Interim reports may be issued periodically, such as quarterly or monthly. Complete financial statements or summarized data may be provided, but interim financial statements do not have to be certified by the outside auditors.
Interim balance sheets and cash flow information should be given. If these statements are not presented, material changes in liquid assets, cash, long-term debt, and stockholders’ equity should be disclosed.
Interim reports typically include results of the current interim period and the cumulative year-to-date figures. Usually comparisons are made to the results of comparable interim periods for the previous year. Interim results should be based on the accounting principles used in the preceding year’s annual report unless a change has been made in the current year.
A gain or loss cannot be deferred to a later interim period except if such deferral would have been allowable for annual reporting. Revenue from merchandise sold and services performed should be accounted for as earned in the interim period in the same manner as in annual reporting. If an advance is received in the first quarter and benefits the whole year, it should be allocated ratably to the interim periods affected.
Expenses should be matched to revenue in the interim period. If a cost cannot be traced to revenue in a future interim period, it should be expensed in the current one. Yearly expenses, such as administrative salaries, insurance, pension plan expense, and year-end bonuses, should be allocated to the quarters. The allocation basis can be based on such factors as time spent, benefit obtained, and activity.
The gross profit method can be used to estimate interim inventory and cost of sales. Disclosure should be made of the method, assumptions, and material adjustments by reconciliations with the annual physical inventory.
A permanent inventory loss should be recognized in the interim period when it occurs. A subsequent recovery is considered a gain in the later interim period. However, if the change in inventory value is temporary, no recognition is given in the accounts. If a temporary liquidation of the LIFO base occurs with replacement expected by year-end, cost of sales should be based on replacement cost.
The historical cost of an inventory item is $10,000, with replacement cost expected to be $15,000. The journal entry is:
The reserve for liquidation of LIFO base is reported as a current liability. When there is replenishment at year-end, the journal entry is:
[Debit]. Reserve for liquidation of LIFO base = $5,000
[Debit]. Inventory = $10,000
[Credit]. Cash = $15,000
Volume discounts to customers tied into annual purchases should be apportioned to the interim period based on the ratio of:
Purchases for the interim period
Total estimated purchases for the year
When a standard cost system is used, variances expected to be reversed by year-end may be deferred to an asset or liability account.