reporting the revenues. The Philippine
government contributes over 10% of Andres’ revenues and must be reported.
Neither of the other significant customers are major customers under the PAS
14 criterion.

An example disclosure:
Major Customers
Revenues from one customer of Andres Corporation’s segments A and C
represents approximately P220 million of the company’s total revenues.

E36-4. Star Drug Company

 Operating Segment Reporting 36-9
Business Segment Financial Results
For Year Ended December 31, 2014

Reportable Operating All

Segments Other Total
X Y Segments Results
Segment revenues (sales) P52,000 P26,000 P12,000 P 90,000
Segment profit (pretax) P12,000 a P 9,000 b P 1,000 c P 22,000
Segment sales P38,500 P22,000 P110,000
a
P52,000 – P30,000 – P10,000
b
P26,000 – P12,500 – P4,500
c
P12,000 – P7,500 – P3,500
E36-5. Merry Diversified Company
Business Segment Financial Results
For Year Ended December 31, 2014

Reportable Operating All

Segments Other Total
X Y Segments Results
Segment revenues (sales) P51,420 P24,400 P14,180 P 90,000
Segment profit (pretax) P14,640 a P 9,000 b P 3,760 c P 27,400
General corporate expenses (4,000)
Income before
income taxes P 23,400
Segment assets P70,300 P28,740 P21,960 P121,000
General corporate assets 9,000
Total assets at
December 31, 2014 P130,000
a
P51,420 – P36,780 operating expenses
b
P24,400 – P15,400 operating expenses
c
P14,180 – P10,420 operating expenses

E36-6. Requirement 1
Determination of reportable segments (see the working papers that follows):
a. Revenue Test. Since the sales of Segment D (P63,900) are more than 10%
(P100,000 x 0.10 = P10,000) of the sales for all business segments,
Segment D is considered to be a reportable segment.
b. Profit Test. Since the profits of Segment D (P21,500) and Segment E
(P3,600) are more than 10% (P35,000 x 0.10 = P3,500) of the total
profit for all business segments, both Segment D and Segment E are
reportable segments.
36-10 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

c. Asset Test. Since the assets of Segment A (P15,100) and Segment D

(P87,900) are more than 10% (P145,000 x 0.10 = P14,500) of the
combined assets of all operating segments, Segment A and Segment D are
reportable segments.
d. The combined revenues of Segments A, D, and E are P82,200, which is
more than 75% of the company revenues (P100,000 x 0.75 = P75,000).

Based on the above tests, Segments A, D, and E are the reportable segments
and Segments B and C should be combined for reporting purposes.

Radiant Diversified Company

Working Paper for Segment Reporting
For Year Ended December 31, 2014
(not required)

All Operating Segments Segment

A B C D E Totals
Total revenues
(sales) P 9,200 P 8,800 P 9,000 P63,900 c P 9,100 P100,000
Segment profit P 3,300 P 3,200 P 3,400 P21,500 d P 3,600 d P 35,000 a
Segment assets P15,100 e P13,900 P14,300 P87,900 e P13,800 P145,000 b
a
P28,000 pretax income + P7,000 general corporate expenses (not allocated so segment profit is
increased)
b
P155,000 total assets – P10,000 general corporate assets (not allocated)
c
Segment D meets the revenue test
d
Segment D and E meet the profit test
e
Segment A and D meet asset test

Requirement 2
Radiant Diversified Company
Business Segment Financial Results
For Year Ended December 31, 2014

Reportable Operating Segments All Other Total

A D E Segments Results

Segment revenues (sales) P 9,200 P63,900 P 9,100 P17,800 P100,000

Segment profit (pretax) P 3,300 P21,500 P 3,600 P 6,600 P 35,000
General corporate expenses (7,000)
Pretax income P 28,000
Segment assets at
December 31, 2014 P15,100 P87,900 P13,800 P28,200 P145,000
Corporate assets 10,000
 Operating Segment Reporting 36-11

Total assets at
December 31, 2014 P155,000

E36-7 It should be emphasized that because a company discloses its segmental results,
this does not diminish the necessity for providing consolidated results as well.
Sometimes individuals become confused because they believe that employment
of segmental reporting means that consolidated statements should not be
presented. There appears to be a need to provide both types of information. The
consolidated results provide information on overall financial position and
profitability, while the segmental results provide information on the specific
details which comprise the overall results.

