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# Reading 24: Multinational Operations LOS d ～ Q88-89

Q88. 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 accounts receivable and inventory respectively are:

A)   \$1,845 and \$2,460.

B)   \$1,801 and \$2,401.

C)   \$1,845 and \$2,401.

Q89. Which of the following statements is most accurate concerning foreign currency translation?

A)   In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method.

B)   The receivables turnover ratio is identical under both the temporal method and the current rate method.

C)   In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method.

Q88. 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 accounts receivable and inventory respectively are:

A)   \$1,845 and \$2,460.

B)   \$1,801 and \$2,401.

C)   \$1,845 and \$2,401.

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, then the current rate method is employed to translate the SF amounts into USD. Hence, A/R = 0.615 × 3,000 = \$1,845 and 0.615 × 4,000 = \$2,460.

Q89. Which of the following statements is most accurate concerning foreign currency translation?

A)   In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method.

B)   The receivables turnover ratio is identical under both the temporal method and the current rate method.

C)   In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method.

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 receivables turnover (sales / receivables) is unaffected because both methods translate sales at the average rate and accounts receivable at the current rate.

When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for cost of goods sold (COGS) is the average rate which is also the rate used for COGS with the current rate method.

With an appreciating currency the fixed asset turnover ratio (sales / fixed assets) will be higher using the temporal method because the temporal method uses the historical rate for fixed assets whereas the current rate method uses the current rate.  They both use the same average rate for sales.

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