70.son Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in /$.

Shelly Jameson is an analyst with Henderson-Wells, an investment banking firm in New York, and is the chief analyst covering WB. She believes that the enormous success of the trading cards has contributed greatly to WB's bottom line. However, she believes that this effect may be misstated in the company's financial statements because of the recent volatility in exchange rates. Many analysts at other major investment banking firms have been raising their ratings on WB because of the recent earnings growth. Jameson, however, wants to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's hot new product and not a result of an exchange rate fluctuation. The following are the financial statements of Kasamatsu, stated in thousands of yen.

Jameson has finally completed translating all the necessary figures into dollars and now wants to compute how much WB's reported sales in dollars will change due to Kasamatsu's sales. Which of the following is closest to Jameson's answer (in thousands of dollars)?

A)   $4,667.

B)   $4,828.

C)   $7,000.

D)   $5,000.

The correct answer was D)

Because sales is an income statement item, the 2002 average exchange rate of 140, JPY/USD must be used to calculate sales in the reporting currency. Kasamatsu's sales were JPY 700,000. The calculation is:

WB will report $5,000 of sales as a result of Kasamatsu's operations. The other answers use incorrect exchange rates.

71.t will Jameson find to be the U.S. dollar impact of Kasamatsu's total selling expenses on WB's financial statements (in thousands of dollars)?

A)   $4,150.

B)   $3,450.

C)   $2,900.

D)   $3,220.

The correct answer was B)

Total selling expenses include cost of goods sold, depreciation, and SG & A. Kasamatsu reported a total of JP 483,000. Since these are all income statement items they must all be translated at the average 2002 exchange rate of 140 JP/US$. Therefore, the calculation is:

The other answers use incorrect exchange rates.

72.son Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in /$.

If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen to dollars, she should use which of the following exchange rates (/$)?

A)   150.

B)   100.

C)   140.

D)   130.

The correct answer was C)

Ideally, all of the components on the income statement would be translated at the exchange rate that was in effect on the day that the transactions took place. For example, all sales that occurred on March 15, 2002, would be translated at the exchange rate that prevailed on that date. Likewise, if a large portion of inventory was purchased on October 27, 2002, then the appropriate portion of cost of goods sold would be calculated using the exchange rate from October 27, 2002. This however, is not especially practical, especially for a very large company with many transactions. The common practice is to use the average exchange rate for the accounting year, in this case 140 JPY/USD.

73.eson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (/$) to use in translating Kasamatsu's reported dividends into U.S. dollars?

A)   150.

B)   100.

C)   140.

D)   145.

The correct answer was D)

Because an asset is, in effect, being transferred from the balance sheet of the subsidiary to that of the parent (in this case the asset is cash in the form of a dividend) on a known date, it is appropriate to use the exchange rate that prevails on the dividend date.