 and welcome to the session. This is Professor Farhad in which we will discuss interim reporting. What is the big idea of interim reporting? Let's think from an investor's perspective. If you are an investor and you own stocks in a company, would you like to know what's going on in the company? And the answer of course you want to know what's going on. Now my second question to you is this. Would you like to know what's going on on a regular basis or would you like to wait till the end of the year? Well as an investor I would like to know what's going on on a regular basis. Well not daily, not weekly, maybe monthly, but most likely it's expensive to provide monthly, usually quarterly basis. So what is interim reporting? Well interim reporting is any reporting period less than one year. Now why did I say quarterly? Why did I say one, two, three, four? Because when we are dealing with quarterly basis is used for publicly traded companies. So when we say interim reporting what we really mean is publicly traded company reporting on regular basis and usually they report on quarterly basis. Now to tell you actually in the real world what I used to work, we used to prepare financial statements on a monthly basis for doctors. Well that's also interim reporting. So monthly could be interim, quarterly, weekly it doesn't matter. It's any period less than a year. Well we call this quarterly because we're dealing with publicly traded companies. And what is the benefit of quarterly reporting? It's giving you timely information. It's enhancing the timeliness of the reporting. So you're not waiting till the end of the year to find out what's going on. So again we deal with quarterly basis and when we are dealing with quarterly basis, so after we prepare Q1, when we go to Q2, Q2 is a cumulative of Q1 or it's year-to-day basis. So it's not we start from zero it's a cumulative till the end of the period, which is the end of the year. What do we provide? We provide financial statements, balance sheet, income statement, cash flow, but those are condensed. They're not really as in details as the regular full year and we don't audit quarterly reporting. We review them. What is reviewed? Reviewed means inquire, asking questions, performing analytical procedures, running some financial ratios to make sure the numbers make sense. And if they don't make sense, we ask more questions, we look at information. And in practice, when I was in practice, I did a lot of reviews, basically preparing financial statements but they're not audited using analytical procedures, inquiries, financial ratios. What else you need to know about interim reporting? It's an SEC requirement. The SEC require you to file quarterly reporting if you're a publicly traded company, not GAP. GAP provide guideline. It will help you, it will help show you what to do when you are reporting on on a quarterly basis. And we have to use what we call something called GAP recommend the integral approach, which we will talk about the integral approach next. Before we discuss the integral approach, whether you are a student or a CPA candidate, I would like to remind you to take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your resources. If you have not connected with me on social media, please connect with me only then. Please like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So the integral approach is what it's recommended by GAP and it says your financial statements are an integral part of your annual report. They're not standalone or discrete. So you cannot consider each quarter as standalone quarter, quarter on its own. You have basically to close the books on the contrary. It's a continuous. That's what it means. It's an integral part of your report. It's seen as part of the full annual report. So you'd have to use the same accounting method and practices that you use for the whole year. So simply put for revenues. If you're using the percentage of completion, you have to keep using it and any cost associated with revenues should be treated the same way. Now, the inventory costing. We have to be aware of the inventory costing. Cost of goods sold for interim reporting can be estimated using the gross profit method. If you don't know what the gross profit method, please go to Farhat Lectures to my inventory chapter and basically review it real quick. And you have to disclose and at the end and reconcile. That's fine. Inventory. If there is any decline in the fair market value of your inventory, don't write it down. If you are expected to recover. Let's assume you have a piece of inventory. You bought it at $100. Mid-year, the value went down to 92. But you know, by the end of the year, because it's a seasonal thing, at the end of the year, it's going to go back to 100. So don't write it down knowing that that year end it's going to go up. It's going to recover. But if it's not going to recover, that's a different story than you write down. Well, you're using now lower cost or net realizable value. Also, you ignore any variances, planned variances, price volume variances during the period. At the end of the year, you would look at your variances. If they are unplanned, if they're not large, you will make the adjustment. But during the quarterly reporting, you just ignore planned variances. Lifeful liquidation. Lifeful liquidation base should be charged at replacement cost if expected to be replaced by year end. So simply put, well, maybe I'm going to work an example about lifeful