There are specific standards to be followed when reporting revenues, costs, and expenses in interim financial statements.
Revenues should be recognized as earned during the interim period in the same way as for the full year, and any seasonal variations in revenue should be disclosed.
Direct costs and expenses, which are those that can be associated with revenues or directly with products or services, should be treated the same way for interim periods as for the full year. However, the Accounting Principles Board (APB) opinion No. 28 provides exceptions for the determination of cost of goods sold in interim financial statements, such as the use of the gross profit method or the LIFO method of inventory.
Indirect costs, or those other than product costs, should be charged to income in the interim period as incurred or allocated among interim periods based on an estimate of time, benefit received, or activity associated with the periods.
Gains and losses that would not be deferred at year-end should also not be deferred to later interim periods within the same fiscal year.
These standards apply to items such as major repairs, quantity discounts, property taxes, and advertising costs, and encourage companies to avoid year-end adjustments by making quarterly estimates of items like inventory shortages, bad debt expense, and contract adjustments.
