Define a business segment as an area of operation in which a company has an established separate product line or industry in which the company operates. For example, General Electric operates in several different industries and must disclose each one of its business segments. Companies often do this to diversify themselves away from the up and downs of certain industries. They will also do this to grow new product lines as their older ones become obsolete. For example, Microsoft replaced the Xbox 360 with the original Xbox as it became obsolete to newer gaming systems.
Disclosure of business segments or areas of operation must be separate. It must also provide specific information to the public with regard to the Income Statement as well as the Balance Sheet. Specifically, the public is concerned with the information regarding the income and assets upon the balance sheet. This way potential investors (and management) can break down the amount of assets that are used in each business line or segment. Then they can determine which are most profitable. Get rid of outdated or unprofitable lines and dispose of them while growing segments which show potential.
For example, Leslie is the CFO for Casa Entertainment Co.. It’s a firm which specializes in home entertainment which has several segments. It has a television production plant as well as produces Video Home System (VHS), Digital Video Disc (DVD) products, and home speaker systems. Leslie is writing the financial statements. Per the disclosure principle for segment disclosure, she is required to separate all four of these divisions in regards to its separate income items as well as the assets listed on the balance sheet. She would then total all of the divisions into a large income statement and balance sheet. As a result, this provides a consolidated form which is easier to read. However, if an investor desired to read deeper into the numbers provided, then they would see which divisions/segments were most successful.
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