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Pit Stop Closed

In: Business and Management

Submitted By gpaulsen
Words 712
Pages 3
Case Study: Pit Stop Closed

1) The Pit Stop Center store closure should not be reported as a discontinued operation in Auto World’s second quarter financial statements. Auto World determined that the Pit Stop Centers meet the definition of a “component of an entity,” which is defined as comprising “operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be a reportable segment or an operating segment, a reporting, a subsidiary, or an asset group.” However, there is a four-step process that determines when a component of an entity should be classified as a discontinued operation. Based on those four steps classification of Pit Stop as a discontinued operation is not appropriate. The test is as follows: * Step One: A component of an entity has been disposed of or classified as held for sale. * Yes, Pit Stop, a component of Auto World is closing all Pit Stop Centers by June 30, 2007. Since this answer is yes, we can move to step two. * Step Two: Are continuing cash flows expected to be generated? * Yes, according to the press release on April 15, 2007 cash flows are expected to be generated. Auto World is expecting operating earnings of $58 million in 2008 and $67 million annually thereafter. Auto World will also be losing $100 million because there will be continuing cash flow from the sale of automotive services and tires by the ongoing Auto Boyz Centers of $600 million, but Pit Stop would have generated approximately $700 million. Since the answer is yes, we can move to step three. * Step Three: Do the continuing cash flows result from a migration or a continuation of activities? * Yes, the services that were previously provided at Pit Stop Service & Tire Centers will now be provided at existing Auto Boyz Retail

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