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标题: Financial Reporting and Analysis【 Reading 24】Sample [打印本页]
作者: pacmandefense    时间: 2012-3-29 14:56     标题: [2012 L2] Financial Reporting and Analysis【Session 6- Reading 24】Sample

eborah Ortiz, CFA®, is the director of Global Research for F.E. Horton & Co. Ortiz recently hired two junior analysts, Tina Hirauye and Dominique Wilkins to assist in the financial statement analysis of global conglomerates. Hirauye and Wilkins are both Level II candidates in the CFA® Program, so Ortiz thought they would be the ideal people to work on a project dealing with consolidating the results of foreign operating units in the financial statements of the global parent.
Before starting on the project, Ortiz has a meeting with Hirayue and Wilkins to discuss the use of different currencies in a company’s operations. At the meeting, Hirayue states that when analyzing multinational firms, there cannot be a difference between local and functional currencies. Wilkins disagrees with her and states that there can be a difference between local and functional currencies, but only if the parent of the subsidiary operates in a hyperinflationary environment. After another 30 minutes of discussion, Ortiz concludes the meeting by telling them to make sure they understand the different accounting rules for remeasurement and translation, under SFAS 52.
Hirauye and Wilkins are given projects involving three different firms:
Hirauye and Wilkins spend the morning reviewing the details of their assignment and decide to take a break for lunch at a restaurant across the street from F.E. Horton & Co.’s headquarters. They agree that they have a challenging task and both are nervous about turning in their consolidated financial statements to Ortiz on the following day. At the restaurant, the two junior analysts run into two F.E. Horton senior analysts, Brad Windbigler and Elizabeth Alvarez, and the four of them decide to eat lunch together. Windbigler and Alvarez recently found out that they both passed Level III of the CFA® Exam, and, upon hearing about the task assigned by Ortiz, they are eager to help their two junior colleagues. Windbigler states that the current exchange rate is defined as the exchange rate between functional and reporting currencies at the balance sheet date, excluding all of a firm’s hedging activities. Alvarez also tries to offer assistance by stating that the correct exchange rate to use for monetary assets and liabilities when applying the temporal method is the average rate. When lunch is over, Hirauye and Wilkins thank their colleagues for their advice and go back to work to finish their assignment.Regarding the statements made at the meeting:
A)
Hirauye’s statement is incorrect; Wilkins’ statement is correct.
B)
Hirauye’s statement is incorrect; Wilkins’ statement is incorrect.
C)
Hirauye’s statement is correct; Wilkins’ statement is correct.


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.

Hirauye and Wilkins both make incorrect statements regarding local and functional currencies. A foreign subsidiary may have a local currency but designate another currency as its functional currency. The functional currency is defined as the currency of the primary environment in which the subsidiary generates and expends cash, but the choice of the functional currency is ultimately a function of management’s judgment. Wilkins is also incorrect because the rate of inflation does not necessarily have an impact on designated currencies. (Study Session 6, LOS 24.a)
Hirauye is working on consolidating the financial statements of Molsan Industries’ Japanese subsidiary. Under SFAS 52, regarding Foreign Currency Translation, if:
A)
more than half of the subsidiary's revenue is from Japanese sources, then the results of the Singapore operation are translated into Japanese yen and then translated into Canadian dollars.
B)
management determines that the subsidiary's functional currency is the Japanese yen, the results of the Singapore operation are first remeasured into Japanese yen and then translated into Canadian dollars.
C)
management determines that the subsidiary's functional currency is the Singapore dollar, then the results of the Singapore operation are remeasured into Canadian dollars.


The functional currency is determined by management. Financial data are remeasured into the functional currency chosen by management and then translated into the reporting currency. (Study Session 6, LOS 24.a)
Wilkins has been tasked with analyzing Tylo Corporation, and is trying to distinguish between the various currencies employed in Tylo’s operations. Concerning the UK subsidiary's functional and reporting currencies the:
A)
functional currency and reporting currency are the U.S. dollar.
B)
functional currency is the British Pound; reporting currency is the U.S. dollar.
C)
parent firm (Tylo) is headquartered in France, therefore the functional currency is the Euro, and the reporting currency is the U.S. dollar.


The functional currency is defined as the currency of the primary economic environment in which the subsidiary generates and expends cash. Although the functional currency can be chosen by management, because we are told that Tylo's UK subsidiary generates and expends cash in British Pounds, the British Pound is the best choice for the functional currency. The reporting currency is the currency in which the parent firm prepares final consolidated statements, which in this case is the U.S. dollar. (Study Session 6, LOS 24.a)
Ortiz had told the junior analysts to make sure they understand the different accounting rules under SFAS 52. When referring to foreign exchange rates, the difference between remeasurement and translation is that remeasurement:
A)
and translation refer to the same process of translating the functional currency into the reporting currency.
B)
is used to describe historical exchange rates while translation is used for current rates.
C)
refers to the conversion of local currency into the functional currency; translation is the conversion of the functional currency into the reporting currency.


Translation is between functional and reporting currency. Remeasurement occurs between local and functional currencies. (Study Session 6, LOS 24.a)
Regarding the statements made at lunch:
A)
Windbigler’s statement is correct; Alvarez’s statement is incorrect.
B)
Windbigler’s statement is incorrect; Alvarez’s statement is incorrect.
C)
Windbigler’s statement is correct; Alvarez’s statement is correct.


Windbigler’s statement is correct. The current rate is defined as the market rate in effect at the balance sheet date. Hedging activities do not affect the rate, but affect the gain or loss from changes in exchange rates. Alvarez’s statement is incorrect. The correct exchange rate to use for monetary assets and liabilities when applying the temporal method is the current rate. (Study Session 6, LOS 24.b)
Wilkins and Hirauye are working on constructing the consolidated statements for Neslarone. They know that after they convert from Swiss Francs (CHF) to U.S. dollars (USD), they will be left with a foreign currency adjustment that needs to be included on the financial statements. To convert from CHF to USD, the analysts should use the:
A)
current rate method and they should record the foreign currency adjustment on the balance sheet.
B)
temporal method and they should record the foreign currency adjustment on the income statement.
C)
current rate method and they should record the foreign currency adjustment on the income statement.


Neslarone is based in Switzerland and generates the majority of its cash in CHF, meaning the local and functional currencies are both CHF. The firm issues financial reports in USD, so the dollar is the reporting currency. The process of converting from the functional currency to the reporting currency is translation and the correct method to use is the current rate method. When using the current rate method, the foreign currency adjustment is recorded in the equity section of the balance sheet. (Study Session 6, LOS 24.c)
作者: pacmandefense    时间: 2012-3-29 14:57

Which of the following statements describing the choice of the functional currency is least accurate? The functional currency should be the same as the parent’s reporting currency if the subsidiary is:
A)
highly integrated with the parent where the local currency, prices, and some costs are controlled or restricted.
B)
highly integrated with the parent where the local currency, prices, and some costs are not controlled or restricted.
C)
mostly independent from the parent.


The preferred functional currency for subsidiaries that are mostly independent of the parent is the local currency. For highly integrated subsidiaries (regardless of local conditions), or for subsidiaries operating in high-inflation environments
作者: pacmandefense    时间: 2012-3-29 14:57

The local currency is best characterized as:
A)
the preferred functional currency for subsidiaries that are highly integrated with the parent.
B)
translated into the functional currency under the current rate method.
C)
the currency of the country in which the foreign subsidiary is located.


The local currency is best described as the currency of the country in which the foreign subsidiary is located. If a subsidiary is highly integrated with its parent or operating in a high-inflation environment, the functional currency is the parent’s currency. Local currencies are remeasured under the temporal method
作者: pacmandefense    时间: 2012-3-29 14:58

Which of the following statements regarding the functional currency is least accurate? The functional currency:
A)
is determined by management.
B)
is remeasured into the reporting currency under the temporal method.
C)
is the currency of the primary economic environment in which the foreign subsidiary generates and expends cash.


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 local currency is remeasured into the functional currency under the temporal method. The functional currency is translated into the reporting currency using the current rate method.
作者: pacmandefense    时间: 2012-3-29 14:58

A Canadian firm owns a foreign subsidiary in the U.S. In 2002, sales were USD1,000,000 and the USD/CAD exchange rate was 0.6329. In 2003, sales were also USD1,000,000 but the exchange rate was 0.7484. What is the impact of the change in the value of the CAD on the parent company’s translated sales? Sales will:
A)
increase by 18%.
B)
decline by 15%.
C)
decrease by 18%.


While sales were flat at USD 1,000,000 in local currency terms, after translation the parent firm would report sales of CAD 1,336,184 for 2003 (= USD 1,000,000 / 0.7484) versus sales of CAD 1,580,028 for 2002 (= USD 1,000,000 / 0.6329). The 15% sales decline reported by the Canadian firm (CAD 1,336,184 versus CAD 1,580,028) is a flow effect. Even though there was no sales growth in the subsidiary, the parent firm still shows a 15% decrease in revenues from the subsidiary due solely to exchange rate effects. Note that because the subsidiary sales are constant the total exchange rate effect can be measured as (0.6329 / 0.7484) − 1 = −0.15.
作者: bigredhockey55    时间: 2012-3-29 15:01

Edmonton Oilfield Supply has made an equipment sale in Venezuela in the amount of VEF 15,000,000. On the day of the sale, the exchange rate is 1.7519 VEF per 1 Canadian dollar. 90 days later, when the Venezuelan firm pays for the equipment, the exchange rate is 1.6326. As a result of the change in the exchange rate, Edmonton will recognize a:
A)
loss of $1,789,500.
B)
gain of $1,096,104.
C)
gain of $625,666.


On the day of the sale, Edmonton will record an account receivable of 15m/1.7519 = $8,562,133. When the payment is received and converted to CAD, the realized amount will be 15m/1.6326 = $9,187,799. As a result of the appreciating VEF, Edmonton will realize a gain of $9,187,799 − 8,562,133 = CAD 625,666.
作者: bigredhockey55    时间: 2012-3-29 15:02

A German company owns a foreign subsidiary in the U.S. If the results below are reported in Euros, after translation what is the effect of the change in the exchange rate on revenues? Round to the nearest dollar and/or percent.