E36-8 P600 + P650 + P250 + P275 + P225 + P200 + P700 = P2,900 = total revenue.
P2,900 X 10% = P290.
Lilibeth, Ken, and Mona meet this test, since their revenues equaled or
exceeded P290.

E36-9 P90 + P25 + P50 + P34 + P150 = P349 = total profits of profitable segments.
P349 X 10% = P34.90.
Lilibeth, Ken, Velvet, and Mona meet this test, since their absolute profit or
loss is equal to or greater than P34.90.

Problems

P36-1. Revenues from a single customer must be disclosed if the amount is 10 percent or
more of sales to unaffiliated customers. For this company, the amount can be
determined as follows:
Sales to Outsiders
Mango........................................................................... P123,000
Piña............................................................................... 81,000
Chico............................................................................ 95,000
Caimito......................................................................... 77,000
Total....................................................................... P376,000
Minimum...................................................................... 10%
Requires Disclosure...................................................... P 37,600

P36-2. Revenues from outsiders as well as intersegment transfers are included in the revenues
for industry segment reporting purposes.
Clothing Linen Shoes
Revenues................................ P1,500,000 P1,400,000 P1,000,000
Operating expenses................ 900,000 200,000 400,000
Income before allocation....... P 600,000 P1,200,000 P 600,000
36-12 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Percentage.............................. 25% 50% 25%
Allocated expenses
P300,000............................. P75,000 P150,000 P75,000
Operating profit (income less
allocation)........................... P525,000 P1,050,000 P525,000

P36-3. Sales
Sporting goods........................................ P 900,000 20%
Furniture................................................. 2,475,000 55%
Paper....................................................... 1,125,000 25%
Total................................................. P4,500,000 100%

Allocation of Common Costs (corporate expenses, interest expense, and income taxes
are not included)
Sporting goods 20% x P400,000 = P 80,000
Furniture 55% x P400,000 = 220,000
Paper 25% x P400,000 = 100,000

Operating Profit or Loss

Traceable Allocated
Sales Expenses Expenses Profit Loss
Sporting goods.......... P 900,000 P 400,000 P 80,000 P 420,000
Furniture.................... 2,475,000 900,000 220,000 1,355,000
Paper......................... 1,125,000 1,050,000 100,000 P25,000
Totals................... P1,775,000 P25,000

Since the operating profits (P1,775,000) are larger in an absolute sense than the single
operating loss, this figure is used as the basis for the operating profit or loss test. Thus,
an operating profit or loss of P177,500 (10%) is necessary in order to require
disclosure. The sporting goods segment meets this standard as does the furniture
segment. The paper segment does not.

P36-4. Revenue Test (Interest on intersegment loans is omitted except for finance segment)
(numbers in thousands)
Segment Revenues Percentage
Plastics P 6,425 63.7% (reportable)
Metals 2,286 22.7% (reportable)
Lumber 738 7.3%
Paper 455 4.5%
Finance 186 1.8%
Total P10,090 100.0%
 Operating Segment Reporting 36-13

Operating Profit or Loss Test (Common costs of P1,250,000 are assigned based on the
revenue percentages above. Interest expense is included for finance segment.)
Traceable Common Operating Operating
Segment Revenues Costs Costs Profit Loss
Plastics P6,425 P3,914 P796.25 P1,714.75
Metals 2,286 1,612 283.75 390.25
Lumber 738 916 91.25 P 269.25
Paper 455 579 56.25 180.25
Finance 186 103 22.50 60.50
Total P2,165.50 P 449.50

Since P2,165.50 is larger in absolute terms than P449.50, it will serve as the basis for
testing. Each of the operating profit and loss figures will be compared to P2,165.50 (in
an absolute sense).
Plastics P1,714.75 / P2,165.50 = 79.2% (reportable)
Metals P 390.25 / P2,165.50 = 18.0% (reportable)
Lumber P 269.25 / P2,165.50 = 12.4% (reportable)
Paper P 180.25 / P2,165.50 = 8.3%
Finance P 60.50 / P2,165.50 = 2.8%

Identifiable Assets Test (includes intangible as well as tangible assets; intersegment

loans are only included for the finance segment)
Plastics P 1,363 21.3% (reportable)
Metals 3,347 52.3% (reportable)
Lumber 314 4.9%
Paper 609 9.5%
Finance 768 12.0% (reportable)
Totals P 6,401 100.0%

The plastic and metals segments meet all three tests and are, therefore, reportable.
Lumber and finance each meet only one of the three tests but that is sufficient for
disclosure to be required.

