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

土豆妮

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

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

 

 

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

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

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

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

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

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

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

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

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

 

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

A) the current rate method.

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

C) the temporal method.

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

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

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

A) $500,000.

B) $550,000.

C) $250,000.

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

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

A) +$85,000,000 pesos.

B) +$5,000,000 pesos.

C) +$35,000,000 pesos.

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Exposure under the current rate method is simply equity.

Beginning exposure = 80,000,000 pesos

Ending exposure = 85,000,000 pesos

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

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

A) the statement of cash flows.

B) the equity accounts.

C) the income statement.

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

土豆妮

Under the current rate method, common stock is translated by using the:

A) exchange rate as of the balance sheet date.

B) present value of weighted average rate.

C) rate that existed when the equity was issued.

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The historical rate is used.

土豆妮

Dave Iverson, CFA, is analyzing the recently released financial statement of Global Corp., a large multinational manufacturing company with production facilities across Europe and Southeast Asia. The company’s choice of functional currency is not disclosed, but Iverson does notice that Global Corp. does not have any cumulative translation adjustments (CTA) on its balance sheet. Which of the following statements is most accurate based upon Iverson’s observation?

A) The current rate method of foreign currency translation is used exclusively.

B) The temporal method of foreign currency translation is used exclusively.

C) The temporal method of foreign currency translation is used for at least some of its subsidiaries.

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The choice of functional currency is the determining factor as to which method of foreign currency translation is utilized. If no CTA appears on the balance sheet, then the parent currency must be the functional currency for all of the company’s subsidiaries and only the temporal method is used.

土豆妮

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.

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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.

土豆妮

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) 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.

C) If the parent currency is the functional currency, the temporal method is applied and exposure is equal to net monetary assets.

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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.

土豆妮

At what exchange rate are revenues and accounts receivable translated under the current rate method?

Revenues

Accounts receivable

A) Average rate Historical rate

B) Average rate Current rate

C) Current rate Current rate

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Under the current rate method, revenues are translated at the average rate; accounts receivable are translated at the current rate.

土豆妮

Which of the following statements is NOT a characteristic of the current rate method of accounting for foreign currency translation?

A) All asset accounts are translated at the current rate of exchange as of the balance sheet date.

B) Nonmonetary liabilities are translated at the historical rate of exchange.

C) The common stock account is translated at the rate of exchange that applied when the equity was issued.

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Under the current rate method, all liabilities are translated at the current rate of exchange.

土豆妮

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.

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As a general rule for the current rate method, all revenues and operating expenses are translated using the average rate.

土豆妮

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) average rate.

B) historical rate.

C) current rate.

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As a general rule for the temporal method, all revenues and operating expenses (excluding COGS) are translated using the average rate.

土豆妮

Which of the following statements is least accurate regarding accounting for foreign currency translations? The:

A) current rate method applies the current exchange rate to all balance sheet accounts.

B) temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company.

C) current rate method applies the average exchange rate to all income statement accounts.

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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.