An inventory loss from a market price decline occurred in
the first quarter. The loss was not expected to be restored in the
fiscal year. However, in the third quarter the inventory had a
market price recovery that exceeded the market decline that occurred
in the first quarter. For interim financial reporting, the
dollar amount of net inventory should
(b) A decline in inventory market price, expected to be
other than temporary, should be recognized in the period of decline.
A subsequent recovery of market value should be recognized
as a cost recovery in the period of increase, but never above
original cost. The decline should be recognized when it occurs in
the first quarter. The subsequent recovery should be recognized
when it occurs in the third quarter. The subsequent recovery
cannot exceed the amount of decline. A nontemporary decline
should be shown in the quarter of price decrease.
For external reporting purposes, it is appropriate to use
estimated gross profit rates to determine the cost of goods sold for
Interim financial reporting
Year-end financial reporting
(b) The requirement is to determine the appropriateness
of estimated gross profit rates in determining cost of goods
sold for interim and year-end external financial reporting purposes.
The use of estimated gross profit rates to determine the
cost of goods sold for an interim period is appropriate. The
method of estimation used and any significant adjustments that
result from reconciliations with the annual physical inventory
should be disclosed. An estimation of cost of goods sold is not
allowable for year-end financial reporting. (The actual cost of the
goods sold must be determined by the use of a cost flow assumption
that most clearly reflects periodic income.) Thus, an estimated
cost of goods sold figure may be used for interim but not
For interim financial reporting, the computation of a company’s
second quarter provision for income taxes uses an effective
tax rate expected to be applicable for the full fiscal year. The
effective tax rate should reflect anticipated
Foreign tax rates
Available tax planning alternatives
(d) The effective tax rate should reflect anticipated investment
tax credits, foreign tax rates, percentage depletion, capital
gains rates, and other available tax planning alternatives.
For interim financial reporting, a company’s income tax
provision for the second quarter of year 1 should be determined
(b) The requirement is to determine what tax rate
should be used to calculate the income tax provision for interim
reporting. Each interim period is considered to be an integral
part of the annual period. Therefore, expectations for the annual
period must be reflected in the interim report. The income tax
expense should be calculated using the estimated annual effective
tax rate. The estimated tax rate should be updated as of the end
of each interim period (here, as of the second quarter). The statutory
tax rate is only a part of the effective tax. The effective tax
rate includes the statutory tax rate and a variety of other items.
ASC Topic 270, Interim Reporting, states that interim financial
reporting should be viewed primarily in which of the following
(c) The integral view, used for interim reporting, holds
that each interim period is an integral part of an annual period,
must reflect expectations for the annual period, and must utilize
special accruals, deferrals, and allocations.
Conceptually, interim financial statements can be described
(a) The primary purposes of interim reporting are to
provide information which is more timely than is available in
annual reports and to highlight business turning points which
could be “buried” in annual reports. This emphasis on timeliness
comes at the expense of reliability. Accounting information
pertaining to shorter periods may require more arbitrary allocations,
and may not be as verifiable or representationally faithful as
information contained in annual reports. Interim reports are
generally more relevant and less reliable. Interim financial statements
should not be any more or less comparable than annual
Wilson Corp. experienced a $50,000 decline in the market
value of its inventory in the first quarter of its fiscal year. Wilson
had expected this decline to reverse in the third quarter, and in
fact, the third quarter recovery exceeded the previous decline by
$10,000. Wilson’s inventory did not experience any other declines
in market value during the fiscal year. What amounts of
loss and/or gain should Wilson report in its interim financial
statements for the first and third quarters?
First quarter. . . . . Third quarter
(a) Temporary declines in inventory market values are
not recognized. Only declines that are apparently permanent or
other than temporary need to be recognized. In this case, Wilson
expected the decline to reverse in the third quarter; therefore, the
decline is temporary and no loss would be recorded in the first
quarter. Because no loss was recorded for the decline, no gain
will be recognized in the third quarter for the recovery of the
$50,000 decline. Also, assuming that the inventory was valued at
cost at the beginning of the fiscal year, no gain will be recorded
for the recovery excess of $10,000 since inventory may not be
valued at an amount in excess of cost.
Which of the following statements is true regarding interim
reporting for companies that prepare their financial statements in
accordance with IFRS?
(c) Interim reports are not required for companies who
prepare statements in accordance with IFRS.
Noble Corporation prepares its financial statements in accordance
with IFRS. If Noble prepares interim financial statements,
which statements are required?
I. Statement of Financial Position
II. Statement of Income
III. Statement of Comprehensive Income
IV. Statement of Cash Flows
V. Statement of Changes in Equity
(d) IFRS does not mandate interim reporting. However,
when interim reports are required by regulation, four financial
statements are required: (1) the statement of financial position,
(2) the statement of comprehensive income, (3) the
statement of changes in equity, and (4) the statement of cash
flows. For consistency purposes, the entity must use the same
accounting policies as used in year-end financial statements.
Which of the following describes IFRS’s requirements regarding
interim financial statements?
(b) The requirement is to identify the statement that is
correct about IFRS requirements regarding interim financial
statements. Answer (b) is correct because IFRS has no requirement
for the presentation of interim financial statements, but if
they are presented, four basic financial statements are required.