bigredhockey55

Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in Yen/dollars.

Yen / Dollar Exchange Rate
December 31, 2005	150
December 31, 2004	130
2005 Average	140
2004 Average	120
Exchange rate on date that 2005 dividends were paid to Wasson Brothers	145
Exchange rate on date of stock issue and acquisition of fixed assets	100

Ashley Jameson is an analyst with Henderson-Wells, an investment banking firm in New York, and is the chief analyst covering WB. She believes that the enormous success of the trading cards has contributed greatly to WB's bottom line. However, she believes that this effect may be misstated in the company's financial statements because of the recent volatility in exchange rates. Many analysts at other major investment banking firms have been raising their ratings on WB because of the recent earnings growth. Jameson, however, wants to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's hot new product and not a result of an exchange rate fluctuation. The following are the financial statements of Kasamatsu, stated in thousands of yen.

Financial Statements for Year Ending December 31, 2005 (in thousands of yen)
Statement of Income and Retained Earnings
Sales			700,000
Expenses
	Cost of goods sold (COGS)		280,000
	Depreciation		126,000
	SG&A		77,000
		Total Expenses	483,000
Earnings before taxes (EBT)			217,000
Income Tax Expense			98,000
Net Income			119,000
Retained Earnings: December 31, 2004			250,000
			369,000
Dividends			58,000
Retained Earnings: December 31, 2005*			311,000
*Retained earnings on 12/31/2005 were US $2 million

Balance Sheet
Assets
	Cash and receivables		60,000
	Inventory		180,000
	Land		200,000
	Fixed assets		346,000
		Total assets	786,000
Liabilities and stockholder's equity
	Liabilities		300,000
	Capital stock		175,000
	Retained earnings		311,000
		Total liabilities and stockholder's equity	786,000

Before Jameson can perform any financial statement analysis she needs to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the following is the most accurate method and reasoning?

A) Current method because the local currency is the USD.

B) Temporal method because the local currency differs from the functional currency.

C) Current method because the functional currency is the yen.

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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.

Under US GAAP the current method must be used to translate the yen financial statements into USD, the reporting currency. Had Kasamatsu been operating in a highly inflationary environment or had the local and functional currency not been the same, then WB would be required to use the temporal method.

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Jameson must also determine how the fluctuation in the yen vs. the dollar has affected Kasamatsu's earnings in the reporting currency. Which of the following best describes the effect of changes in the yen/dollar rate has had on earnings in the reporting currency? Earnings have:

A) increased because the yen is depreciating versus the USD.

B) decreased because the yen is depreciating versus the USD.

C) increased because the yen is appreciating versus the USD.

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Examination of the history of the exchange rate shows that both the year-end and average exchange rates are lower in 2005 than in 2004 (lower in that the yen has weakened vs. the USD). Therefore, Kasamatsu has to earn more yen than it did in the previous year for WB to be able to report the same dollar amount of net income. This means that the true economic performance of Kasamatsu is understated when viewed as a component of WB's net income.

bigredhockey55

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

C) 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.

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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

bigredhockey55

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.

bigredhockey55

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

A) rate that existed when the equity was issued.

B) exchange rate as of the balance sheet date.

C) present value of weighted average rate.

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The historical rate is used.

bigredhockey55

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

Revenues

Accounts receivable

A) Average rate Current rate

B) Average rate Historical 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.

bigredhockey55

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) historical rate.

B) average 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.

bigredhockey55

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.

bigredhockey55

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.

bigredhockey55

Which of the following statements is least accurate regarding the use of the temporal method for foreign exchange accounting?

A) All nonmonetary assets and liabilities are translated at the historical rate of exchange.

B) All monetary assets are translated at the current rate of exchange.

C) Under the temporal method, the foreign exchange gain or loss is placed on the balance sheet in the equity section.

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Under the temporal method, the foreign exchange gain or loss is placed on the income statement.

bigredhockey55

Which of the following general statements is most accurate with respect to the temporal method? Nonmonetary assets are translated at:

A) the average rate during the year.

B) historical rates at the time of the transaction.

C) the current rate.

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As a general rule in using the temporal method, nonmonetary assets are translated using the historical rate at the time of the transaction