Year

Sales

$ per 1 Euro

Exchange Rate

2001

$10,000

0.9

2002

$10,000

0.8

A)
The company shows a 12.5% growth in revenues in 2002.
B)
The company shows a 0.1% decline in revenues in 2002.
C)
There is no change is revenue growth between 2001 and 2002.


While sales were flat in terms of local currency, after translation the reported revenue increased 12.5%. 10,000/0.9 = 11,111; 10,000/0.8 = 12,500; 12,500/11,111 = 12.5% increase due to exchange rate effects.
作者: bigredhockey55    时间: 2012-3-29 15:03

A U.S. firm owns a foreign subsidiary in France. In 2002, sales were EUR 1,000,000 and the USD/EUR exchange rate was 1.0620. In 2003, sales were EUR 1,100,000 and the exchange rate was 1.1417. What is the impact of the change in the value of the USD on the parent company’s translated sales?
A)
Sales will decrease by 7.5%.
B)
Sales will increase by 18.25%.
C)
Sales will increase by 7.5%.


The increase in sales due to the appreciating EUR is measured as 7.5% [= (1.1417 / 1.0620) − 1]. Sales for the subsidiary rose 10% [= (1,100,000 / 1,000,000) – 1] in the local currency (EUR). After translation the parent firm will report sales of USD 1,062,000 (= EUR 1,000,000 × 1.0620) for 2002 and USD 1,255,870 (= EUR 1,100,000 × 1.1417) for 2003.
Growth measured from the parent’s perspective suggests sales rose 18.25% [= (1,255,870 / 1,062,000) − 1], but this includes the growth rate in sales measured in the local currency and the rate of appreciation in the foreign currency, or (1.10 × 1.075) − 1 = 0.1825. The question only asks for the impact of the change in the value of the USD.
作者: bigredhockey55    时间: 2012-3-29 15:03

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.


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.
作者: bigredhockey55    时间: 2012-3-29 15:04

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.

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


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.

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.


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.
What is the change in exposure for Grande, Inc., for the year ended December 31, 2001?
A)
+$5,000,000 pesos.
B)
+$85,000,000 pesos.
C)
+$35,000,000 pesos.


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

The translation gain or loss from the activities of Grande, Inc., should be reported in:
A)
the statement of cash flows.
B)
the income statement.
C)
the equity accounts.


Under the current rate method, translation gains or losses are accumulated on the balance sheet in the equity section.
作者: bigredhockey55    时间: 2012-3-29 15:11

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


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.
作者: bigredhockey55    时间: 2012-3-29 15:12

An important distinction between the temporal method and the current rate method is that:
A)
monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (current rate method) at current rates.
B)
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).
C)
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.


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.
作者: bigredhockey55    时间: 2012-3-29 15:12

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.


Under the current rate method, the foreign currency translation gain or loss appears on the parent firm's balance sheet in the equity accounts
作者: bigredhockey55    时间: 2012-3-29 15:12

Which of the following general statements is CORRECT with respect to the temporal method? Monetary assets are:
A)
translated at the average rate.
B)
translated at the current rate.
C)
not translated.


As a general rule in using the temporal method, monetary assets are translated using the current rate.
作者: bigredhockey55    时间: 2012-3-29 15:13

Which of the following statements is least accurate regarding accounting for foreign currency translations? The:
A)
temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company.
B)
current rate method applies the average exchange rate to all income statement accounts.
C)
current rate method applies the current exchange rate to all balance sheet accounts.


The current rate method applies the current exchange rate to all balance sheet accounts except for common stock, which is translated at a historical rate.
作者: bigredhockey55    时间: 2012-3-29 15:13

Under the temporal method, the inventory and cost of goods sold (COGS) accounts are both nonmonetary accounts. Which of the following statements is least accurate regarding these accounts?
A)
The Inventory account is remeasured using the historical rate under both LIFO and FIFO.
B)
If the firm accounts for inventory using last in, first out (LIFO), then the beginning-of-period rate is used to remeasure COGS.
C)
If the firm accounts for inventory using first in, first out (FIFO), then a more current rate will be applied to the inventory account.


Under LIFO, the last goods purchased are the first goods out to COGS. Hence, although technically the historical rate is used to remeasure COGS, a more recent rate is typically more appropriate for COGS under LIFO.
作者: bigredhockey55    时间: 2012-3-29 15:13

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.


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.
作者: bigredhockey55    时间: 2012-3-29 15:14

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.


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
作者: bigredhockey55    时间: 2012-3-29 15:15

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.


The monetary asset and liability accounts under the temporal method are cash, accounts receivable, accounts payable, and long-term debt.
作者: bigredhockey55    时间: 2012-3-29 15:16

Which of the following statements regarding the functional currency under US GAAP is least accurate?
A)
The functional currency is defined as the primary currency of the economic environment in which the parent firm operates.
B)
Self-contained, independent subsidiaries whose operations are primarily located in the local market will use the local currency as the functional currency.
C)
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.


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.
作者: bigredhockey55    时间: 2012-3-29 15:16

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, 2005150
December 31, 2004130
2005 Average140
2004 Average120

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

Sales700,000
Expenses
Cost of goods sold (COGS)280,000
Depreciation126,000
SG&A77,000
Total Expenses483,000
Earnings before taxes (EBT)217,000
Income Tax Expense98,000
Net Income119,000
Retained Earnings: December 31, 2004250,000
369,000
Dividends58,000
Retained Earnings: December 31, 2005*311,000
*Retained earnings on 12/31/2005 were US $2 million

Balance Sheet

Assets
Cash and receivables60,000
Inventory180,000
Land200,000
Fixed assets346,000
Total assets786,000
Liabilities and stockholder's equity
Liabilities300,000
Capital stock175,000
Retained earnings311,000
Total liabilities and stockholder's equity786,000
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)
Temporal method because the local currency differs from the functional currency.
C)
Current method because the functional currency is the yen.


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.
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.


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.
作者: bigredhockey55    时间: 2012-3-29 15:17

Which of the following statements regarding foreign currency disclosures in the footnotes to financial statements is most accurate?
A)
A multinational firm with small liability balances generally has minimal foreign currency exposure on its balance sheet.
B)
If the parent currency is the functional currency, the temporal method is applied and exposure is equal to net monetary assets.
C)
All U.S.-based multinational firms must disclose the accounting method used for foreign currency translation in order to be in compliance with GAAP standards.


The choice of functional currency is the determining factor as to which method of foreign currency translation is utilized. Therefore, when the parent currency is the functional currency, the temporal method must be used. The choice of functional currency is largely left to management’s discretion
作者: bigredhockey55    时间: 2012-3-29 15:18

Which of the following currency translation methods is most appropriate in a hyperinflationary economy under US GAAP? The:
A)
temporal method because all non-monetary accounts are translated at the historical rate.
B)
current/non-current method since current assets and liabilities are translated at the current exchange rate.
C)
current rate method since the translation gain or loss is shown on the income statement.


The temporal rate method is most appropriate because the value of non-monetary assets and liabilities is translated at the historical rate. Under IFRS, the firm restates the financials using an inflation index, and then translates using the current rate method.
作者: bigredhockey55    时间: 2012-3-29 15:21

Under the current rate method, common stock is translated by using the:
A)
rate that existed when the equity was issued.
B)
exchange rate as of the balance sheet date.
C)
present value of weighted average rate.


The historical rate is used.
作者: bigredhockey55    时间: 2012-3-29 15:22

At what exchange rate are revenues and accounts receivable translated under the current rate method?
RevenuesAccounts receivable
A)
Average rateCurrent rate
B)
Average rateHistorical rate
C)
Current rateCurrent rate


Under the current rate method, revenues are translated at the average rate; accounts receivable are translated at the current rate.
作者: bigredhockey55    时间: 2012-3-29 15:23

Which of the following general statements is CORRECT with respect to the temporal method? Revenues and operating expenses (excluding COGS) are translated at the:
A)
historical rate.
B)
average rate.
C)
current rate.


As a general rule for the temporal method, all revenues and operating expenses (excluding COGS) are translated using the average rate.
作者: bigredhockey55    时间: 2012-3-29 15:23

Which of the following general statements is most accurate with respect to the current rate method? Revenues:
A)
and operating expenses are translated at the current rate.
B)
and operating expenses are translated at the average rate.
C)
are translated at the average rate while operating expenses are translated at the current rate.


As a general rule for the current rate method, all revenues and operating expenses are translated using the average rate.
作者: bigredhockey55    时间: 2012-3-29 15:24

Which of the following general statements is most accurate with respect to the current rate method? Revenues:
A)
and operating expenses are translated at the current rate.
B)
and operating expenses are translated at the average rate.
C)
are translated at the average rate while operating expenses are translated at the current rate.


As a general rule for the current rate method, all revenues and operating expenses are translated using the average rate.
作者: bigredhockey55    时间: 2012-3-29 15:25

Which of the following statements is least accurate regarding the use of the temporal method for foreign exchange accounting?
A)
All nonmonetary assets and liabilities are translated at the historical rate of exchange.
B)
All monetary assets are translated at the current rate of exchange.
C)
Under the temporal method, the foreign exchange gain or loss is placed on the balance sheet in the equity section.


Under the temporal method, the foreign exchange gain or loss is placed on the income statement.
作者: bigredhockey55    时间: 2012-3-29 15:25

Which of the following general statements is most accurate with respect to the temporal method? Nonmonetary assets are translated at:
A)
the average rate during the year.
B)
historical rates at the time of the transaction.
C)
the current rate.


As a general rule in using the temporal method, nonmonetary assets are translated using the historical rate at the time of the transaction
作者: bigredhockey55    时间: 2012-3-29 15:26

Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2007 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents.) Assume that this is the historical rate, accept as noted below. One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the LIFO inventory assumption, was bought and sold evenly throughout the year, and that COGS is translated at the average rate for the year.
Scud Co. Int'l
Balance Sheet (in SF thousands)

Dec. 31, 2007

Dec. 31, 2008
Cash & A/R400600
Inventory500500
Net Fixed Assets

700

600

Total Assets1,6001,700

A/P

100

200
Long-term debt200100
Common Stock1,3001,300
Retained Earnings

0

100

Total Liabilities1,6001,700

Income Statement (in SF thousands)
December 31, 2008

In SF

Sales7,000
COGS(6,800)
Depreciation(100)
Remeasurement Gain/Loss--
Net Income100

Assume that the functional currency is the U.S. dollar when answering the following questions.The level of cash on the 2008 remeasured balance sheet would be:
A)
$510.
B)
$480.
C)
$462.


