Reading 25: Multinational Operations-LOS c 习题精选 current, company, balance, contrast, 2011

土豆妮

Session 6: Financial Reporting and Analysis: Intercorporate Investments, Post-Employment and Share-Based Compensation, and Multinational Operations
Reading 25: Multinational Operations

LOS c: Compare and contrast the current rate method and the temporal method, analyze and evaluate the effects of each on the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios.

 

 

Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico. Giant Company uses either the temporal or the current rate method of foreign currency translation for its subsidiaries.

• Grande, Inc., began operations January 1, 2001.

• Common Stock and Fixed Assets were acquired January 1, 2000.

• Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover.

• The beginning U.S. dollar value of Giant's retained earnings was $2,600,000.

• The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001.

Exchange Rates were:	January 1, 2000	$0.14/M peso
	January 1, 2001	$0.12/M peso
	June 30, 2001	$0.11/M peso (this is the 2001 average rate)
	December 31, 2001	$0.10/M peso

	Grande, Inc.
	Balance Sheet (in M Pesos)
	Jan. 1, 2001	Dec. 31, 2001
Cash	5,000,000	20,000,000
Accounts Receivable (A/R)	20,000,000	35,000,000
Inventory	15,000,000	15,000,000
Fixed Assets (net)	90,000,000	60,000,000
Accounts Payable (A/P)	10,000,000	10,000,000
Long Term Debt	40,000,000	35,000,000
Common Stock	80,000,000	80,000,000
Retained Earnings		5,000,000
	2001 Income Statement
	(in M Pesos)
Sales	60,000,000
Cost of Goods Sold (COGS)	(45,000,000)
Depreciation	(10,000,000)
Net Income	5,000,000

Assume that Giant Company considers the Mexican peso to be the local currency and the functional currency of Grande, Inc.

 

Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:

A) the current rate method.

B) the current rate method followed by the temporal method.

C) the temporal method.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

The current rate method is used when the local currency and functional currency are the same.

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The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31, 2001, is:

A) $500,000.

B) $550,000.

C) $250,000.

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Using the current rate method, the income statement is translated using the average rate for all income statement accounts: Sales ? COGS ? Depreciation = Net Income. (60,000,000 × $0.11) ? (45,000,000 × $0.11) ? (10,000,000) × $0.11) = $550,000.

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What is the change in exposure for Grande, Inc., for the year ended December 31, 2001?

A) +$85,000,000 pesos.

B) +$5,000,000 pesos.

C) +$35,000,000 pesos.

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Exposure under the current rate method is simply equity.

Beginning exposure = 80,000,000 pesos

Ending exposure = 85,000,000 pesos

Change in exposure = 85,000,000 pesos ? 80,000,000 pesos = +5,000,000 pesos

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The translation gain or loss from the activities of Grande, Inc., should be reported in:

A) the statement of cash flows.

B) the equity accounts.

C) the income statement.

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Under the current rate method, translation gains or losses are accumulated on the balance sheet in the equity section.

土豆妮

The U.S. Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary’s 2001 income statement shows ￡500 of net income and a ￡50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under U.S. GAAP?

A) $725.

B) $715.

C) $750.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

Since the functional currency is the local currency, use the current rate method. The net income is translated at the average rate, and dividends are translated at the rate that applied when they were paid. Hence: 1.58(￡500) ? 1.50(￡50) = $715.

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土豆妮

Which of the following statements regarding foreign currency translation are least accurate? Under the:

A) temporal method, sales are remeasured using the average rate.

B) temporal method, COGS and depreciation are remeasured using the historical rate.

C) current rate method, the foreign currency translation gain or loss appears on the parent firm's income statement.

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Under the current rate method, the foreign currency translation gain or loss appears on the parent firm's balance sheet in the equity accounts.

土豆妮

An important distinction between the temporal method and the current rate method is that:

A) the current rate method results in an adjustment to the equity account on the balance sheet. The temporal method results in a gain or loss appearing on the income statement.

B) monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (current rate method) at current rates.

C) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (current rate method), but a function of the average rate under remeasurement (temporal method).

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The current rate method results in an adjustment to the equity account on the balance sheet. The temporal method results in a gain or loss appearing on the income statement. Depreciation and COGS are a function of the average rate under the current rate method, but a function of the historical rate under the temporal method. Monetary assets and liabilities are use the current rates under both methods.