P36-5. Requirement 1
Fantasy Corporation
Statement of Profit or Loss and Other Comprehensive Income
For Year Ended December 31, 2014

Revenues
Sales (net) P600,000
36-14 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Interest revenue 3,000
Total revenues P603,000

Expenses
Cost of goods sold P323,700
Administrative and office salaries 43,000
Miscellaneous office expenses 2,300
Bad debts expense 6,000
Advertising expense 40,000
Sales salaries and commissions 59,000
Depreciation expense 31,000
Delivery expense 25,000
Property taxes 7,000
Interest expense 8,800
Loss from tornado 10,000
Income tax expense 14,160
Total expenses (569,960)
Net income P 33,040

Earnings per share (10,000 ordinary shares):

Net income P3.30

Requirement 2
Fantasy Corporation
Working Paper for Segment Reporting
For Year Ended December 31, 2014
(not required)

All Operating Segments Segment

B C Other Totals Unallocate Totals
d
Total revenues (sales) P360,000 P150,000 P90,000 P600,000 P 0 P600,000

Operating expenses
Cost of goods sold P198,000 P 78,000 P47,700 P323,700 P 0 P323,700
Sales salaries 27,000 12,000 8,000 47,000 0 47,000
Sales commissions 7,200 3,000 1,800 12,000 0 12,000
Bad debts expense 3,600 1,500 900 6,000 0 6,000
Delivery expense 16,000 5,000 4,000 25,000 0 25,000
Advertising expense 18,200 9,800 7,000 35,000 5,000 40,000
Administrative and
office salaries 15,000 14,000 10,000 39,000 4,000 43,000
Property taxes 4,000 2,000 1,000 7,000 0 7,000
Misc. office expenses 0 0 0 0 2,300 2,300
 Operating Segment Reporting 36-15
Depreciation expense 15,000 6,000 4,000 25,000 6,000 31,000
Total operating
expenses P304,000 P131,300 P 84,400 P 519,700 P 17,300 P 537,000
Segment profit P 56,000 P 18,700 P 5,600 P 80,300 P(17,300) P 63,000

Segments assets P890,000 P370,000 P210,000 P1,470,000 P130,000 P1,600,000

Fantasy Corporation
Business Segment Financial Results
For Year Ended December 31, 2014

Reportable Operating Segments All

Other Total
B C Segments Results
Segment revenues (sales) P360,000 P150,000 P 90,000 P600,000
Segment profit (pretax) P 56,000 P 18,700 P 5,600 P 80,300
General corporate expenses (17,300)
Interest revenue 3,000
Interest expense (8,800)
Pretax income P 57,200
Segments assets at
December 31, 2014 P890,000 P370,000 P210,000 P1,470,000
General corporate assets 130,000
Total assets at
December 31, 2014 P1,600,000
Requirement 3
Segment profit is total revenue less operating expenses. In computing segment profit,
none of the following items has been added or deducted: general corporate expenses,
interest revenue, interest expense, tornado loss, income taxes.

Depreciation for Divisions B and C was P15,000 and P6,000, respectively. Capital
expenditures of Divisions B and C amounted to P50,000 and P27,000, respectively, in
2014 and are included in the total company assets at year-end.

Requirement 4
Segment Profit
Profit margin before income taxes = Segment Revenues (Sales)

P56,000
Division B: P360,000 = 15.6%

P18,700
Division C: P150,000 = 12.5%
36-16 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

P5,600
Other Divisions: P90,000 = 6.2%

These ratios reveal that the two reportable divisions (A and B) have higher profit
margin than the other operating divisions. This may indicate less efficiency in the
control of costs and expenses in the other divisions.

P36-6. Jerry Conglomerate Company

Working Paper for Segment Reporting
For Year Ended December 31, 2014
(not required)

All Operating Segments Segment

A B Other Totals Unallocate Totals
d
Total revenues (sales) P120,000 P138,000 P42,000 P300,000 P 0 P300,000

Operating expenses:
Cost of goods sold P 49,000 P 70,000 P21,000 P140,000 P 0 P140,000
Depreciation expense 11,200 12,600 4,200 28,000 2,000 30,000
Other operating
expenses 22,680 21,600 9,720 54,000 6,000 60,000
Total operating
expenses P 82,880 P104,200 P 34,920 P222,000 P 8,000 P230,000
Segment profit P 37,120 P 33,800 P 7,080 P 78,000 P (8,000) P 70,000

