Final answer:
The '10% Size Test' is a test used for determining reportable segments in financial reporting. It helps identify significant operating segments that need to be disclosed separately and provides transparency in a company's financial statements.
Step-by-step explanation:
The '10% Size Test' is a test used for determining reportable segments in financial reporting. According to this test, a segment is considered reportable if its revenue or operating profit is 10% or more of the combined revenue or operating profit of all operating segments. For example, if a segment's revenue is $1 million and the combined revenue of all segments is $10 million, then the segment meets the 10% size criterion.
This test helps identify significant operating segments that need to be separately disclosed in financial statements. It ensures that material segments are highlighted to investors, allowing them to make more informed decisions. It also provides transparency by revealing the financial performance and position of each significant segment.
Overall, the 10% Size Test is a crucial tool in financial reporting as it helps in segment reporting, enabling stakeholders to have a clearer understanding of a company's operations and financials.