LOS f: Calculate financial ratios for the reportable segments of a company, and interpret the level and trend of each ratio.

1.Wellboromun Corporation discloses segment data on two reportable segments, Hazardous Waste and Chemicals. Below are fiscal year data on the Hazardous Waste segment:

Which of the following is the most accurate characterization of the operations of the Hazardous Waste segment?

A)  Operating income has increased because of improved operating margins despite the trend in asset turnover.

B)  Operating income has increased because of improved asset turnover despite the trend in operating margins.

C)  Asset turnover and operating margins have both contributed to the increase in operating income.

D)  Operating income has increased despite the trends in operating margin and asset turnover because of sales growth.

2.Madrigality Incorporated discloses segment data on two reportable segments, Entertainment and Costumes. These two segments constitute all of Madrigality’s operations. Below are fiscal year data on the two segments:

Which of the following is the least accurate description of operating trends at Madrigality?

A)  Operating margins are higher in the Entertainment segment than the Costumes segment.

B)  A deterioration in asset turnover has caused Madrigality’s ROA to decline despite an improvement in operating margins.

C)  Asset turnover used to be higher in the Costumes segment but is now higher in the Entertainment segment.

D)  ROA for Madrigality has declined despite improvement in the Entertainment segment because of deterioration in ROA at the Costumes segment.

3.Wellboromun Corporation discloses segment data on two reportable segments, Hazardous Waste and Chemicals. These two segments constitute all of Wellboromun’s operations. Below are fiscal year data on the two segments:

Which of the following is the least accurate characterization of the operations of the Wellboromun Corporation?

A)  Deterioration in asset turnover at both the Hazardous Waste and Chemicals segments has caused a decline in asset turnover for the firm overall.

B)  Operating margins are higher in the Hazardous Waste segment than in the Chemicals segment.

C)  Asset turnover is better in the Hazardous Waste segment than in the Chemicals segment.

D)  Overall operating margins have increased despite deteriorating margins in the Chemicals segment because of improved margins in the Hazardous Waste segment.

A)  Interest income.

B)  Investments in equity income investees.

C)  Sales of more than 5% to any one customer.

D)  Extraordinary items.

A)  Companies are required to disclose some measure of profitability for all reportable segments.

B)  Segment data enables an analyst to improve forecasts of profitability and revenues.

C)  A segment is a component of an enterprise that accounts for at least 10% of the enterprise’s combined assets, profit /loss, and revenues.

D)  Computation of segment profitability may be affected by transfer pricing.

6.Which of the following segment data is a company least likely to be required to disclose under SFAS 131 if they are reported internally to the chief operating decision maker?

A)  Intersegment sales.

B)  Sales to any foreign government.

C)  Income tax expense.

D)  Depletion expense.

答案和详解如下：

LOS f: Calculate financial ratios for the reportable segments of a company, and interpret the level and trend of each ratio.

1.Wellboromun Corporation discloses segment data on two reportable segments, Hazardous Waste and Chemicals. Below are fiscal year data on the Hazardous Waste segment:

	FY4	FY3	FY2	FY1
Sales	1,090	974	832	785
Operating income	218	175	133	110
Assets	991	812	640	561

Which of the following is the most accurate characterization of the operations of the Hazardous Waste segment?

A)  Operating income has increased because of improved operating margins despite the trend in asset turnover.

B)  Operating income has increased because of improved asset turnover despite the trend in operating margins.

C)  Asset turnover and operating margins have both contributed to the increase in operating income.

D)  Operating income has increased despite the trends in operating margin and asset turnover because of sales growth.

The correct answer was A)

Operating margins (operating income/sales) have improved consistently each year from (110/785 =) 14% in FY1 to (218/1090 =) 20% in FY4. Asset turnover (sales/average assets) has deteriorated from (832/((561+640)/2) =) 1.39 times in FY2 to (1,090/((991+812)/2) =) 1.21 times in FY4. The improvement in operating margins has caused an increase in operating income despite a decline in asset turnover.

2.Madrigality Incorporated discloses segment data on two reportable segments, Entertainment and Costumes. These two segments constitute all of Madrigality’s operations. Below are fiscal year data on the two segments:

	FY4	FY3	FY2	FY1
Entertainment
Sales	763	682	582	550
Operating income	87	70	53	44
Assets	396	325	256	224
Costumes
Sales	385	319	294	227
Operating income	69	63	59	48
Assets	214	164	124	108

Which of the following is the least accurate description of operating trends at Madrigality?

A)  Operating margins are higher in the Entertainment segment than the Costumes segment.

B)  A deterioration in asset turnover has caused Madrigality’s ROA to decline despite an improvement in operating margins.

C)  Asset turnover used to be higher in the Costumes segment but is now higher in the Entertainment segment.

D)  ROA for Madrigality has declined despite improvement in the Entertainment segment because of deterioration in ROA at the Costumes segment.

