土豆妮

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) $2,020.

B) $2,600.

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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土豆妮

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.

土豆妮

Which of the following statements concerning the translation of a subsidiary’s financial statement and the subsidiary’s ratios is FALSE?

A) Ratios calculated under the all-current method will not differ from those calculated under the temporal method.

B) The subsidiary's ratios in the local currency will differ from ratios calculated after translation.

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

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

土豆妮

Which of the following subsidiary ratios will be affected by the translation adjustment under the all-current method?

A) Return on equity.

B) Gross margin.

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.

土豆妮

Which of the following statements most accurately describes a financial effect of translation?

A) Accounts receivable turnover ratios are affected.

B) The debt/equity ratio is higher under re-measurement if the foreign currency depreciates.

C) Use of the temporal method may distort profit margins.

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Profit margins may be distorted, especially if FIFO inventory accounting is used.

土豆妮

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.

土豆妮

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 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.

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.

土豆妮

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 $2,401.

B) $1,845 and $2,361.

C) $1,771 and $2,361.

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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.

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.

土豆妮

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.

土豆妮

The U.S. dollar has been depreciating relative to the local currency over the past year. The use of the 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 operating profit margin (EBIT/S) relative to what the ratio would have been without the effects of translation?

A) The ratio will fall.

B) There will be no affect on the ratio.

C) The ratio will rise.

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Under the current rate method, the average rate is applied to all income statement accounts. Hence, since the average rate is applied to both numerator and denominator of the equation and the ratio will not change.