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 U.S. dollar is the functional currency and the reporting currency, the temporal method should be used to remeasure the Swiss Franc into U.S. dollars. With the temporal method monetary assets like cash and monetary liabilities are remeasured at the current exchange rate. 600SF × 0.85$/SF = $510. (Study Session 6, LOS 24.d)

The level of net fixed assets on the remeasured 2008 balance sheet would be:
A)
$480.
B)
$510.
C)
$462.


Net fixed assets are considered non-monetary assets. For non-monetary assets, the temporal method uses the historical rate: 600SF × 0.77$/SF = $462. (Study Session 6, LOS 24.d)
Which of the following ratios may be larger in the presentation currency versus the local currency when translated under the current rate method?
A)
Return on assets.
B)
Current ratio.
C)
Net profit margin.


All pure income statement and balance sheet ratios are unaffected by the application of the current rate method. What we mean by “pure” is that the components of the ratio all come from the balance sheet, or the components of the ratio all come from the income statement. Return on assets is a “mixed ratio” because assets come from the balance sheet and are translated at the current rate and net income is translated at the average rate. Unless the exchange rate doesn’t change during the year, the two inputs will be translated at different rates, and the local currency value of the ratio will change when translated into the reporting currency. The other ratios will always be the same using the current rate method. (Study Session 6, LOS 24.d)
The level of retained earnings on the remeasured 2008 balance sheet would be:
A)
$305.
B)
$85.
C)
$101.


To get this value, we need to finish remeasuring our balance sheet at the appropriate rates. The retained earnings figure will be what makes the balance sheet balance.

Scud Co. Int'l
Balance Sheet (in SF thousands)

Dec. 31, 2008 Remeasured $
Cash & A/R 600 × 0.85 = 10
Inventory 500 × 0.77 = 385
Net Fixed Assets 600 × 0.77 = 462
Total Assets 1,700 1,357
A/P 200 × 0.85 = 170
Long-term debt 100 × 0.85 = 85
Common Stock 1,300 × 0.77 = 1001
Retained Earnings 100 101
Total Liabilities and Owner's Equity 1,700 1,357

(Study Session 6, LOS 24.d)

The level of sales on the remeasured income statement would be:
A)
$5,390.
B)
$5,600.
C)
$5,950.


Revenues and SG&A use the average exchange rate with both the temporal and current rate methods.
7000SF × 0.80$/SF = $5600
(Study Session 6, LOS 24.d)

The translation gain or loss on the income statement would be:
A)
$25.
B)
$0.
C)
$18.


We need to complete our remeasurement of the income statement. Since beginning retained earnings for the year were zero, we know that net income on the remeasured income must be equal to ending retained earnings. The remeasurement gain or loss is the plug figure that causes this to be the case.

Income Statement (in SF thousands)
December 31, 2008

Sales 7,000 × 0.80 = $5,600
COGS (6,800) × 0.80 = $5,440
Depreciation 100 × 0.77 = = $77
Income before remeasurement gain/loss = $83
Remeasurement gain = Plug = $18
Net Income $101

(Study Session 6, LOS 24.d)
作者: bigredhockey55    时间: 2012-3-29 15:31

Walter Jameson, CFA®, is an analyst for Continental Corp., a global investment bank. Jameson has been assigned coverage of Wasson Brothers (WB), a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. Jameson has completed his review of the firm’s U.S. operations, but his research report is due at the end of the week and he has yet to assess the impact of Wasson’s foreign subsidiaries on his earnings model.
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/$.

Yen/Dollar Exchange Rate


December 31, 2002
150

December 31, 2001
130


2002 Average
140

2001 Average
120

Exchange rate on date that 2002

     dividends were paid to Wasson Brothers


145

Exchange rate on date of stock

     issue and acquisition of fixed assets


100

Kasamatsu Industries Financial Data (12/31/02)


Yen
(in thousands)

Exchange
Rate

U.S. Dollars
(in thousands)


Sales

700,000




COGS

280,000




Depreciation

126,000




SG & A

77,000




Income Tax Expense

98,000




Net Income

119,000




2001 Retained Earnings

0




Dividends

58,000




2002 Retained Earnings

61,000




Current Assets

50,000




Fixed Assets

486,000




Current Liabilities

46,000




Long Term Debt

254,000




Capital Stock

175,000




Accumulated Translation Adjustment


The first step in Jameson’s analysis is to compute Kasamatsu’s impact on WB's net income. What is Kasamatsu’s impact on WB's net income (in thousands dollars)?
A)
$821.
B)
$793.
C)
$850.

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.

Because Kasamatsu is a wholly owned subsidiary of WB, all of its net income will be included in WB's. Kasamatsu’s local currency is also the functional currency, so the current rate method should be used to translate the financial statements into U.S. dollars. The appropriate exchange rate to use would be the average exchange rate for 2002, and no adjustment needs to be made for the dividend. The calculation is:
119,000 / 140 = 850

Therefore, WB will report an additional $850,000 of net income as a result of their subsidiary's operating results. Both remaining answers use incorrect exchange rates. (Study Session 6, LOS 24.e)

Jameson now computes the adjustment to WB's financial data due to Kasamatsu's payment of dividends. What is the U.S. dollar amount of this adjustment (in thousands)?
A)
$414.
B)
$400.
C)
$387.


WB receives a cash dividend from their subsidiary. This dividend must be translated at the prevailing exchange rate on the date the dividend is received (145/$). $58,000 / 145 = 400. Both remaining answers use incorrect exchange rates. (Study Session 6, LOS 24.e)
The carrying value of Kasamatsu’s total assets on December 31, 2002, using the current rate method of accounting for translations is:
A)
$3,573.
B)
$3,240.
C)
$5,360.


Under the current rate method, all balance sheet accounts, with the exception of equity, are translated at the current rate. At the current rate of 150 under the current rate method, the amount is: (486,000 + 50,000) / 150 = $3,573. (Study Session 6, LOS 24.d)
The yen has depreciated against the dollar in the last year. If the exchange rate in 2001 was in effect during 2002, under the current rate method the reported cost of goods sold would have been:
A)
higher by $287.
B)
lower by $333.
C)
higher by $333.


Under the current rate method, COGS is translated at the average rate in effect during the reporting period. Using the average exchange rate during 2002, COGS is calculated as 280,000 / 140 = $2,000. Using the average rate in effect during 2001 results in COGS of $2,333 (280,000 / 120), or $333 higher. (Study Session 6, LOS 24.d)
Jameson has prepared a report assessing the impact of the currency translation on Kasamatsu’s financial ratios. The details of his report are as follows: With respect to the direction of changes for the ratios, Jameson is:
A)
correct with respect to the quick ratio, but incorrect with respect to the total asset turnover ratio.
B)
incorrect with respect to the quick ratio, but correct with respect to the total asset turnover ratio.
C)
incorrect with respect to the quick ratio, and incorrect with respect to the total asset turnover ratio.


For the quick ratio, both current assets (with the exception of inventory) and current liabilities will be translated at the current rate. The ratio will be unchanged, so Jameson is incorrect with respect to this one.

For the total asset turnover ratio, sales will be translated at the average rate, while assets will be translated at the current rate. Since the currency is depreciating, the rate used to translate sales will be higher than the rate used to translate assets, resulting in a higher total asset turnover ratio. Jameson is correct with respect to the direction of change for this one. (Study Session 6, LOS 24.d)
Having converted all of Kasamatsu’s accounts using the current rate methods, Jameson is curious to compare the difference between the temporal and current rate methods on balance sheet accounts. The difference in translated fixed assets and long term debt respectively if Jameson were to use the temporal method rather than the current rate method is:
Fixed AssetsLong-Term Debt
A)
$0$0
B)
$1620$0
C)
$1620$121

Fixed assets under the temporal method, are reported at historical translation rates. 486,000 / 100 = $4,860. Under current rate, fixed assets are translated at the current rate (486,000 / 150) = $3,240, a difference of $1,620.
Even though it is a balance sheet account, under the temporal method, long term debt is considered a monetary liability and is translated at the current rate. Under the current rate method, long-term debt is also translated at the current rate, so the difference between the two methods is $0. (Study Session 6, LOS 24.d)
作者: bigredhockey55    时间: 2012-3-29 15:34

Navratov Corp. is a designer and manufacturer of high end sporting goods. The majority of the firm’s business comes from Olympic athletes from Russia and the United States. On January 1, 2003, Navratov was purchased by a U.S. competitor, Evert Industries. Because Evert’s business focuses on professional athletes in North America and Asia, Evert’s management feels the acquisition of Navratov is a natural extension of their business and that buying the Russian firm should generate economies of scale.
Peter Capriati is an analyst for Evert and has been assigned the task of integrating Navratov’s financial statements into Evert’s. Capriati knows that Evert’s management pays a great deal of attention to making sure the firm’s financial ratios are above the industry average. Because Navratov’s sales are split evenly between the U.S. and Russia, management has given him the flexibility to designate the either the Ruble (Navratov’s local currency) or the U.S. dollar (Evert’s reporting currency) as Navratov’s functional currency. As a result of choosing the functional currency, Capriati will use either the temporal or current rate method to convert Navratov’s financial statements, depending on which method will have the most favorable impact on Evert’s financial ratios.
Selected financial data for Navratov Corp is shown below:

Navratov Corporation
Income Statement (in Russian Rubles)
12 months ended December 31, 2003


Revenue

7,400,000


Cost of Goods Sold (COGS)

(5,200,000)


Depreciation

(1,200,000)


Taxes

(250,000)


Net Income

750,000

Navratov Corporation
Balance Sheet (in Russian Rubles)
December 31, 2002


Assets


Liabilities and Equity

Cash

500,000


Accounts Payable

3,450,000


Accounts Receivable

2,500,000


Long Term Debt

5,000,000


Inventory

3,700,000


Common Stock

3,500,000


Net Fixed Assets

6,000,000


Retained Earnings

750,000




Total Assets

12,700,000


Total Liabilities and Equity

12,700,000



Navratov Corporation
Balance Sheet (in Russian Rubles)
December 31, 2003


Assets


Liabilities and Equity

Cash

1,000,000


Accounts Payable

2,000,000


Accounts Receivable

2,500,000


Long Term Debt

5,000,000


Inventory

3,700,000


Common Stock

3,500,000


Net Fixed Assets

4,800,000


Retained Earnings

1,500,000




Total Assets

12,000,000


Total Liabilities and Equity

12,000,000


Exchange rates:Which of the following statements about the temporal method and the current rate method is least accurate?
A)
Subsidiaries that operate in highly inflationary environments will generally use the temporal method under U.S. GAAP.
B)
Subsidiaries whose operations are well integrated with the parent will generally use the current rate method.
C)
Net income is generally more volatile under the temporal method than under the current rate method.


