The Proper Accounting Treatment of Auto World Inc Essay

The Proper Accounting Treatment of Auto World Inc - Essay Example However, there is still a need to verify, through certain audit procedures and audit evidence if Pit Stop is really a component of an entity. This includes assessing if the cash flows subsequent to the disposal can be classified as direct or indirect cash flows in accordance with EITF No. 3 – 13 and if Auto World will still have a significant influence on Pit Stop’s operations after its disposal. The major accounting issue for Auto World is the proper accounting treatment, presentation and disclosure for Pit Stop’s operations in Auto World’s financial statements for the period ended June 30, 2007. All these will depend on whether or not Pit Stop is really a component of Auto World and whether it will qualify as discontinued operations. According to Paragraph 41 of SFAS No. 144, â€Å"a component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity†. Another definition in paragraph 10 of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, stated that an operating segment is one that has its own business activities where it derives and incurs revenues and expenses, respectively. One factor to determine whether it is an operating segment is that its operating results are consistently viewed and analyzed by top management for decisions related to resource allocation and to performance assessment. Lastly, a â€Å"component of an entity† (SFAS No. 144, par. 41) can also be a reporting unit, that is, â€Å"an operating segment or one level below an operating segment† (SFAS No. 142, par. 30). Using the above definitions, it seems that Pit Stop is a â€Å"component of an entity (SFAS No. 144, Par. 41). This is based on the facts that one, all 30 branches of Pit Stop will be disposed one time and two, Pit Stop is distinguishable from the  other operations of Auto World, both in terms of physical branches and in terms of revenues and expenses.