Segments assets P890,000 P370,000 P210,000 P1,470,000 P130,000 P1,600,000

Jerry Conglomerate Company

Business Segment Financial Results
For Year Ended December 31, 2014

Reportable Operating Segments All

Other Total
A B Segments Results
Segment revenues (sales) P120,000 P138,000 P 42,000 P300,000
Segment profit (pretax) P 37,120 P 33,800 P 7,080 P 78,000
General corporate expenses (8,000)
Pretax income P 70,000
 Operating Segment Reporting 36-17
Note: Of the P30,000 total depreciation expense, P2,000 is related to general corporate
activities. The remaining depreciation expense is allocated to Segments A and B and
the other operating segments in the amounts of P11,200, P12,600, and P4,200
respectively.

Segment profit is total revenues less operating expenses. Income taxes, depreciation
expense, and other operating expenses related to general corporate activities have not
been deducted in the computation of operating profits.

P36-7 Computations are given below which furnish some basis of comparison of the two
companies:
Plain Henry
Co. Co.
Composition of current assets
Inventories 63% 45%
Receivables 24% 27%
Cash 13% 28%
100% 100%

Computation of various ratios

Current ratio (P910 ÷P300) 3.03 to 1 (P1,140 ÷ P350) 3.26 to 1
Acid-test ratio (P120 + P220)
÷ P300 1.13 to 1 (P320 + P302) ÷ P350 1.78 to 1
Accounts receivable turnover 4.23
(P930 ÷ P220) times (P1,500 ÷ P302) 4.97 times
1.14a 1.74b
Inventory turnover times times
Cash to current liabilities
(P120 ÷ P300) .40 to 1 (P320 ÷ P350) .91 to 1

a b
(P930 X .70) ÷ P570 (P1,500 X .60) ÷ P518

Henry Co. appears to be a better short-term credit risk than Plain Co. Analysis of
various liquidity ratios demonstrates that Herring Co. is stronger financially, all other
factors being equal, in the short-term. Comparative risk could be judged better if
additional information were available relating to such items as net income, purpose of the
loan, due date of current and non-current liabilities, future prospects, etc.
36-18 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
P36-8 (a) Determination of reportable segments:

1. Revenue test: 10% X P785,000* = P78,500. Only Segment C (P580,000) meets this test.
*P40,000 + P75,000 + P580,000 + P35,000 + P55,000

2. Operating profit test: 10% X (P11,000 + P75,000 + P4,000 + P7,000) = P9,700.

Segments A (P11,000), B (P15,000 absolute value), and C (P75,000) all meet this
test.

3. Identifiable assets test: 10% X P730,000** = P73,000. Segments B (P80,000) and C

(P500,000) meet this test.

**P35,000 + P80,000 + P500,000 + P65,000 + P50,000

(b) Disclosures required by PFRS:
A B C Other Totals
External Revenues P40,000 P 55,000 P480,000 P 90,000 P665,000
Intersegment
Revenues 20,000 100,000 120,000
Total Revenues 40,000 75,000 580,000 90,000 P785,000
Cost of Goods Sold 19,000 50,000 270,000 49,000
Operating
Expenses 10,000 40,000 235,000 30,000
Total Expenses 29,000 90,000 505,000 79,000
Operating Profit
(Loss) P11,000 P(15,000) P75,000 P11,000 P82,000
Identifiable Assets P35,000 P80,000 P500,000 P115,000 P730,000

Reconciliation of revenues
Total segment revenues P785,000
Revenues of immaterial segments (90,000)
Elimination of intersegment revenues (120,000)
Revenues from reportable segments P575,000

Reconciliation of profit or loss

Total segment operating profit P82,000
Profits of immaterial segments (11,000)
Profits from reportable segments P71,000

Reconciliation of assets
Total segment assets P730,000
Assets of immaterial segments (115,000)
Assets from reportable segments P615,000
 Operating Segment Reporting 36-19

Multiple Choice Questions

MC36- 1. B MC36-11. C MC36-21. C MC36-31. D

2. C 12. B 22. B 32. C
3. C 13. B 23. C 33. A
4. E 14. E 24. C 34. D
5. C 15. D 25. B 35. D
6. D 16. B 26. A
7. C 17. B 27. B
8. C 18. A 28. D
9. C 19. C 29. A
10. C 20. B 30. D