Subsidiaries whose operations are well integrated with the parent will generally use the parent’s currency as the functional currency. Remeasurement from the local currency to the functional currency is done with the temporal method. (Study Session 6, LOS 24.c)
If Capriati uses the current rate method to translate Navratov’s income statement, the net profit margin will be:
A)
10.1%.
B)
8.6%.
C)
11.7%.

The net profit margin is a pure income statement ratio, meaning it will be unaffected by the application of the current rate method. The calculation is shown below:
Under the current rate method, all income statement accounts will be translated at the average rate.

Revenue

7,400,000

$0.37

$2,738,000


Cost of Goods Sold (COGS)

(5,200,000)

$0.37

(1,924,000)


Depreciation

(1,200,000)

$0.37

(444,000)


Taxes

(250,000)

$0.37

(92,500)


Net Income

750,000

$0.37

$277,500


Note that under the current rate method, since all income statement accounts are translated at the same average rate, you do not have to translate the income statement to get the correct answer. (750,000 / 7,400,000) = 10.1%. (Study Session 6, LOS 24.d)

What is the difference in the translated receivables turnover ratio for Navratov Corp. between the temporal and current rate methods? The receivables turnover rate is:
A)
lower under the current rate method by 0.30x.
B)
the same under both methods.
C)
higher under the current rate method by 0.36x.


The receivables turnover ratio is calculated as (sales / receivables). Under the both the current rate and temporal methods, sales are translated at the average rate, while receivables are translated at the current rate. Since both the sales and receivables components are translated at the same rate, there will be no difference in the ratios between the two methods. (Study Session 6, LOS 24.d)
What is the difference in the total asset turnover ratio for Navratov Corp. between the temporal and current rate methods? The total asset turnover ratio is:
A)
higher under the current rate method.
B)
the same under both methods.
C)
lower under the current rate method.

The total asset turnover ratio = (sales / total assets)
We can see from the exchange rates that the Russian ruble is depreciating (it takes fewer dollars to buy a ruble). With a depreciating local currency, sales are going to be the same under either method, since sales are translated at the average rate. Assets on the other hand will be higher under the temporal method, and lower under the current rate method. This is because all assets are translated at the current rate under the current rate method (which has the lower exchange rate), and at different rates under the temporal method (which is has fixed assets converted at the higher historical rate). With the same numerator and lower denominator, the current rate method will lead to the higher total asset turnover ratio. (Study Session 6, LOS 24.d)

Given the observed appreciation or depreciation of the ruble versus the U.S. dollar, which of the following statements regarding Navratov’s leverage ratios under the temporal method compared to the current rate method is most accurate? The temporal method will lead to a:
A)
higher debt-to-equity ratio and a higher debt-to-capital ratio.
B)
higher debt-to-equity ratio and a lower debt-to-capital ratio.
C)
lower debt-to-equity ratio and a lower debt-to-capital ratio.


Since it is taking fewer dollars to buy a ruble, the exchange rate is depreciating.
Both the debt-to-equity and debt-to-capital ratios will be lower under the temporal method versus the current rate method if a foreign currency is depreciating. Under both methods, long term debt and accounts payable are both translated at the current exchange rate, so those are the same.
Equity under the temporal method is effectively translated at a mixed rate under the temporal method, and the current rate under the current rate method. Since the currency is depreciating, the equity value will be higher under the mixed rate scenario. With the same debt and higher equity, the temporal method will lead to a lower debt-to-equity ratio than the current rate method.
Assets under the temporal method are also effectively translated at a mixed rate under the temporal method, and the current rate under the current rate method. Since the currency is depreciating, the asset value will be higher under the mixed rate scenario. With the same debt and higher assets, the temporal method will lead to a lower debt-to-capital ratio than the current rate method. (Study Session 6, LOS 24.d)

Capriati has completed his research and has summarized his findings in a report for Evert’s management. Which of the statements made in Capriati’s report is least accurate?
A)
The statement of cash flows for Navratov Corp should be the same under both the temporal and current rate methods of translation.
B)
Evert would prefer the temporal method for reporting its gross profit margin if the Russian Ruble was depreciating.
C)
A depreciating foreign currency will have a smaller impact on Evert’s consolidated financial statements than an appreciating foreign currency.


If the ruble was depreciating, Evert would report a higher gross profit margin under the current rate method. Under both the temporal and current rate methods, revenues are translated at an average rate, while COGS are translated at a historical rate under the temporal method and an average rate under the current rate method. A depreciating currency means that COGS would be higher under the temporal method, resulting in a lower gross profit margin. The other statements are true – an appreciating foreign currency tends to have the largest impact on the parent company’s financials and the statement of cash flows should theoretically be the same under both methods but flow effects from changing rates will have an impact on reporting currency methods. (Study Session 6, LOS 24.c)
作者: bigredhockey55    时间: 2012-3-29 15:35

Which of the following ratios is affected by translation under the current rate method?
A)
Net profit margin.
B)
Fixed asset turnover ratio.
C)
Debt/Assets ratio.


Recall that all pure income statements and balance sheet ratios are unaffected by translation under the current rate method. The fixed asset turnover ratio is not a pure ratio; it consists of an income statement measure (sales, translated at the average rate) and a balance sheet measure (fixed assets, translated at the current rate).
作者: rgonzalez    时间: 2012-3-29 15:38

Which of the following statements is most accurate concerning foreign currency translation?
A)
In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency depreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method.
B)
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.
C)
The receivables turnover ratio is identical under both the temporal method and the current rate method.

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 the appropriate rates to use for cost of goods sold (COGS) are the older historical rates. The average rate is used for COGS under the current rate method. If the local currency depreciates, COGS would be higher under the temporal method.
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.   
作者: rgonzalez    时间: 2012-3-29 15:38


The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The Swiss franc (SF) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO inventory cost-flow assumption. In addition, the value of the SF is as follows:


Beginning of year
$0.5902

Average throughout the year
$0.6002

End of year
$0.6150


The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:


Accounts receivable
= 3,000

Inventory
= 4,000

Fixed assets
= 12,000

Accounts payable
= 2,000

Long-term debt
= 5,000

Common stock
= 10,000

Retained earnings
= 2,000

Net income
= 2,000


The translated value of accounts receivable and inventory respectively are:
A)
$1,801 and $2,401.
B)
$1,845 and $2,460.
C)
$1,845 and $2,401.


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 SF is the functional currency, then the current rate method is employed to translate the SF amounts into USD. Hence, A/R = 0.615 × 3,000 = $1,845 and 0.615 × 4,000 = $2,460.
作者: rgonzalez    时间: 2012-3-29 15:39

The U.S. dollar has been depreciating relative to the local currency over the past year. The use of the 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 return on equity (ROE) relative to what the ratio would have been without the effects of translation?
A)
ROE will most likely decline.
B)
ROE will most likely rise.
C)
The impact of the depreciation of the US dollar on ROE is indeterminate.


ROE = Net Income / Equity. Under the current rate method, the equity accounts as a whole are translated at the current rate whereas net income is translated at the average rate. Since the dollar is depreciating, each foreign currency unit is buying more dollars in the denominator relative to the numerator of the equation. Hence, the denominator is increasing and the entire ratio falls.
作者: rgonzalez    时间: 2012-3-29 15:44

Hann Company is a U.S. multinational firm with operations in several foreign countries. Hann has a 100 percent stake in a French subsidiary. The foreign subsidiary's local currency has appreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the French firm accounts for inventories using the FIFO inventory cost-flow assumption. The net profit margin as computed under the current rate method would most likely be:
A)
lower than the same ratio computed under the temporal method.
B)
higher than the same ratio computed under the temporal method.
C)
either higher or lower than the same ratio computed under the temporal method.


The foreign currency gain or loss appears on the income statement under the temporal method. Hence, to make any determinations regarding the movements of this ratio, we need more information regarding the net monetary asset or liability position as of both the beginning and ending balance sheet date.
作者: rgonzalez    时间: 2012-3-29 15:44

Hann Company is a U.S. multinational firm with operations in several foreign countries. Hann has a 100% stake in a French subsidiary. The foreign subsidiary's local currency has appreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the French firm accounts for inventories using the first in, first out (FIFO) inventory cost-flow assumption. The gross profit margin as computed under the current rate method would most likely be:
A)
higher than the gross profit margin as computed under the temporal method.
B)
lower than the gross profit margin as computed under the temporal method.
C)
equal to the gross profit margin as computed under the temporal method.


The average rate is used to convert sales under both the temporal method and the current rate method. Hence, the only difference between the two computations is on cost of goods sold (COGS). Since the firm uses FIFO, older materials are flowing into COGS and an older exchange rate applies. Since in the past the foreign currency bought fewer dollars, the gross profit under the temporal method will be higher than that of the current rate method.It may help to 'think' that with the current rate method, you use the average rate for COGS, which makes COGS higher because the currency has appreciated.
作者: rgonzalez    时间: 2012-3-29 15:47

Which of the following statements regarding the effects of translation on financial ratios is least accurate?
A)
Return ratios are affected because both the numerator and denominator are affected.
B)
Depreciation is distorted in the temporal method.
C)
Fixed assets are higher under the temporal method if the local currency appreciates.


