Reading 24: Multinational Operations LOS d ～ Q99-100

regarding, white, following, statements

Q99. 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) Fixed assets are higher under the temporal method if the local currency appreciates.

C) Depreciation is distorted in the temporal method.

Q100. 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.

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发表于 2009-1-20 13:29 | 只看该作者

答案和详解如下：

Q99. 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) Fixed assets are higher under the temporal method if the local currency appreciates.

C) Depreciation is distorted in the temporal method.

Correct answer is B)

Q100. 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.

Correct answer is B)

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