Reading 25: Multinational Operations-LOS d 习题精选 2011, currency, balance, company, center

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

LOS d: Calculate the translation effects, evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s currency, and analyze the different effects of the current rate method and the temporal method on the subsidiary's financial ratios.

 

 

Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method?

A) Tax expense.

B) Cost of goods sold.

C) Equity.

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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.

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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) $5,902 and $3,075.

C) $6,150 and $3,075.

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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.

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.

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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.

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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.

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.

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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 not change.

B) The ratio will fall.

C) The ratio will rise.

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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.

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Which example least accurately describes pure balance sheet and income statement ratios?

A) The current ratio is a pure balance sheet ratio.

B) All pure balance sheet ratios are affected by the all-current translation method.

C) When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled.

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All pure balance sheet ratios are unaffected by the all-current translation method.

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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.

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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.

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The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005.

Cash	134
Accounts receivable	270
Inventory	404
Net fixed assets	1347
Total assets	2155

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) $2,178.

C) $2,133.

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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.

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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) The statement of cash flows is not affected by the choice of translation.

C) Ratios calculated under the current rate method will not differ from those calculated under the temporal method.

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Ratios calculated under the current rate method will differ from those calculated under the temporal method.

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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)
Cash	20		0.25		$80
Accounts receivable	30		0.25		120
Inventory	100		0.3125		320
Fixed assets (net)	500		0.3333		1,500
Total assets	650				$2,020
Accounts payable	50		0.25		$200
Capital stock	380		0.3333		1,140
Retained earnings	220		--		680
Total liabilities and equity	650				$2,020

Acer Tool & Die Company Income Statement For year ending December 31, 2002 (Amounts in millions of Chad)
Revenues	1,000
Cost of sales	700
Depreciation expense	50
Selling expense	30
Net income	220

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.

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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.

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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 ATE year="2005" day="31" M="M" >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 ATE year="2005" day="31" M="M" >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 ATE year="2004" day="31" M="M" >Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at ATE year="2002" day="31" M="M" >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) $1,400.

B) $1,750.

C) $1,167.

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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

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On APJ's 2005 balance sheet, the level of accounts receivable is U.S. dollars would be:

A) $110.

B) $165.

C) $132.

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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

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On APJ's 2005 balance sheet, the level of fixed assets in U.S. dollars would be:

A) $156.

B) $234.

C) $187.

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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

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