Segment Reporting Video - ExamPrep.ai CPA Review

Lesson: Segment Reporting

In this lesson, explore the intricacies of segment reporting with Nick Palazzolo, CPA, as he sheds light on the benefits of this accounting practice for investors and companies alike. Delving into the purpose behind breaking down company activities into distinct segments such as by geography or product line, Nick illustrates how this can lead to more informed investment decisions. He also clarifies the criteria defining operating segments, and unpacks the 10% size test and the 75% reporting sufficiency test used to determine when segments should be reported separately in financial disclosures. This lesson simplifies complex reporting standards, ensuring a clear understanding of when and why certain business segments stand apart in financial statements.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Segment reporting. Why segment reporting? What is all of this? Segment reporting helps to provide information by breaking out a company's activity in various financial or economic components. Segments may be broken out in a variety of ways, such as by product, service line, geography, etc. For example, Apple US versus Apple Europe or by product to service line, such as Microsoft gaming which includes Xbox and then Microsoft Office, which includes Excel and other components. This is helpful because it allows investors to assess each segment's prospects for future net cash flow and make more informed judgments about the entity as a whole.

When entities are required to disclose segment profit and loss and segment assets related items, they are not required to report segment cash flow operating segments. Operating segments are defined by a few characteristics. Operating segments engage in business activities with the purpose of earning revenues and incurring expenses. These may also include internal operating segments which buy and sell from other segments. Operating segments have their operating performance reviewed by a chief decision maker within the organization who may allocate resources toward or away from the segment, and they also have discrete financial information available.

Now, is each segment separately reportable? We've got two tests: the 10% size test and the 75% reporting sufficiency test. Let's talk about the 10% size test first. Basically, if a segment makes up 10% or more of revenue, reported profit or loss, or assets, it should be separately reported as a segment. For example, if a company makes $10 million overall and their Japanese segment makes $1.2 million, this is more than 10% of total revenue and should be reported separately. However, if the Japanese segment only makes $800,000, this is less than 10% of the total and would not be

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