Fixed assets are lower under the temporal method if the local currency appreciates.
作者: rgonzalez    时间: 2012-3-29 15:47

Where does the currency translation gain or loss appear in the financial statements under the temporal method and the current rate method?
Temporal methodCurrent rate method
A)
Income statementBalance sheet
B)
Balance sheetIncome statement
C)
Balance sheetBalance sheet


Currency translation gain or loss appears on the income statement under the temporal method and the balance sheet under the current rate method.
作者: rgonzalez    时间: 2012-3-29 15:48

Hise Home Supply is a large, profitable home improvement retailer located in the United Kingdom. Hise has recently been acquiring niche retailers with popular brand names in certain segments of the home improvement market. One of these retailers was Wilson Tile and Stone, a U.S. business that derived a large part of its sales from the UK. The management team for Hise now makes all operating, financing, and investment decisions. Brian Heltzel, a financial analyst for Hise, is responsible for translating Wilson’s financial statements from U.S. dollars to the reporting currency. Hise conducts its business and issues financial statements in British pounds (£).

Wilson Tile and Stone – December 31, 2007 and 2008 Balance Sheets





2007

2008


Cash

$1,200

$1,400


Accounts receivable

6,500

9,900


Inventory

10,400

12,400


Current assets

$18,100

$23,700


Fixed assets

40,000

40,000


Accumulated depreciation

10,000

15,000


Net fixed assets

$30,000

$25,000





TOTAL ASSETS

$48,100

$48,700





Accounts payable

$5,000

$6,000


Current portion of LT debt

1,500

1,500


Long term debt

25,000

23,500


Total liabilities

$31,500

$31,000


Common stock

10,000

10,000


Retained earnings

6,600

7,700


Total equity

$16,600

$17,700





TOTAL LIABILITIES and EQUITY

$48,100

$48,700


Wilson Tile and Stone – 2008 Income Statement




Revenue
$75,000

Cost of goods sold
(60,000)

Gross margin
$15,000

Other expenses
(2,300)

Depreciation expense
(5,000)

Net Income
$7,700

Wilson uses the FIFO method for inventory accounting.
Applicable exchange rates are as follows: Which of the following statements regarding foreign currency translation methods is most accurate?
A)
The British pound is the reporting currency and Heltzel should use the current rate method.
B)
The British pound is the functional currency and Heltzel should use the temporal method.
C)
The U.S. dollar is the functional currency and Heltzel should use the current rate method.


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.
Subsidiaries whose operations are well integrated with the parent (i.e. parent makes operating, financing, and investing decisions) will use the parent’s currency as the functional currency. In this case, the British pound is both the functional and the reporting currency. Since Heltzel is translating from the local to the functional currency, remeasurement under the temporal method is appropriate. (Study Session 6, LOS 23.c)

As Heltzel is translating the balance sheet and income statement, which of the following are closest to the values Heltzel determines for revenues and accounts payable for 2008?
RevenuesAccounts Payable
A)
£44,118£3,529
B)
£41,667 £3,333
C)
£44,118£3,333


Since the British pound is the functional currency, the temporal method should be used. Under both the current rate and temporal methods, revenues are translated at the average rate. The value Heltzel will calculate for revenues is $75,000 / $1.70 = £44,118. Also, under both the temporal and current rate methods, monetary assets and liabilities are calculated using the current exchange rate. The value Heltzel will calculate for accounts payable will be $6,000 / $1.80 = £3,333. (Study Session 6, LOS 23.d)
Suppose that 2008 income before remeasurement gain/loss is £4,138. Dividends paid during the year are £2,250, and beginning retained earnings are £5,150. Assume for purposes of this question only the ending retained earnings are 7,323. The remeasurement gain/loss for 2008 will be closest to:
A)
-£77.
B)
£285.
C)
£1,012.


Net income = ending retained earnings − beginning retained earnings + dividends paid.
Net income = 7323 − 5150 + 2250 = £4423.
Remeasurement gain = net income − net income before remeasurement gain = 4423 − 4138 = £285.
(Study Session 6, LOS 23.d)

After remeasurement, what will be the impact on Wilson’s quick ratio and accounts receivable turnover ratios respectively for 2008?
Quick RatioAccounts Receivable Turnover
A)
No changeIncrease
B)
IncreaseIncrease
C)
No changeDecrease


The quick ratio takes (cash + accounts receivable) / (current liabilities). Since all of these items are monetary assets and liabilities, they are all remeasured at the current exchange rate, resulting in no change to the ratio. The accounts receivable turnover ratio is calculated as (sales / accounts receivable). Note that the local currency (the U.S. dollar) is depreciating (it takes more $ to buy a pound). Since sales is remeasured at the average rate and accounts receivable is remeasured at the current rate, the depreciating currency means that the remeasured denominator will be smaller than the remeasured numerator, resulting in a larger ratio. (Study Session 6, LOS 23.d)
Heltzel decides to redefine the functional currency to assess how the current rate vs. the temporal method will impact Wilson’s financial statements. Wilson’s gross profit margin will be lower under the:
A)
current rate method, and the total asset turnover ratio will be higher under the current rate method.
B)
current rate method, and the total asset turnover ratio will be higher under the temporal method.
C)
temporal method, and the total asset turnover ratio will be higher under the current rate method.

Wilson’s gross profit margin (gross profit / sales) will be lower under the temporal method. Sales under both methods are converted at the average rate, while COGS is converted at the historical rate under the temporal method (note FIFO inventory accounting). Since the local currency (the U.S. dollar) is depreciating, COGS will be higher under temporal method, resulting in a lower gross profit and a lower gross profit margin.
Wilson’s total asset turnover ratio (sales / total assets) will be higher under the current rate method. Non-monetary assets are converted at the historical rate using the temporal method and the current rate under the current rate method. The depreciating local currency means that total assets will be lower under the current rate method. The lower denominator will lead to a higher total asset turnover ratio under the current rate method. (Study Session 6, LOS 23.d)
作者: rgonzalez    时间: 2012-3-29 15:50

Which of the following ratios is unaffected by the choice between the current rate method and the temporal method?
A)
Accounts payable turnover.
B)
Quick ratio.
C)
Current ratio.


All of the components of the quick ratio (cash and cash equivalents, accounts receivable, and accounts payable) are converted at the same rate under both methods so the ratio is unaffected by the method. The current ratio is the same as the quick ratio except it also contains inventory which is translated at the historical rate with the temporal method and at the current rate with the current rate method. Accounts payable turnover is purchases/accounts payable. Purchases is an inventory item (like COGS) that may not use the same rate under the temporal method and the current rate method.
作者: rgonzalez    时间: 2012-3-29 15:50

The U.S. dollar has been appreciating relative to the local currency over the past year. The use of the temporal method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/FA) relative to what the ratio would have been without the effects of translation assuming no new fixed assets were purchased throughout the year?
A)
There will be no effect on the ratio.
B)
The ratio will fall.
C)
The ratio will rise.


Since the dollar has appreciated, the local currency has depreciated, so each foreign currency unit bought more dollars in the past relative to the present. Fixed assets are remeasured at the historical rate and sales are remeasured at the average rate under the temporal method. Since the historical rate is buying more dollars relative to the average rate, the denominator is staying the same whereas the numerator is getting smaller. Thus, the ratio is lower.
作者: rgonzalez    时间: 2012-3-29 15:51

The U.S. dollar has been appreciating relative to the local currency over the past year. The use of the temporal method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/FA) relative to what the ratio would have been without the effects of translation assuming no new fixed assets were purchased throughout the year?
A)
There will be no effect on the ratio.
B)
The ratio will fall.
C)
The ratio will rise.


Since the dollar has appreciated, the local currency has depreciated, so each foreign currency unit bought more dollars in the past relative to the present. Fixed assets are remeasured at the historical rate and sales are remeasured at the average rate under the temporal method. Since the historical rate is buying more dollars relative to the average rate, the denominator is staying the same whereas the numerator is getting smaller. Thus, the ratio is lower.
作者: rgonzalez    时间: 2012-3-29 15:54

The 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 fall.
B)
The ratio will not change.
C)
The ratio will rise.



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.
作者: rgonzalez    时间: 2012-3-29 15:55

The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.

Acer Tool & Die Company Balance Sheet
As of December 31, 2005

Chad

(millions)

Exchange Rate

(Chad/US$)

U.S. $

(millions)

Cash200.25$80
Accounts receivable300.25120
Inventory1000.3125320
Fixed assets (net)5000.33331,500
Total assets650$2,020
Accounts payable500.25$200
Capital stock3800.33331,140
Retained earnings220--680
Total liabilities and equity650$2,020


Acer Tool & Die Company Income Statement
For year ending December 31, 2005
(Amounts in millions of Chad)

Revenues1,000
Cost of sales700
Depreciation expense50
Selling expense30
Translation gain (or loss)
Net income220


Acer has determined that the exchange rate exposure at the beginning of 2005 is −260 Chad.
The exchange rate at the beginning of 2005 was 0.3333 Chad/US$. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method. Assume that retained earnings at year end 2004 were zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid during 2005.What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?
A)
$2,222.
B)
$2,242.
C)
$2,240.


Purchases = COGS − Beginning inventory + ending inventory = 710 Chad
ChadConversionUS$
Beginning inventory900.3333$270
Purchases7100.31252,272
Ending inventory1000.3125320
COGS700 $2,222


What is the remeasurement gain or loss for the period using the temporal method?
A)
$50 gain.
B)
$52 loss.
C)
$32 loss.


Remeasured income statement under temporal method:
Revenues = 1000/0.3125 = 3200
COGS = 2222 (from previous question)
Depreciation = 50/0.3333 = 150
Selling expense = 30/0.3125 = 96
Income before remeasurement gain = 3200 − 2222 − 150 − 96 = 732
Net income = 680 (= retained earnings at year end 2005 − retained earnings at year end 2004)
Remeasurement gain/loss = 680 − 732 = -52
作者: rgonzalez    时间: 2012-3-29 15:56

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.

Assets

Liabilities and Equity


Cash

200


A/P

180


A/R

240


Common Stock

720


Maintenance Supplies

180



Fixed Assets

280



Total Assets

900


Total Liab & Equity

900


APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as:

Sales

3,500


Total Costs

2,900


Net Income

600


The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:

Assets
Liabilities and Equity

Cash

441


A/P

210


A/R

330


Common Stock

720


Supplies

291


Retained Earnings

600


Fixed Assets

468





Total Assets

1,530


Total Liab. & Equity

1,530

On APJ's 2005 income statement, the level of net income in U.S. dollars would be:
A)
$300.
B)
$200.
C)
$240.