土豆妮

Global International Corp. (GIC) has three subsidiaries: GIC Europe whose local currency is the euro and whose functional currency is the euro; GIC China whose local currency is the yuan and whose functional currency is the Hong Kong dollar; and GIC Bahamas whose local currency is the Bahamian dollar and whose functional currency is the U.S. dollar. GIC’s reporting currency is the U.S. dollar. Which conversion methods should be used by GIC for each of its subsidiaries?

A) GIC Europe’s data should be remeasured under the temporal method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be translated under the current rate method into U.S. dollars.

B) GIC Europe’s data should be translated under the current rate method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars.

C) The financial data for all three subsidiaries should be remeasured under the temporal method.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

GIC Europe’s data should be translated under the current rate method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars.

土豆妮

Wasson 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 Yen/dollars.

Yen / Dollar Exchange Rate
December 31, 2005	150
December 31, 2004	130
2005 Average	140
2004 Average	120
Exchange rate on date that 2005 dividends were paid to Wasson Brothers	145
Exchange rate on date of stock issue and acquisition of fixed assets	100

Ashley 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.

Financial Statements for Year Ending December 31, 2005 (in thousands of yen)
Statement of Income and Retained Earnings
Sales			700,000
Expenses
	Cost of goods sold (COGS)		280,000
	Depreciation		126,000
	SG&A		77,000
		Total Expenses	483,000
Earnings before taxes (EBT)			217,000
Income Tax Expense			98,000
Net Income			119,000
Retained Earnings: December 31, 2004			250,000
			369,000
Dividends			58,000
Retained Earnings: December 31, 2005*			311,000
*Retained earnings on 12/31/2005 were US $2 million

Balance Sheet
Assets
	Cash and receivables		60,000
	Inventory		180,000
	Land		200,000
	Fixed assets		346,000
		Total assets	786,000
Liabilities and stockholder's equity
	Liabilities		300,000
	Capital stock		175,000
	Retained earnings		311,000
		Total liabilities and stockholder's equity	786,000

Before Jameson can perform any financial statement analysis she needs to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the following is the most accurate method and reasoning?

A) Current method because the local currency is the USD.

B) Current method because the functional currency is the yen.

C) Temporal method because the local currency differs from the functional currency.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

Under US GAAP the current method must be used to translate the yen financial statements into USD, the reporting currency. Had Kasamatsu been operating in a highly inflationary environment or had the local and functional currency not been the same, then WB would be required to use the temporal method.

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Jameson must also determine how the fluctuation in the yen vs. the dollar has affected Kasamatsu's earnings in the reporting currency. Which of the following best describes the effect of changes in the yen/dollar rate has had on earnings in the reporting currency? Earnings have:

A) increased because the yen is depreciating versus the USD.

B) decreased because the yen is depreciating versus the USD.

C) increased because the yen is appreciating versus the USD.

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Examination of the history of the exchange rate shows that both the year-end and average exchange rates are lower in 2005 than in 2004 (lower in that the yen has weakened vs. the USD). Therefore, Kasamatsu has to earn more yen than it did in the previous year for WB to be able to report the same dollar amount of net income. This means that the true economic performance of Kasamatsu is understated when viewed as a component of WB's net income.

土豆妮

Which of the following statements regarding the functional currency under US GAAP is least accurate?

A) Self-contained, independent subsidiaries whose operations are primarily located in the local market will use the local currency as the functional currency.

B) If a firm operates in a country or environment which is subject to cumulative inflation of 100% or more over a three year period, that firm will use the parent's currency as the functional currency.

C) The functional currency is defined as the primary currency of the economic environment in which the parent firm operates.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

The functional currency is defined as the primary currency of the economic environment in which the foreign subsidiary operates.

土豆妮

Each of the following items is considered a monetary asset or liability account under the temporal method for foreign currency translation EXCEPT:

A) accounts payable.

B) inventory.

C) long-term debt.

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The monetary asset and liability accounts under the temporal method are cash, accounts receivable, accounts payable, and long-term debt.

土豆妮

Which of the following statements regarding the foreign currency translation under US GAAP is least accurate? The functional currency is the:

A) parent firm's home currency for self-contained independent foreign subsidiaries.

B) parent firm's home currency if the foreign subsidiary operates in a country with high inflation.

C) subsidiary's local currency for self-contained, independent foreign subsidiaries.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

This statement is incorrect, both remaining statements are correct regarding rules that govern the determination of the functional currency of subsidiaries.

土豆妮

Which of the following situations does NOT require the use of the temporal method? The:

A) foreign subsidiary is operating in a highly inflationary economy.

B) functional currency is some currency other that the local currency or the U.S. dollar.

C) local currency is the functional currency.

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The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

The temporal method is not required in the situation when the local currency is the functional currency.