Financial Accounting and Reporting-CPA Practice Exam

What does segment profit/loss primarily consist of?

1. Revenues and Non-Direct Costs

2. Directly Traceable Costs and Operating Expenses

3. Revenues, Directly Traceable Costs, and Reasonably Allocated Costs

4. Operating Costs and Administrative Expenses

The correct answer is: Revenues, Directly Traceable Costs, and Reasonably Allocated Costs

Segment profit or loss is fundamentally derived from evaluating the financial performance of a specific segment of a business. It primarily includes revenues generated by the segment, along with costs that can be directly traced to that segment. This encompasses directly traceable costs, which are expenses that can be specifically identified with the segment, such as materials and labor costs. Additionally, segment profit or loss may also consider reasonably allocated costs. These are indirect costs that are allocated to segments based on a rational and systematic basis, reflecting a fair representation of the costs incurred in supporting the segment's activities. This inclusion helps provide a more accurate picture of the segment's profitability, as it accounts not only for the direct contributions to revenue but also for the portion of the company's total overhead that can be associated with the segment. The other options do not capture the full picture of segment reporting in accordance with Generally Accepted Accounting Principles (GAAP). For example, not all operating costs or administrative expenses are directly traceable to a segment, and the lack of a focus on reasonably allocated costs could lead to misrepresentations of a segment's actual performance. Therefore, the combination of revenues, directly traceable costs, and reasonably allocated costs is essential for accurately assessing segment profit or loss.