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 Australian dollar is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1. (Study Session 6, LOS 24.d)

On APJ's 2005 balance sheet, the level of common stock (not including retained earnings) in U.S. dollars would be:
A)
$288.
B)
$240.
C)
$360.


Since the Australian dollar is the local and the functional currency, use the current rate method.
In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
Common Stock (720 / 2) = 360
(Study Session 6, LOS 24.d)

On APJ's 2005 balance sheet, the level of retained earnings in U.S. dollars would be:
A)
$200.
B)
$240.
C)
$300.

Since there is no mention of dividends being paid, the retained earnings will equal net income (RE = NI − Div). The items in the income statement are translated at the average exchange rate under SFAS 52. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.

Income Statement (in $)
Sales (3,500 / 2.5) $1,400
Costs (2,900 / 2.5)$1,160
Net Income $240

(Study Session 6, LOS 24.d)

On APJ's 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars would be:
A)
−$220.
B)
−$280.
C)
−$160.


Since the Australian dollar is both the local and the functional currency, use the current rate method.
When using the current rate method, all assets and liabilities are translated at the current rate. Total assets = 1530/3 = 510 and accounts payable = 210/3 = 70. The common stock is translated at the historical rate on the date of purchase = 720/2 = 360. Beginning retained earnings = 0, so ending retained earnings = translated net income = 240. The cumulative translation adjustment is the plug figure that makes the balance sheet balance = 510 − 70 − 360 − 240 = -160. (Study Session 6, LOS 24.d)
Which one of the following is a condition under which the temporal method should be used to account for foreign currency translations?
A)
The Australian dollar is chosen as the functional currency.
B)
The cumulative Australian inflation rate over the last three years would have to be less than 100%.
C)
APJ would have to be a mere operational extension of Dell's main operations.


The conditions necessary for implementation of the temporal method are:
(Study Session 6, LOS 24.c)

Which one of the following statements correctly describes the effect on Dell's financial statements if the U.S. dollar had been chosen as the functional currency?
A)
The current rate method would apply.
B)
The translation adjustment would appear as a line item on Dell's income statement.
C)
The translation adjustment would appear as a line item on Dell's balance sheet.


If the U.S. dollar had been chosen as the functional currency, then the provisions of the temporal method would apply. Under the temporal method, the translation adjustment would appear as a line item on Dell's income statement and not as an element of equity. Hence, earnings may become more volatile as a result. (Study Session 6, LOS 24.c)
作者: rgonzalez    时间: 2012-3-29 15:57

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airline located in Sydney . The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2001 in U.S. dollars.

Assets

Liabilities and Equity


Cash

$100


Accounts Payable (A/P)

$90


Accounts Receivable (A/R)

120


Common Stock

360


Maintenance Supplies

90



Fixed Assets

140



Total Assets

$450


Total Liabilities & Equity

$450


APJ's income statement for the year ending Dec. 31, 2002 is expressed in Australian dollars as:

Sales

3,500


Total Costs

2,900


Net Income

600


The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2001, the exchange rate was 2.5 Australian dollars = $1 but at Dec. 31, 2002, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2002 Balance Sheet for APJ is given in Australian dollars as follows:

Assets
Liabilities and Equity

Cash

441


A/P

210


A/R

330


Common Stock

720


Supplies

291


Retained Earnings

600


Fixed Assets

468





Total Assets

1,530


Total Liabilities & Equity

1,530

On APJ's 2002 income statement, the level of sales in U.S. dollars would be:</FONT
A)
$1,272.</FONT
B)
$1,985.</FONT
C)
$1,167.</FONT


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 Australian dollar is the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1.

Income Statement (in $)

Sales (3,500 / 2.75)

$1,272

Costs (2,900 / 2.75)

$1,055

Net Income$217


On APJ's 2002 income statement, the level of net income in U.S. dollars would be:
A)
$242.
B)
$200.
C)
$217.


Since we are using the current rate method, the items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1.

Income Statement (in $)

Sales (3,500 / 2.75)

$1,272

Costs (2,900 / 2.75)

$1,055

Net Income$217


On APJ's 2002 balance sheet, the level of accounts receivable is U.S. dollars would be:
A)
$330.
B)
$110.
C)
$132.


Since we are using the current rate method, in the balance sheet all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
A/R (330 / 3) = 110


作者: rgonzalez    时间: 2012-3-29 15:59

Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company’s reactors.

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

20,000,000

35,000,000


Inventory

15,000,000

15,000,000


Fixed Assets (net)

70,000,000

60,000,000





Accounts Payable

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

(45,000,000)


Depreciation

(10,000,000)


Net Income

5,000,000

Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:
A)
the temporal method.
B)
the temporal method followed by the current rate method.
C)
the current rate method.


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 used when the functional currency is the parent’s currency. (Study Session 6, LOS 24.c)
The Cost of Goods Sold for Grande, Inc., for the year ended December 31, 2001, expressed in U.S. dollars is:
A)
$5,400,000.
B)
$5,250,000.
C)
$4,950,000.


Both the beginning and ending inventory under LIFO cost flow assumptions are translated at the $0.12 rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: $0.11. (45,000,000 × $0.11) = $4,950,000. The average rate is the best estimate of the historical rate because the inventory that was sold was purchased evenly through the year. (Study Session 6, LOS 24.c)
Which of the following statements regarding the current rate method are most correct?
A)
This method is not typically used when the subsidiary is relatively independent of the parent.
B)
Revenues and expenses are translated at the historic rate.
C)
Under this method, translation gains and losses are reported in equity in the CTA account.


Under the current rate method, translation gains and losses are reported in equity in the CTA account. This method is typically used when the subsidiary is relatively independent of the parent. Revenues and expenses are translated at the average rate.
(Study Session 6, LOS 24.c)

The translation gain or loss from the activities of Grande, Inc., should be reported in:
A)
the statement of cash flows.
B)
the income statement.
C)
the statement of shareholder’s equity.


Under the temporal method, translation gains and losses are included in the income statement. (Study Session 6, LOS 24.d)
Revenues for 2001 translated into U.S. dollars amount to:
A)
$6,600,000.
B)
$6,000,000.
C)
$7,800,000.


Under the temporal method, revenues are translated at the average rate during the reporting period.
60,000,000 × 0.11 = $6,600,000
(Study Session 6, LOS 24.d)

As a result of making the appropriate currency adjustments to the financial statements, Grande Inc.’s December 31, 2001 quick ratio will be:
A)
higher.
B)
unchanged.
C)
lower.


Since the functional currency is the reporting currency, the temporal method must be used. Since it is taking fewer dollars to buy a peso, the peso is depreciating.

The quick ratio is a liquidity ratio that does not include inventory. The quick ratio is calculated as [(cash + accounts receivable) / accounts payable]. Since monetary assets and liabilities are translated at the current rate, the quick ratio will be unchanged. (Study Session 6, LOS 24.d)
作者: rgonzalez    时间: 2012-3-29 15:59

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.

Assets

Liabilities and Equity


Cash

$200


A/P

$180


A/R

240


Common Stock

720


Maintenance Supplies

180



Fixed Assets

280



Total Assets

$900


Total Liab & Equity

$900


APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as:

Sales

3,500


Total Costs

2,900


Net Income

600


The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:

Assets
Liabilities and Equity

Cash

441


A/P

210


A/R

330


Common Stock

720


Supplies

291


Retained Earnings

600


Fixed Assets

468





Total Assets

1,530


Total Liab. & Equity

1,530

On APJ's 2005 income statement, the level of sales in U.S. dollars would be:
A)
$1,750.
B)
$1,167.
C)
$1,400.

Since the Australian $ is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.

Income Statement (in $)
Sales (3,500 / 2.5) $1,400
Costs (2,900 / 2.5)$1,160
Net Income $240


On APJ's 2005 balance sheet, the level of accounts receivable is U.S. dollars would be:
A)
$110.
B)
$165.
C)
$132.

Since the Australian $ is both the local and the functional currency, use the current rate method.
In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
A/R (330 / 3) = 110

On APJ's 2005 balance sheet, the level of fixed assets in U.S. dollars would be:
A)
$156.
B)
$234.
C)
$187.


Since the Australian $ is both the local and the functional currency, use the current rate method. In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.

Fixed Assets (468 / 3) = 156
作者: rgonzalez    时间: 2012-3-29 16:00

The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the weighted-average inventory cost-flow assumption. In addition, the value of the SF is as follows:

Beginning of year$0.5902
Average throughout the year$0.6002
End of year$0.6150


The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:

Accounts receivable= 3,000
Inventory= 4,000
Fixed assets= 12,000
Accounts payable= 2,000
Long-term debt= 5,000
Common stock= 10,000
Retained earnings= 2,000
Net income= 2,000


The total value of net monetary assets is equal to:
A)
12,000 SF.
B)
-4,000 SF.
C)
3,000 SF.


Monetary assets and liabilities include cash, A/R, A/P and Long-term debt. Hence, net monetary assets is equal to 3,000 − (2,000 + 5,000) = -4,000 SF.
作者: rgonzalez    时间: 2012-3-29 16:01

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/$.

Yen/Dollar Exchange Rate

December 31, 2002150
December 31, 2001130
2002 Average140
2001 Average120
Exchange rate on date that 2002 dividends were paid to Wasson Brothers145
Exchange rate on date of stock issue and acquisition of fixed assets.100


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.

Financial Statements for Year Ending December 31, 2002

(in thousands on yen)

Statement of Income and Retained Earnings

Sales700,000
Expenses
Cost of Goods Sold (COGS)280,000
Depreciation126,000
SG&A77,000
Total Expenses483,000
Earnings Before Taxes (EBT)217,000
Income Tax Expense98,000
Net Income119,000
Retained Earnings: December 31, 2001250,000
369,000
Dividends58,000
Retained Earnings: December 31, 2002 *311,000
* Retained earnings on 12/31/2002 were US $2million


Balance Sheet

Assets
Cash and receivables60,000
Inventory180,000
Land200,000
Fixed assets346,000
Total assets786,000
Liabilities and stockholder's equity
Liabilities300,000
Capital stock175,000
Retained earnings311,000
Total liabilities and stockholder's equity786,000

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)
$4,828.
B)
$5,000.
C)
$4,667.


