Profitability Analysis and Analytical Issues Paper 8

1

U.S. GAAP state that transaction gains and losses have direct cash flow effects when foreign-denominated monetary assets are settled in amounts greater or less than the functional currency equivalent of the original transactions. These transaction gains and losses should be reflected in income






2

U.S. GAAP define foreign currency transactions as those denominated in other than an entity’s functional currency. Transaction gains and losses are reported as






3

Unrealized foreign currency gains and losses included in the other comprehensive income section of a consolidated balance sheet represent






4

When restating financial statements originally recorded in a foreign currency,






5

Formerly, there was significant disagreement among informed observers regarding the basic nature, information content, and meaning of results produced by various methods of translating amounts from foreign currencies into the reporting currency. Current U.S. GAAP direct that organizations






6

The Brinjac Company owns a foreign subsidiary Included among the subsidiary’s liabilities for the year just ended are 400,000 drongos of revenue received in advance, recorded when $.50 was the dollar equivalent per drongo, and a deferred tax liability for 187,500 drongos, recognized when $.40 was the dollar equivalent per drongo. The rate of exchange in effect at year-end was $.35 per drongo. If the U.S. dollar is the functional currency, what total should be included for these two liabilities on Brinjac’s consolidated balance sheet at year end?






7

FreezeIt, Inc., is a manufacturer of refrigeration systems based out of the United States with one subsidiary in Canada. The Canadian subsidiary exports all of its manufactured products to the United States and does not currently sell any of its manufactured products in Canada. The Canadian subsidiary incurs all of its expenses in Canadian dollars, and all of its revenues are in U.S. dollars. The U.S. operations are conducted only in U.S. dollars. What financial impact will a rise in the Canadian dollar against the U.S. dollar have on the Canadian subsidiary assuming no operational changes?






8

Willow World is a privately-held manufacturer of home furnishings based out of the United States. Willow World has one subsidiary in Mexico that exports all of its manufactured products to the United States and does not currently sell any of its manufactured products in Mexico. The Mexican subsidiary incurs all of its expenses in Mexican pesos and all of its revenues are in U.S. dollars. The U.S. operations are conducted only in U.S. dollars. What will be the financial impact on the company’s return on investment (ROI) if the Mexican peso rises against the U.S. dollar assuming no operational changes?






9

A U.S.-based company has transaction exposure if it has an account






10

Which one of the following statements best reflects the relationship between the results of financial ratios calculated in a local currency versus those where a functional currency is used?






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