Pit Stop Report - Case Study Example

Though the company was expecting to generate cash flows from the restructuring of the company, it had to incur $52 million cost due to the termination of the operating leases or due to the closure of the pit shops. The report is an attempt to analyze that the closure of the operations should be classified as discontinued operation, and to establish which procedure should be undertaken by the company in that situation. Closure of the Pit Store Auto World had two different segments: the Auto Boyz centre and the pit stop centers.

The company submits their financial statements as per the US GAAP method. They followed the requirements as mentioned in the Financial Accounting Standards Board (FASB) standards. As per the FASB statement number 131, the company discloses its financial reporting about different statements (FASB, “Summary of Statement no. 131”). It has been found in the financial statements of the company that the company’s net sales and operating earnings are mentioned segment-wise. As per the FASB standard 146, the company also meets the criteria and it has to reveal the costs associated with the retirement or disposal of assets (FASB, “NEWS RELEASE 07/30/02”). . flows after disposal and the cash flows can be classified as direct cash flows, then the operations cannot be referred to as discontinued operations.

When the company is generating cash flows after disposal and the generated cash flows can be classified as indirect cash flows, then the operation can be called as discontinued operations. In the case of Auto World, the company is not generating cash flows which can be classified as direct cash flows, so the operation can be classified as discontinued cash flows (Jarnagin 36-37). Due to the closing of the pit stop shops, the company management estimated that the restructuring and other charges would be $52 million.

The charges were due to the termination of the operating leases and also included some other costs. The accountants of the company should not include this cost as the cost in the segment of the pit stop centre because the cost is from the discontinued operation. So the accountants should include and disclose this cost in the income statement of the company for the next quarter. Recommendation The decision of the management is right as they want all of their services to be available under one roof, which will be more profitable for them and attractive to customers.

To avoid the pre tax of $52 million, the company management should use the pit stop stores as stores including both the pit stop stores and the Auto Boyz centers. They should continue operating until the contract with the lessor is terminated, and then they can relocate their branch or extend the contract with the lessor. In this process they don’t have to incur the cost due to the termination of the operating lease, but they have to incur little cost due to the stoppage of operation and the relocation of stores.

Conclusion Auto World has taken the