sabaruch

Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2001 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents). One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO) inventory assumption and was bought and sold evenly throughout the year.

Scud Co. Int'l
Balance Sheet (in SF thousands)
	Dec. 31, 2001	Dec. 31, 2002
Cash & accounts receivables (A/R)	400	600
Inventory	500	500
Net Fixed Assets	700	600
Total Assets	1,600	1,700

Accounts payable (A/P)	100	200
Long-term debt	200	100
Common Stock	1,300	1,300
Retained Earnings	0	100
Total Liabilities	1,600	1,700

Income Statement (in SF thousands)
December 31, 2002
	In SF
Sales	7,000
Cost of Goods Sold (COGS)	(6,800)
Depreciation	(100)
Translation Gain/Loss	--
Net Income	100

Assume that the functional currency is the U.S. dollar when answering the following questions.The level of long-term debt on the 2002 balance sheet would be:

A) $77.

B) $85.

C) $80.

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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 U.S. dollar is the functional currency and the reporting currency, the temporal method should be used to remeasure the Swiss Franc into U.S. dollars. With the temporal method monetary assets like cash and monetary liabilities are remeasured at the current exchange rate. Long term debt is considered a monetary asset, thus use the current rate: 100SF × 0.85$/SF = $85.

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Depreciation would be:

A) $77.

B) $85.

C) $80.

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The temporal method uses the historical rate to remeasure depreciation: 100SF × 0.77$/SF = $77.

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The level of common stock on the 2002 balance sheet would be:

A) $1,105.

B) $1,001.

C) $1,040.

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Common stock uses the historical rate for both the temporal method and the current rate method: 1300SF × 0.77$/SF = $1001.

sabaruch

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

A) Cost of goods sold.

B) Tax expense.

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.

sabaruch

Which of the following ratios is unaffected by the choice between the current rate method and the temporal method?

A) Accounts receivable turnover.

B) Net profit margin.

C) Debt/Assets.

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Both accounts receivable and sales are converted at the same rate so the ratio is the same under each method.

sabaruch

Fronttalk Company is a U.S. multinational firm with a 100% stake in a foreign subsidiary. The foreign subsidiary's local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the subsidiary 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.

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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.

sabaruch

Under U.S. GAAP, the temporal method is preferred to the current rate method in hyperinflationary economies because the temporal method:

A) is easier to perform under hyperinflation.

B) results in non-monetary asset values that are a better proxy for the economic values of those assets.

C) provides better conversions of subsidiary revenues.

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The temporal method results in non-monetary asset values that are a better proxy for the economic values of those assets than those obtained under the current rate method. Both methods convert revenues and SG&A at the average rate so there could be no clear preference when considering these measures.

sabaruch

In a hyperinflationary economy, translation under the current rate method will most likely result in relatively:

A) high balance sheet values for long term assets.

B) low balance sheet values for long term liabilities.

C) high translation gains.

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In a hyperinflationary economy, translation under the current rate method will most likely result in relatively low balance sheet values for assets and liabilities. Translation losses will also occur.

sabaruch

The nation of Deadoa is experiencing hyperinflation. A subsidiary of a multinational operating in Deadoa will notice changes in its purchasing power and in its financial results as reported on its parent company's financial statements. Which of the following best describes the situation for a subsidiary operating in Deadoa? Purchasing power will:

A) dramatically appreciate and the local currency will be rapidly appreciating against the presentation currency.

B) quickly deteriorate and the local currency will be rapidly appreciating against the presentation currency.

C) quickly deteriorate and the local currency will be rapidly depreciating against the presentation currency.

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Purchasing power and Deadoa currency will depreciate.

sabaruch

In reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment?

A) Typically not affected because their local currency-denominated values decrease to offset the impact of inflation.

B) Typically not affected because their local currency-denominated values increase to offset the impact of inflation.

C) All non-monetary accounts are re-measured at the current rate.

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Typically not affected because their local currency-denominated values increase to offset the impact of inflation (i.e., real estate values typically rise with inflation).

sabaruch

A hyperinflationary economy is typically defined as one that has:

A) cumulative inflation that exceeds 100% over a three-year period.

B) an inflation rate that exceeds 10% per year for three consecutive years.

C) cumulative inflation that exceeds 100% over a twelve-year period.

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The typical definition is that cumulative inflation exceeds 100% over a three-year period.

sabaruch

Assume U.S. GAAP for this question.) For a subsidiary in a hyperinflationary economy, the functional currency should be the:

A) Local currency.

B) Subsidiary's operating currency.

C) Parent's currency.

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The functional currency should be the parent's currency. Under IFRS, the firm would restate the financials for inflation, and then translate under the current rate method.