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.

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:

700,000

140

= 5,000


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

What 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)
$3,220.
B)
$3,450.
C)
$4,150.


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:

483,000

140

= 3,450


Both remaining answers use incorrect exchange rates.
作者: rgonzalez    时间: 2012-3-29 16:01

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/Dollar Exchange Rate

December 31, 2002150
December 31, 2001130
2002 Average140
2001 Average120
Exchange rate on date that 2002 dividends were paid to Wasson Brothers145
Exchange rate on date of stock issue and acquisition of fixed assets.100
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)
140.
B)
150.
C)
130.


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.
Jameson 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)
145.
C)
140.


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.
作者: rgonzalez    时间: 2012-3-29 16:02

A U.S. company has a subsidiary based in Malaysia, which has the following income statement for 2006 and balance sheets for 2005 and 2006 (in million Ringgit).

Sales

1,000


Cost of goods sold

600


Depreciation

80


Operating expenses

120


Earnings before taxes

200


Taxes

60


Net income

140


Dividends

20


2005

2006




Cash

50

60


Accounts receivables

100

110


Inventories

100

110


Other current assets

100

110




Gross PP&E

700

800


Less accumulated depreciation

70

150


Net PP&E

630

650


Other fixed assets

20

40




Total assets

1,000

1,080




Account payable

70

80


Current portion of LTD

100

100


Notes payable

100

150


Other current liabilities

30

30


Long-term debt

300

200


Common stock

100

100


Paid in capital

50

50


Retained earnings

250

370


The value of the Ringgit at various times over the past two years is as follows:

January 1, 2005
$0.37

April 1, 2005
$0.38

December 31, 2005
$0.40

June 30, 2006
$0.47

December 31, 2006
$0.50

Average for 2005
$0.39

Average for 2006
$0.45
The common stock and long-term debt were originally issued in January of 2005. The fixed assets and first inventory purchases were made in April of 2005. Additional fixed asset purchases were made in June 2006. Inventory is measured using the FIFO method. It can be assumed that all of the ending inventory was acquired in June when the last major purchase was made. The operations of the subsidiary are independent from the operations of the U.S. parent. Inflation over the past three years has averaged 15% per year.

The amount of 2006 cost of goods sold in USD is:

(Note: if needed, use $0.40 as the rate to convert 2005 ending inventory)

A)
$300,000,000.
B)
$270,000,000.
C)
$262,800,000.


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.

Because the operations are independent from the parent, the current rate method will be used. Cost of goods sold should be accounted for at the average rate for the past year. The amount of cost of goods sold is 0.45 × 600,000,000 = $270,000,000. (Study Session 6, LOS 24.d)
The value of December 31, 2006, gross property, plant, and equipment reported in USD is:
A)
$400,000,000.
B)
$304,000,000.
C)
$313,000,000.


Because the operations are independent from the parent, the current rate method will be used. Fixed assets should be accounted for at the current rate. The value is 0.5 × 800,000,000 = $400,000,000. (Study Session 6, LOS 24.d)
The amount of 2006 depreciation expense in USD is:
A)
$30,400,000.
B)
$40,000,000.
C)
$36,000,000.


Because the operations are independent from the parent, the current rate method will be used. Depreciation should be accounted for at the average rate for the past year. The amount of depreciation is 0.45 × 80,000,000 = $36,000,000. (Study Session 6, LOS 24.d)
The value of December 31, 2006, inventory reported in USD is:
A)
$49,500,000.
B)
$51,700,000.
C)
$55,000,000.


Because the operations are independent from the parent, the current rate method will be used. Inventory should be accounted for at the current rate. The value is 0.50 × 110,000,000 = $55,000,000. (Study Session 6, LOS 24.d)
The value of all financing debt (notes payable, current portion of long-term debt, and long-term debt) on December 31, 2006, reported in USD is:
A)
$171,000,000.
B)
$225,000,000.
C)
$202,500,000.


Because the operations are independent from the parent, the current rate method will be used. All debt is considered a monetary liability and should be accounted for at the current rate. The value is 0.50 × 450,000,000 = $225,000,000. (Study Session 6, LOS 24.d)
The combined value of the common stock and paid in capital on December 31, 2006, reported in USD is:
A)
$55,500,000.
B)
$63,000,000.
C)
$75,000,000.


Because the operations are independent from the parent, the current rate method will be used. Common stock should be accounted for at the historical rate—the rate in effect when it was issued. The value is 0.37 × 150,000,000 = $55,500,000. (Study Session 6, LOS 24.d)
作者: rgonzalez    时间: 2012-3-29 16:03

The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2002, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.

Acer Tool & Die Company Balance Sheet

As of December 31, 2002

Chad

(millions)

Exchange Rate

(Chad/US$)

U.S. $

(millions)

Cash200.25$80
Accounts receivable300.25120
Inventory1000.3125320
Fixed assets (net)5000.33331,500
Total assets650$2,020
Accounts payable500.25$200
Capital stock3800.33331,140
Retained earnings220--680
Total liabilities and equity650$2,020


Acer Tool & Die Company Income Statement

For year ending December 31, 2002

(Amounts in millions of Chad)

Revenues1,000
Cost of sales700
Depreciation expense50
Selling expense30
Net income220


The exchange rate at the beginning of 2002 was 0.3333 Chad/US$. The exchange rate at the end of 2002 was 0.25 Chad/US$. The average rate for 2002 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method.
Using the current rate method for the Acer Tool & Die Company, what is the value of total assets after translation?
A)
$2,600.
B)
$2,020.
C)
$1,950.


With the current rate method, all balance sheet items except for common stock are translated at the current rate. Total assets = 650 / 0.25 = $2,600
作者: rgonzalez    时间: 2012-3-29 16:04

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/$.

Yen/Dollar Exchange Rate

December 31, 2002150
December 31, 2001130
2002 Average140
2001 Average120
Exchange rate on date that 2002 dividends were paid to Wasson Brothers145
Exchange rate on date of stock issue and acquisition of fixed assets.100
Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. However, she must use the appropriate rate to convert the numbers from yen into dollars. What is the appropriate exchange rate (yen/$) to use in converting Kasamatsu's assets?
A)
140.
B)
100.
C)
150.


Because the current method of currency translation is being used all assets and liabilities are translated using the exchange rate in effect on the balance sheet date. In this particular case, the exchange rate prevailing on December 31, 2002, is the appropriate rate.
Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's liabilities into U.S. dollars?
A)
150.
B)
140.
C)
100.


Under the current method, assets and liabilities are translated at the exchange rate prevailing on the balance sheet date.
Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's capital stock into U.S. dollars?
A)
100.
B)
130.
C)
150.


Because WB issued stock and acquired Kasamatsu and their capital stock, they must carry that capital stock on their balance sheet at historical cost, which will be the basis for calculating depreciation expense. Therefore, even though this is a balance sheet item, the exchange rate that prevailed on the date of the acquisition of the capital stock must be used to translate into the reporting currency. Using the exchange rate that was effective on the balance sheet date would be improper, as this would cause the "historical" cost of the capital stock to fluctuate.
作者: rgonzalez    时间: 2012-3-29 16:05

Which of the following subsidiary ratios will be affected by the translation adjustment under the current rate method?
A)
Gross margin.
B)
Return on equity.
C)
Net profit margin.


The translation adjustment will affect the book value of equity and therefore the return on equity ratio. The other ratios are pure ratios (both component of the ratio come from the income statement) and are not affected by translation.
作者: rgonzalez    时间: 2012-3-29 16:05

Which of the following statements concerning the translation of a subsidiary’s financial statement and the subsidiary’s ratios is least accurate?
A)
The subsidiary's ratios in the local currency will differ from ratios calculated after translation.
B)
Ratios calculated under the current rate method will not differ from those calculated under the temporal method.
C)
The statement of cash flows is not affected by the choice of translation.


Ratios calculated under the current rate method will differ from those calculated under the temporal method.
作者: rgonzalez    时间: 2012-3-29 16:06

The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005.
Cash134
Accounts receivable270
Inventory404
Net fixed assets1347
Total assets2155

The exchange rate per was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are:
A)
$1,923.
B)
$2,133.
C)
$2,178.

With the current rate method all balance sheet items except common stock use the current exchange rate to translate the functional currency into the reporting currency.
2155 × $0.9896 = $2,133.
作者: rgonzalez    时间: 2012-3-29 16:07

The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the weighted-average inventory cost-flow assumption. In addition, the value of the SF is as follows:
Beginning of year $0.5902
Average throughout the year $0.6002
End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:
Accounts receivable = 3,000
Inventory= 4,000
Fixed assets= 12,000
Accounts payable= 2,000
Long-term debt= 5,000
Common stock= 10,000
Retained earnings= 2,000
Net income= 2,000

The remeasured value of accounts receivable and inventory respectively are closest to:
A)
$1,845 and $2,361.
B)
$1,771 and $2,361.
C)
$1,845 and $2,401.


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 USD is the functional currency, use the temporal method. Under the temporal method, inventory is remeasured using the historical rate. However, our best guess of the historical rate under the weighted average inventory cost-flow assumption is the average rate through the period. Hence, A/R = $0.615 × 3,000 = $1,845 and Inventory = $0.6002 × 4,000 = $2,401.
作者: rgonzalez    时间: 2012-3-29 16:07

The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The Swiss franc (SF) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO inventory cost-flow assumption. In addition, the value of the SF is as follows:

Beginning of year$0.5902
Average throughout the year$0.6002
End of year$0.6150


The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:

Accounts receivable= 3,000
Inventory= 4,000
Fixed assets= 12,000
Accounts payable= 2,000
Long-term debt= 5,000
Common stock= 10,000
Retained earnings= 2,000
Net income= 2,000


The translated value of common stock and long-term debt respectively are:
A)
$5,902 and $3,001.
B)
$6,150 and $3,075.
C)
$5,902 and $3,075.


