Q97. 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 all-current 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)   lower debt-to-equity ratio and a lower debt-to-capital ratio.

C)   higher debt-to-equity ratio and a lower debt-to-capital ratio.

Q98. 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 all-current 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.

答案和详解如下：

Q97. 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 all-current 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)   lower debt-to-equity ratio and a lower debt-to-capital ratio.

C)   higher debt-to-equity ratio and a lower debt-to-capital ratio.

Correct answer is B)

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 all-current 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 all-current 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 all-current method.

Assets under the temporal method are also effectively translated at a mixed rate under the temporal method, and the current rate under the all-current 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 all-current method.

Q98. 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 all-current 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.

Correct answer is B)

If the ruble was depreciating, Evert would report a higher gross profit margin under the all-current method. Under both the temporal and all-current 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 all-current 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.