The correct answer was A)

Below are segment and total data for Madrigality, along with the relevant ratios.

Operating margin = Operating income/sales
Asset turnover = Sales/average assets
ROA = Operating income/average assets

Note that average assets equals the average of the current fiscal year with the previous fiscal year.

Madrigality Totals	FY4	FY3	FY2	FY1
Sales	1,148	1,001	876	777
Operating income	156	133	113	92
Assets	610	488	380	332
Ratio Analysis:
Entertainment
Operating margin	11.4	10.3	9.1	8.0
Asset turnover	2.1	2.3	2.4
ROA	24.1	24.1	22.1
Costumes
Operating margin	17.9	19.7	20.1	21.1
Asset turnover	2.0	2.2	2.5
ROA	36.7	43.8	50.9
Total
Operating margin	13.6	13.3	12.8	11.8
Asset turnover	2.1	2.3	2.5
ROA	28.4	30.6	31.5

Operating margins are higher in the Costumes segment than in the Entertainment segment, not vice versa. The other statements are all true.

3.Wellboromun Corporation discloses segment data on two reportable segments, Hazardous Waste and Chemicals. These two segments constitute all of Wellboromun’s operations. Below are fiscal year data on the two segments:

Which of the following is the least accurate characterization of the operations of the Wellboromun Corporation?

A)  Deterioration in asset turnover at both the Hazardous Waste and Chemicals segments has caused a decline in asset turnover for the firm overall.

B)  Operating margins are higher in the Hazardous Waste segment than in the Chemicals segment.

C)  Asset turnover is better in the Hazardous Waste segment than in the Chemicals segment.

D)  Overall operating margins have increased despite deteriorating margins in the Chemicals segment because of improved margins in the Hazardous Waste segment.

The correct answer was C)

Overall operating margins have increased steadily from ((53+110)/(378+785) = 163/1163 =) 14% in FY1 to ((77+218)/(642+1090) = 295/1732 =) 17% in FY4 because of an improvement in operating margins in the Hazardous Waste segment from (110/785 =) 14% in FY1 to (218/1090 =) 20% in FY4 despite a decline in operating margins from (53/378 =) 14% in FY1 to (77/642 =) 12% in FY4 in the Chemicals segment. Operating margins are higher in the Hazardous Waste segment than in the Chemicals segment.

Asset turnover has declined in both segments. In Chemicals it fell from (490/((310+270)/2) =) 1.7 times in FY2 to (642/((535+409)/2) =) 1.4 times in FY4. In Hazardous Waste, asset turnover fell from (832/((640+561)/2) =) 1.4 times in FY2 to (1090/((991+812)/2) = ) 1.2 times in FY4. Thus asset turnover at the firm overall has fallen from (1322/((950+831)/2) = 1.5x to (1732/(1526+1221)/2 =) 1.3x. Asset turnover is higher in the Chemicals segment than in the Hazardous Waste segment, although it is declining in both segments.

4.Monthly internal reporting to the Chief Operating Officer (COO) and Chief Executive Officer (CEO) at Ludicom Corp. includes segment data on the following items. Which is the company least likely to be required to disclose under SFAS 131?

A)  Interest income.

B)  Investments in equity income investees.

C)  Sales of more than 5% to any one customer.

D)  Extraordinary items.

The correct answer was C)

Sales to one customer are only required to be disclosed if they exceed 10%, not 5%, of sales. Interest income, income from and investments in equity income investees, and extraordinary items are all required to be disclosed if they were reported internally to the chief operating decision maker.

5.Which statement about SFAS 131 on reportable segments is least accurate?

A)  Companies are required to disclose some measure of profitability for all reportable segments.

B)  Segment data enables an analyst to improve forecasts of profitability and revenues.

C)  A segment is a component of an enterprise that accounts for at least 10% of the enterprise’s combined assets, profit /loss, and revenues.

D)  Computation of segment profitability may be affected by transfer pricing.

The correct answer was C)

A segment is a component of an enterprise that accounts for at least 10% of any one item among the enterprise’s combined assets, profit/loss, or revenues, not all three. Companies are required to disclose some measure of profitability, usually operating profit, for all reportable segments. Segment data enables analysts to improve their estimates of sales and earnings because of better understanding of the company’s operations, and empirical evidence indicates that analyst forecasts of sales and earnings have in fact improved since the introduction of SFAS 131. The computation of segment profit may be affected by intercompany transfers and transfer pricing.

6.Which of the following segment data is a company least likely to be required to disclose under SFAS 131 if they are reported internally to the chief operating decision maker?

A)  Intersegment sales.

B)  Sales to any foreign government.

C)  Income tax expense.

D)  Depletion expense.

The correct answer was B)

Sales to any foreign government are only required to be disclosed if they exceed 10% of enterprise sales. Intersegment sales, income tax expense and depletion expense are all required to be disclosed if they were reported internally to the chief operating decision maker.