liquidation in a second. But the point is, if you experience any lifeful liquidation, it means you are selling old inventory that has a low cost and you generated a large profit, and that large profit will be replaced by newer inventory, then don't do that. Use the newer inventory cost. Let's work an example. Assuming the first quarter, you started with 100 units and you paid for them $10. You purchased 200 units at $15. So in total, you had 300 units, 110 and 200 at $15. Let's assume you sold 240 units at $20. Well, let's go ahead and see what happens. You sold 240 at $20. Your sales is $4,800. Now, what is your cost of sales? Well, you're using lifeful last and first out. Well, you sold the 200 unit that you purchased at $15. Then you went into your older unit that you started with and you sold 40, those have a cost of 10. So if we follow the traditional lifeful, your cost of goods sold is $3,400. So simply put, your sales is $4,800. Your cost of goods sold is $3,400. Based on regular lifeful, your profit is $1,500. If we expect, if the company expect, to replace 100 units at $17 in the second quarter. So let's assume you're going to replace your inventory. Then what's going to happen? If that's the case, then we don't use for the 40 units. We don't go back and liquidate. We use the $17 cost of goods sold. So the $17 will be part of cost of goods sold. This way, we don't experience what's called the lifeful liquidation. Now, if we use $17 of cost of goods sold, our profit will obviously would go down because our cost will go up. You can do the computation. But the point is, if you are going to replace, don't record the lifeful liquidation because it's just, it's a quarter, the second quarter, it's going to reverse. So wait till the end of the year. Also, what do we need to do with cost other than product cost, which is simply put period cost? Well, you charge to income as incurred or allocated, like estimated, if it's based on time expired, like for example, prepaid, you expense during the period. If it benefit a particular period, like a rent, you expense the rent. Any activity associated with the period, depreciation and cost of goods sold as a good example, you expense during the period. If you cannot identify with any particular activity or benefit the expense, you charge when it's incurred. You should not do arbitrary assignment of cost. Something should make sense. Gains and losses that you don't defer at the end of the year should not be deferred at the end of the period. So at the end of the year, think about the end of the year. If you have a gain or loss, a gain or loss will not be deferred, then don't defer it during the period. If it's going to be deferred, then don't do it, wait until the end of the year and defer it. But if it's not going to be deferred, then record it. So you ask yourself, would this gain or loss be deferred at the end of the year? If not, it means you have to recognize it now, defer it now, that's what I mean by recognize it, defer it now. Advertising is a little bit interesting. The general guidelines deferred in an interim period cost advertising expense that could benefit future period, but the problem with advertising, you really don't know what period it's going to expense. It's going to be expense, otherwise the company expense. So simply put, decide is it going to be benefiting this period or many periods? Now, there's some flexibility here. For example, some companies like RJR and Pillsbury, they charge advertising expense as percentage of sales and adjust at year end. So what they do, they look at their sales and if their sales increase based on some relative value, they will expense their advertisement versus general food and Kellogg, they expense advertising cost as incurred. So there's some flexibility here, okay? Because you don't know what advertising it's going, what is the value of advertising, that's why you have this flexibility. Other expenses subject to year end adjustment, you know, we have a lot of expenses at the end of the year. So for example, bet that expense, executive bonuses and other similar expenses, what we do is estimate those costs and allocate them in the period the best you can. So you can do that. Now, income tax expense, we're going to be using the annualized approach and I'm going to work an example. I'm going to keep it for a separate recording. How do we treat, how do we treat income tax expense? What disclosure do you have to make? Sales or gross revenue provision for income taxes. For the interim period, you have to show basic and diluted EPS. This is important and investors look at this all the time. Seasonal revenue costs or expenses, you have to be careful when interim financial reporting are being done because certain businesses, for example, toy companies, companies like Mattel, their business is seasonal, it goes up in certain period of time, it goes down. So you have to disclose why you have a different revenue than the prior quarter. Significant estimate, any provisions for income taxes, contingent item, changes in accounting principle, significant changes in financial position, anything that's relevant, you think it's important. What should you do now? Go to Farhat Lectures, work MCQs and True-Fals. In the next session, I would work an example with income taxes just to show you how we use the annualized approach when we are estimating provisions for income taxes during the interim period. Once again, good luck, study hard, and of course, stay safe.