Auto World Inc Essay

simple machine World Inc. (AWI) is a leading self-propelled retail and serve up chain. They render many in carrying into action(p) segments comprised of two divergent centers 10 miles apart from each new(prenominal). lapidate Stop Centers (PSC) offer service labor, installed merchandise, and tires while their Auto Boyz Centers ( alphabet) sells self-propelled merchandise. AWI has a plan to close their operating segment PSC to change their legitimate operating structure to improve and expeditiously deliver retail products and automotive services by providing their customers with a unmatched stop shopping for do-it-yourself retail customers and do-it-for-me customers (PSC Case).AWI expects this change to enhance their mightiness to increase market shargon, improve gross revenue, and company gelt. This change in restructuring willing remove an effect on current earnings and will penury to be reported properly in their 2007 Income Statement. AWI must report this go on activity properly under US Generally Accepted accounting Principles (generally accepted accounting principles).The FASB Accounting Standards Codification (ASC), commonly known as GAAP has limited standards that must be followed in order to classify the disposal of an entity as quit or continues operation of a parting of an entity. Under the centering of numerous ASCs, AWI does not meet the two conditions to report their PSC closures as discontinued operations. The criteria used, assessment period, presentation, and divine revelation for this retail company will be excuseed in detail when applying proper GAAP.A component of an entity comprises operations and capital full points that potful be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity it whitethorn be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group in which Auto World determined correctly under the first requirement tha t the PSC met the comment of a component of an entity (ASC 205-20-20).The two conditions for reporting the disposed motion as discontinued operations are The declarations of operations of a component of an entity that every has been disposed of or is classified as held for sale under the requirements of split 360-10-45-9, shall be reported in discontinued operations in congruity with paragraph 205-20-45-3 if both of the following conditions are met1. The operations and cash in flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a end point of the disposal transaction. 2. The entity will not have any signifi tint go along involvement in the operations of the component after the disposal transaction (ASC 205-20-45-1). Several steps below will be used to explain why the disposal of the PSC stores should be considered a continuation of operations kind of than discontinue of operations (ASC 205-20-55-3). These three steps along with their respective answers are also depicted in a flow chart (see extension A). shade one asks are proceed cash flows expected to be generated by the ongoing entity?Yes, the keep cash flows are being generated by ABC from transactions with customers from PSC. Step two asks if the continuing cash flows ending from a migration or continuation of activities. The continuing cash flows are the result of a migration from the closed PSCs to the one stop ABC. ABC sells products akin to those sold in the closed retail stores. After the closure of the Pit Stop Centers, Auto World estimates that there will be continuing cash flows from the sale of automotive services and tires by the ongoing ABCs of approximately $600 million.Auto World estimates that the Pit Stop Centers would have generated approximately $700 million of sales absent the disposal transaction (PSC Case). Step three asks if the continuing cash flows are significant. Yes, the ongoing ABC estimates the continuing cash in flows will approximate 86 percent (see Appendix B) of that would have been generated by PSCs absent the disposal transaction. AWI is expecting these actions to generate significant cash flow in 2007 and to increase free cash flow in 2008.AWI is also expecting to yield improvements in operating earnings of approximately $58 million in 2008 to be significant leading to the classification as a discontinued operation to be inappropriate (ASC 205-20-55-70). Since stakeholders rely on financial statements to base their decisions and to project future cash flows, current reading presented must be accurate under GAAP Under the piece requirement, one issue I have identified is the intentions of cautions decisions to improve their companys net earnings.The professional literature I relied on are these two statements, the actions we are announcing today will nevertheless enhance our ability to increase market share and improve sales and earnings at our company and in this regard, we remain committed to the automotive business and we expect to deliver significant additional profitable addition were made by Mr. Bobby, chairman and chief executive officer. When considering the use and disclosure of restructuring charges, depending on the industry, there should not be re-occurring restructuring cost line period on the Income Statement year after year.Closing the PSC stores as of the mo quarter in June 2007 is an event taking place in 2007 which can happen only once. If management continues to show this type of special/ unusual charge in future periods, the question of integrity should be raised. focussing does not want to give off the impression of possibly smoothing earnings by using restructuring charges. Once a decision to restructure is made, GAAP requires companies to estimate the future costs they expect to incur to carry out(p) the restructuring for such things as plant closings (AWI currently estimates it will incur restructuring and other charges totaling $5 2 million pre-tax).These estimated restructuring costs are then charged to an disbursal account with an offsetting credit to a liability account (Restructuring reserve) in the current period (Revsine, pg 155). In developing my recommendation and conclusion for resolving this issue, management should accommodate a foot note explaining these changes which will allow stakeholders to make better decisions.The new re-structured ABC will continue to sell automotive parts that were previously sold through the PSCs, and under the ASC, PSC store closures are not considered and cannot be reported as a discontinued operation in AWIs second quarter financial statements. The continuing cash flows are being generated by ABC from transactions with customers from PSC, given by the level of significance of 86 percent for this continuing cash flow subsequent to the disposal transaction.