Reading 24: Multinational Operations LOS c ～ Q5 white, style, based, black

mayanfang1

Q5. 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 c

orresponding 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.

mayanfang1

答案和详解如下：

Q5. 

 

Correct answer is B)

The basis for using the all current 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.
According to SFAS 52 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 also known as remeasurement.

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