Reading 24: Multinational Operations LOS d ～ Q90-91 following, method, black, white

mayanfang1

Q90. Which of the following ratios is affected by translation under the all-current method?

A)   Net profit margin.

B)   Fixed asset turnover ratio.

C)   Debt/Assets ratio.

Q91. Fronttalk Company is a U.S. multinational firm with operations in several foreign countries. It has a 100% stake in

     a German subsidiary. The foreign subsidiary's local currency has depreciated against the U.S. dollar over the

     latest financial statement reporting period. In addition, the German firm 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.

mayanfang1

答案和详解如下：

Q90. Which of the following ratios is affected by translation under the all-current method?

A)   Net profit margin.

B)   Fixed asset turnover ratio.

C)   Debt/Assets ratio.

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.
Recall that all pure income statements and balance sheet ratios are unaffected by translation under the all-current 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).

Q91. Fronttalk Company is a U.S. multinational firm with operations in several foreign countries. It has a 100% stake in

     a German subsidiary. The foreign subsidiary's local currency has depreciated against the U.S. dollar over the

     latest financial statement reporting period. In addition, the German firm 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.

Correct answer is A)

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 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.

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hitman1986

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