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 SF is the functional currency, use the current rate method. Common stock is translated at the historical rate which is the rate that applied when the transaction was made or $0.5902 and long-term debt is translated at the current rate of $0.615. 10,000 × 0.5902 = $5,902 for common stock and 5000 × 0.6150 = $3,075 for long term debt.
作者: rgonzalez    时间: 2012-3-29 16:08

Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.
The following information is relevant to Geocorp’s subsidiaries:
The following table is a summary of selected financial results from Geocorp’s foreign operations:

All values are in millions

CAD

JPY

CNY

GBP

EUR


Revenues
50

5,000


250
150
700

Cost of goods sold (COGS)
20

2,700


110
100
480

Gross profit
30

2,300


140
50
220

Selling, general & administrative (SGA) expenses
18

1,000


52
29
200

EBIT
12

1,300


88
21
10

Cash
35

4,200


130
102
400

Accounts receivable
12

1,400


55
45
170

Inventory
20

3,900


135
123
300

Fixed assets
62

7,680


188
370
450

Accounts payable
27

3,300


76
68
350

Long-term debt
70

8,450


290
320
550

Common stock
10

2,000


150
50
350

The following exchange rates apply (USD per foreign currency unit):

Currency

Historical Rate

Average Rate

December 31, 2002


CAD

USD 0.7013

USD 0.6803

USD 0.6592


JPY

USD 0.0094

USD 0.0088

USD 0.0082


CNY

USD 0.1010

USD 0.1109

USD 0.1208


EUR

USD 0.9801

USD 1.0318

USD 1.0834


GBP

USD 1.4803

USD 1.5506

USD 1.6209


With respect to the Canadian subsidiary, what method should be used to value its revenues, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, average rate, USD 34.0 million.
B)
Current method, current rate, USD 33.0 million.
C)
Current method, average rate, USD 34.0 million.


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.

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Revenues under the current method are translated using the average rate. Hence, 50 × 0.6803 = USD 34.0 million. (Study Session 6, LOS 24.d)
With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, current rate, USD 11.5 million.
B)
Current method, current rate, USD 11.5 million.
C)
Current method, average rate, USD 12.3 million.


Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Assets under the current method are translated using the current rate. Hence, 1400 × 0.0082 = USD 11.5 million. (Study Session 6, LOS 24.d)
With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?
A)
Temporal method, average rate, USD 206.4 million.
B)
Current method, average rate, USD 206.4 million.
C)
Current method, current rate, USD 216.7 million.


Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Expenses under the current method are translated using the average rate. Hence, 200 × 1.0318 = USD 206.4 million. (Study Session 6, LOS 24.d)
With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?
A)
Current method, current rate, USD 599.7 million.
B)
Temporal method, historical rate, USD 547.7 million.
C)
Current method, historical rate, USD 547.7 million.


Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Fixed assets under the temporal method are translated using the historical rate. Hence, 370 × 1.4803 = USD 547.7 million. (Study Session 6, LOS 24.d)
With respect to the Chinese subsidiary, what method should be used to value its long term debt, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, historical rate, USD 29.3 million.
B)
Temporal method, current rate, USD 35.0 million.
C)
Current method, current rate, USD 35.0 million.


Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Long-term debt under the temporal method is considered a monetary liability and is translated using the current rate. Hence, 290 × 0.1208 = USD 35.0 million. (Study Session 6, LOS 24.d)
Which of the following statements is most accurate with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?
A)
Inventory is translated at historical rates, and COGS is translated at the current rate.
B)
Inventory is translated at the current rate while COGS is translated at historical rates.
C)
Inventory is translated at historical rates, and COGS is translated at historical rates.


If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at historical rates. (Study Session 6, LOS 24.c)
作者: rgonzalez    时间: 2012-3-29 16:09

Which example least accurately describes pure balance sheet and income statement ratios?
A)
All pure balance sheet ratios are affected by the all-current translation method.
B)
The current ratio is a pure balance sheet ratio.
C)
When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled.


All pure balance sheet ratios are unaffected by the all-current translation method.
作者: sabaruch    时间: 2012-3-29 16:19

Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2001 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents). One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO) inventory assumption and was bought and sold evenly throughout the year.
Scud Co. Int'l
Balance Sheet (in SF thousands)

Dec. 31, 2001

Dec. 31, 2002
Cash & accounts receivables (A/R)400600
Inventory500500
Net Fixed Assets

700

600

Total Assets1,6001,700

Accounts payable (A/P)

100

200
Long-term debt200100
Common Stock1,3001,300
Retained Earnings

0

100

Total Liabilities1,6001,700

Income Statement (in SF thousands)
December 31, 2002

In SF

Sales7,000
Cost of Goods Sold (COGS)(6,800)
Depreciation(100)
Translation Gain/Loss--
Net Income100

Assume that the functional currency is the U.S. dollar when answering the following questions.The level of long-term debt on the 2002 balance sheet would be:
A)
$77.
B)
$85.
C)
$80.


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 U.S. dollar is the functional currency and the reporting currency, the temporal method should be used to remeasure the Swiss Franc into U.S. dollars. With the temporal method monetary assets like cash and monetary liabilities are remeasured at the current exchange rate. Long term debt is considered a monetary asset, thus use the current rate: 100SF × 0.85$/SF = $85.

Depreciation would be:
A)
$77.
B)
$85.
C)
$80.


The temporal method uses the historical rate to remeasure depreciation: 100SF × 0.77$/SF = $77.
The level of common stock on the 2002 balance sheet would be:
A)
$1,105.
B)
$1,001.
C)
$1,040.


Common stock uses the historical rate for both the temporal method and the current rate method: 1300SF × 0.77$/SF = $1001.
作者: sabaruch    时间: 2012-3-29 16:20

Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method?
A)
Cost of goods sold.
B)
Tax expense.
C)
Equity.


Taxes are converted at the same rate (average rate) under both methods. Equity under the temporal method is a mixed rate whereas under the current rate method it is at the current rate.  COGS under the temporal method is at the historical rate and under the current rate method it is at the average rate.
作者: sabaruch    时间: 2012-3-29 16:20

Which of the following ratios is unaffected by the choice between the current rate method and the temporal method?
A)
Accounts receivable turnover.
B)
Net profit margin.
C)
Debt/Assets.


Both accounts receivable and sales are converted at the same rate so the ratio is the same under each method.
作者: sabaruch    时间: 2012-3-29 16:21

Fronttalk Company is a U.S. multinational firm with a 100% stake in a foreign subsidiary. The foreign subsidiary's local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the subsidiary accounts for inventories using the last in, first out (LIFO) inventory cost-flow assumption and all purchases were made toward the end of the year. The gross profit margin as computed under the temporal method would most likely be:
A)
higher than the same ratio computed under the current rate method.
B)
equal to the same ratio computed under the current rate method.
C)
lower than the same ratio computed under the current rate method.


The foreign company uses LIFO so new purchases are flowing to cost of goods sold (COGS) and most purchases occurred toward the end of the year, so the current rate of exchange is our best guess for the COGS account. Since the local currency is depreciating, it is taking more foreign currency units to buy a dollar in the more recent periods and as a result, COGS as measured in U.S. dollars is lower and the gross profit margin is higher under the temporal method.
作者: sabaruch    时间: 2012-3-29 16:22

Under U.S. GAAP, the temporal method is preferred to the current rate method in hyperinflationary economies because the temporal method:
A)
is easier to perform under hyperinflation.
B)
results in non-monetary asset values that are a better proxy for the economic values of those assets.
C)
provides better conversions of subsidiary revenues.


The temporal method results in non-monetary asset values that are a better proxy for the economic values of those assets than those obtained under the current rate method. Both methods convert revenues and SG&A at the average rate so there could be no clear preference when considering these measures.
作者: sabaruch    时间: 2012-3-29 16:22

In a hyperinflationary economy, translation under the current rate method will most likely result in relatively:
A)
high balance sheet values for long term assets.
B)
low balance sheet values for long term liabilities.
C)
high translation gains.


In a hyperinflationary economy, translation under the current rate method will most likely result in relatively low balance sheet values for assets and liabilities. Translation losses will also occur.
作者: sabaruch    时间: 2012-3-29 16:25

The nation of Deadoa is experiencing hyperinflation. A subsidiary of a multinational operating in Deadoa will notice changes in its purchasing power and in its financial results as reported on its parent company's financial statements. Which of the following best describes the situation for a subsidiary operating in Deadoa? Purchasing power will:
A)
dramatically appreciate and the local currency will be rapidly appreciating against the presentation currency.
B)
quickly deteriorate and the local currency will be rapidly appreciating against the presentation currency.
C)
quickly deteriorate and the local currency will be rapidly depreciating against the presentation currency.



Purchasing power and Deadoa currency will depreciate.
作者: sabaruch    时间: 2012-3-29 16:27

In reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment?
A)
Typically not affected because their local currency-denominated values decrease to offset the impact of inflation.
B)
Typically not affected because their local currency-denominated values increase to offset the impact of inflation.
C)
All non-monetary accounts are re-measured at the current rate.


Typically not affected because their local currency-denominated values increase to offset the impact of inflation (i.e., real estate values typically rise with inflation).
作者: sabaruch    时间: 2012-3-29 16:36

A hyperinflationary economy is typically defined as one that has:
A)
cumulative inflation that exceeds 100% over a three-year period.
B)
an inflation rate that exceeds 10% per year for three consecutive years.
C)
cumulative inflation that exceeds 100% over a twelve-year period.


The typical definition is that cumulative inflation exceeds 100% over a three-year period.
作者: sabaruch    时间: 2012-3-29 16:36

Assume U.S. GAAP for this question.) For a subsidiary in a hyperinflationary economy, the functional currency should be the:
A)
Local currency.
B)
Subsidiary's operating currency.
C)
Parent's currency.


The functional currency should be the parent's currency. Under IFRS, the firm would restate the financials for inflation, and then translate under the current rate method.
作者: sabaruch    时间: 2012-3-29 16:37

Which translation method should be used under a hyperinflationary economy when using U.S. GAAP?
A)
All-current, because dividends are translated at the rate that applied when they were issued.
B)
Temporal, because all non-monetary accounts are re-measured at the historical rate.
C)
Monetary/non-monetary, because all monetary accounts are translated at the historical rate.


The temporal method is more appropriate because all non-monetary accounts are remeasured at the historical rate. Under IFRS, the financials would be restated for inflation, and then translated under the current rate method.



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