CFA Level 2 - Financial Reporting: Multinational Ops

CFA Level 2 - Financial Reporting and Analysis Session 6 - Reading 25 Multinational Operations-LOS d (Practice Questions, Sample Questions) 1. Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method? A) Tax expense. [Explanation: 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] B) Cost of goods sold. C) Equity 2.1 Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in /$. Yen/Dollar Exchange Rate December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were paid to Wasson Brothers 145 Exchange rate on date of stock issue and acquisition of fixed assets. 100 If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen to dollars, she should use which of the following exchange rates? A) 140. [Explanation: Ideally, all of the components on the income statement would be translated at the exchange rate that was in effect on the day that the transactions took place. For example, all sales that occurred on March 15, 2002, would be translated at the exchange rate that prevailed on that date. Likewise, if a large portion of inventory was purchased on October 27, 2002, then the appropriate portion of cost of goods sold would be calculated using the exchange rate from October 27, 2002. This however, is not especially practical, especially for a very large company with many transactions. The common practice is to use the average exchange rate for the accounting year, in this case 140 JPY/USD] B) 150. C) 130 2.2 Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (/$) to use in translating Kasamatsu's reported dividends into U.S. dollars? A) 150. B) 140. C) 145 [Explanation: Because an asset is, in effect, being transferred from the balance sheet of the subsidiary to that of the parent (in this case the asset is cash in the form of a dividend) on a known date, it is appropriate to use the exchange rate that prevails on the dividend date] 3. The Herlitzka Company, a U.S. multinational firm, has a 100% 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 $0.6150 The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows: Accounts receivable = 3,000 Inventory = 4,000 Fixed assets = 12,000 Accounts payable = 2,000 Long-term debt = 5,000 Common stock = 10,000 Retained earnings = 2,000 Net income = 2,000 The total value of net monetary assets is equal to: A) 12,000 SF. B) -4,000 SF. [Explanation: Monetary assets and liabilities include cash, A/R, A/P and Long-term debt. Hence, net monetary assets is equal to 3,000 ? (2,000 + 5,000) = -4,000 SF] C) 3,000 SF 4.1 Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in yen/$. Yen/Dollar Exchange Rate December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were paid to Wasson Brothers 145 Exchange rate on date of stock issue and acquisition of fixed assets. 100 Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. However, she must use the appropriate rate to convert the numbers from yen into dollars. What is the appropriate exchange rate (yen/$) to use in converting Kasamatsu's assets? A) 150. [Explanation: Because the current method of currency translation is being used all assets and liabilities are translated using the exchange rate in effect on the balance sheet date. In this particular case, the exchange rate prevailing on December 31, 2002, is the appropriate rate] B) 140. C) 100 4.2 Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's liabilities into U.S. dollars? A) 140. B) 150. [Explanation: Under the current method, assets and liabilities are translated at the exchange rate prevailing on the balance sheet date] C) 100 4.3 Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's capital stock into U.S. dollars? A) 100. [Explanation: Because WB issued stock and acquired Kasamatsu and their capital stock, they must carry that capital stock on their balance sheet at historical cost, which will be the basis for calculating depreciation expense. Therefore, even though this is a balance sheet item, the exchange rate that prevailed on the date of the acquisition of the capital stock must be used to translate into the reporting currency. Using the exchange rate that was effective on the balance sheet date would be improper, as this would cause the "historical" cost of the capital stock to fluctuate] B) 130. C) 150