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 return on equity (ROE) relative to what the ratio would have been without the effects of translation?

A) ROE will most likely decline.

B) ROE will most likely rise.

C) The impact of the depreciation of the US dollar on ROE is indeterminate.

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ROE = Net Income / Equity. Under the current rate method, the equity accounts as a whole are translated at the current rate whereas net income is translated at the average rate. Since the dollar is depreciating, each foreign currency unit is buying more dollars in the denominator relative to the numerator of the equation. Hence, the denominator is increasing and the entire ratio falls.

土豆妮

The U.S. dollar has been appreciating relative to the local currency over the past year. The use of the temporal method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/FA) relative to what the ratio would have been without the effects of translation assuming no new fixed assets were purchased throughout the year?

A) There will be no effect on the ratio.

B) The ratio will rise.

C) The ratio will fall.

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Since the dollar is appreciating the local currency is depreciating thus each foreign currency unit is buying more dollars in the past relative to the present. Fixed assets are remeasured at the historical rate and sales are remeasured at the average rate under the temporal method. Since the historical rate is buying more dollars relative to the average rate, the denominator is staying the same whereas the numerator is getting smaller thus the ratio is falling.

土豆妮

Which of the following ratios is unaffected by the choice between translation under the all-current method and remeasurement under the temporal method?

A) Accounts payable turnover.

B) Current ratio.

C) Quick ratio.

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All of the components of the quick ratio (cash and cash equivalents, accounts receivable, and accounts payable) are converted at the same rate under both methods so the ratio is unaffected by the method. The current ratio is the same as the quick ratio except it also contains inventory which is translated at the historical rate with the temporal method and at the current rate with the all-current 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.

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 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.