Question 6 Melnick Metals, a U.S.-based company that mines and processes both precious and industrial metals, operates subsidiaries throughout the world. Melnick uses the temporal method of accounting for currency effects and FIFO accounting for inventory. Newly hired CFO Carl Crandall is concerned about several of Melnick’s policies. The company’s functional currency for European and African units is the euro, while the yen is the functional currency for all Asian subsidiaries. Crandall prepares the consolidated financial statements in U.S. dollars. Crandall does not believe Melnick is following accounting rules regarding its choice of functional currency. He prepares a report for the board recommending several changes: § Because most of our African subsidiaries operate in countries with hyperinflationary economies, their functional currency should be the U.S. dollar. § Most of our autonomous Asian operations are located in countries with fairly stable currencies and should use their local currencies as functional currencies. § The local currency used by our Malakland unit south of Nepal is controlled by the warlords currently in power, who have also implemented price controls. The unit should continue to use the yen as its functional currency. § Melnick’s units in Morocco and Egypt are just sales offices that do not operate independently. As such, they should use the euro as their functional currency. The temporal method is much more complicated than the all-current method, and Crandall would like to limit its use as much as possible. Crandall does not like to use historical exchange rates when it is not necessary. Melnick Metals started operations in Canagua in 2001. The unit consists of a plant, a sales office, and a fleet of trucks, and operates independently. Canagua’s national currency is called the porto. Between the beginning of 2002 and the end of 2004, consumer prices in Canagua rose 75 percent. At the end of 2004, the asset portion of the Canagua unit’s balance sheet looked like this: Cash | 5,600 portos | Inventory | 12,670 portos | Fixed assets | 37,890 portos | Total assets | 56,160 portos |
For accounting purposes, the current exchange rate for the porto is $0.16, the average exchange rate is $0.18 for all assets, and the historical exchange rate for all assets is $0.21. Crandall must translate the Canagua unit’s results into Melnick’s reporting currency following standard accounting rules. Part 1) If the board acts on all four of Melnick’s recommendations, Crandall must use the all-current method to translate the: A) autonomous Asian subsidiaries’ local results into the U.S. dollar. B) Morocco and Egypt subsidiaries’ local results into the euro. C) Malakland subsidiary’s local results into the yen. D) results of subsidiaries in hyperinflationary African countries from local currencies into the U.S. dollar. Part 2) Using the temporal method, which of the following accounts should not be translated at the historical rate? A) SG&A expense. B) Depreciation expense. C) Inventory. D) Common stock. Part 3) Assuming the euro depreciates in the next year and Crandall uses the proper accounting technique, what direction are inventory and operating profit margins for Melnick’s French and German operations most likely to move when they are translated into U.S. dollars?
| Inventory | Operating margins | A) | Lower | Higher | B) | Lower | No charge | C) | Higher | No charge | D) | Higher | Higher |
Part 4) In U.S. dollars, the total assets of the Canagua subsidiary are valued closest to: A) $10,108.80. B) $8,985.60. C) $11,513.60. D) $10,880.10. Part 5) Which of Crandall’s arguments regarding functional currencies is least valid?
A) Because most of our African subsidiaries operate in countries with hyperinflationary economies, their functional currency should be the U.S. dollar. B) Most of our autonomous Asian operations are located in countries with fairly stable currencies and should use their local currencies as functional currencies. C) The local currency used by our Malakland unit south of Nepal is controlled by the warlords currently in power, who have also implemented price controls. The unit should continue to use the yen as its functional currency. D) Melnick’s units in Morocco and Egypt are just sales offices that do not operate independently. As such, they should use the euro as their functional currency. Part 6) Using the all-current method, if the foreign currency appreciated during the year relative to the parent company’s currency, how will the following ratios most likely move when they are translated to the reporting currency?
| Return on fixed assets | Debt / equity | A) | Lower | Lower | B) | Higher | No change | C) | Lower | No change | D) | Higher | Lower |
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发表于 2008-5-17 17:09
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