bigredhockey55

Edmonton Oilfield Supply has made an equipment sale in Venezuela in the amount of VEF 15,000,000. On the day of the sale, the exchange rate is 1.7519 VEF per 1 Canadian dollar. 90 days later, when the Venezuelan firm pays for the equipment, the exchange rate is 1.6326. As a result of the change in the exchange rate, Edmonton will recognize a:

A) loss of $1,789,500.

B) gain of $1,096,104.

C) gain of $625,666.

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On the day of the sale, Edmonton will record an account receivable of 15m/1.7519 = $8,562,133. When the payment is received and converted to CAD, the realized amount will be 15m/1.6326 = $9,187,799. As a result of the appreciating VEF, Edmonton will realize a gain of $9,187,799 − 8,562,133 = CAD 625,666.

pacmandefense

A Canadian firm owns a foreign subsidiary in the U.S. In 2002, sales were USD1,000,000 and the USD/CAD exchange rate was 0.6329. In 2003, sales were also USD1,000,000 but the exchange rate was 0.7484. What is the impact of the change in the value of the CAD on the parent company’s translated sales? Sales will:

A) increase by 18%.

B) decline by 15%.

C) decrease by 18%.

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While sales were flat at USD 1,000,000 in local currency terms, after translation the parent firm would report sales of CAD 1,336,184 for 2003 (= USD 1,000,000 / 0.7484) versus sales of CAD 1,580,028 for 2002 (= USD 1,000,000 / 0.6329). The 15% sales decline reported by the Canadian firm (CAD 1,336,184 versus CAD 1,580,028) is a flow effect. Even though there was no sales growth in the subsidiary, the parent firm still shows a 15% decrease in revenues from the subsidiary due solely to exchange rate effects. Note that because the subsidiary sales are constant the total exchange rate effect can be measured as (0.6329 / 0.7484) − 1 = −0.15.

pacmandefense

Which of the following statements regarding the functional currency is least accurate? The functional currency:

A) is determined by management.

B) is remeasured into the reporting currency under the temporal method.

C) is the currency of the primary economic environment in which the foreign subsidiary generates and expends cash.

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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.

The local currency is remeasured into the functional currency under the temporal method. The functional currency is translated into the reporting currency using the current rate method.

pacmandefense

The local currency is best characterized as:

A) the preferred functional currency for subsidiaries that are highly integrated with the parent.

B) translated into the functional currency under the current rate method.

C) the currency of the country in which the foreign subsidiary is located.

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The local currency is best described as the currency of the country in which the foreign subsidiary is located. If a subsidiary is highly integrated with its parent or operating in a high-inflation environment, the functional currency is the parent’s currency. Local currencies are remeasured under the temporal method

pacmandefense

Which of the following statements describing the choice of the functional currency is least accurate? The functional currency should be the same as the parent’s reporting currency if the subsidiary is:

A) highly integrated with the parent where the local currency, prices, and some costs are controlled or restricted.

B) highly integrated with the parent where the local currency, prices, and some costs are not controlled or restricted.

C) mostly independent from the parent.

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The preferred functional currency for subsidiaries that are mostly independent of the parent is the local currency. For highly integrated subsidiaries (regardless of local conditions), or for subsidiaries operating in high-inflation environments