Reading 26- LOS g～ Q 6－9

6．ich of the following ratios is unaffected by the choice between translation under the all-current method and remeasurement under the temporal method?

A)   Return on assets.

B)   Debt/Assets.

C)   Accounts receivable turnover.

D)   Net profit margin.

The correct answer was C)

Both accounts receivable and sales are converted at the same rate so the ratio is the same under each method.

7．ich of the following statements concerning the translation of a subsidiary’s financial statement and the subsidiary’s ratios is FALSE?

A)   Ratios calculated under the all-current method will not differ from those calculated under the temporal method.

B)   The statement of cash flows is not affected by the choice of translation.

C)   Using the all-current method versus the temporal method may show different trends.

D)   The subsidiary's ratios in the local currency will differ from ratios calculated after translation.

The correct answer was A)

Ratios calculated under the all-current method will differ from those calculated under the temporal method.

8．ich of the following statements is CORRECT concerning foreign currency translation?

A)   In the case in which a firm uses FIFO inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method.

B)   The receivables turnover ratio is identical under both the temporal method and the current rate method.

C)   Profit margins are identical under both the temporal method and the current rate method.

D)   In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method.

The correct answer was B)     

The receivables turnover (sales / receivables) is unaffected because both methods translate sales at the average rate and accounts receivable at the current rate.

When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for COGS is the average rate which is also the rate used for COGS with the current rate method.

Profit margins (income / sales) are not the same under both methods because the temporal method uses a mixed rate for income whereas the current rate method uses an average rate.

With an appreciating currency the fixed asset turnover ratio (sales / fixed assets) will be higher using the temporal method because the temporal method uses the historical rate for fixed assets whereas the current rate method uses the current rate.  They both use the same average rate for sales.   

9．e U.S. dollar has been appreciating relative to the local currency over the past year. Using current-rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the long-term debt to equity ratio (LTD/E) relative to what the ratio would have been without the effects of translation?

A)   The ratio will not change.

B)   The effect of translation on the ratio is indeterminate.

C)   The ratio will rise.

D)   The ratio will fall.

The correct answer was A)

Under the current rate method, both LTD and equity are translated at the current rate of exchange. Hence, since the same rate is applied in both the numerator and denominator, the ratio will not change.

Note: When equity is broken out into separate accounts, common stock is taken at the historical rate. When taken as a whole, equity should be translated at the current rate. In this case we are not given any information on the common stock amount, so we translate equity at the current rate.