of 126
Regarding the different methods of consolidating foreign subsidiaries' operating results, it
would be most accurate to state that:
A)
under the temporal method, monetary assets and monetary liabilities are translated
at a historical exchange rate.
B)
under the current rate method, revenues and expenses are translated at the
exchange rate that existed when the underlying transaction occurred.
C)
under the current rate method, individual components of stockholder’s equity are
translated at the current exchange rates.
Navratov Corp. is a designer and manufacturer of high end sporting goods. The majority of
the firm's business comes from Olympic athletes from Russia and the United States. On
January 1, 2003, Navratov was purchased by a U.S. competitor, Evert Industries. Because
Evert's business focuses on professional athletes in North America and Asia, Evert's
management feels the acquisition of Navratov is a natural extension of their business and
that buying the Russian firm should generate economies of scale.
Peter Capriati is an analyst for Evert and has been assigned the task of integrating
Navratov's financial statements into Evert's. Capriati knows that Evert's management pays a
great deal of attention to making sure the firm's financial ratios are above the industry
average. Because Navratov's sales are split evenly between the U.S. and Russia,
management has given him the flexibility to designate the either the Ruble (Navratov's local
currency) or the U.S. dollar (Evert's reporting currency) as Navratov's functional currency. As
a result of choosing the functional currency, Capriati will use either the temporal or current
rate method to convert Navratov's financial statements, depending on which method will
have the most favorable impact on Evert's financial ratios.
Selected financial data for Navratov Corp is shown below:
Navratov Corporation
Income Statement (in Russian Rubles)
12 months ended December 31, 2003
Revenue
7,400,000
Cost of Goods Sold (COGS)
(5,200,000)
Depreciation
(1,200,000)
Taxes
(250,000)
Net Income
750,000
Navratov Corporation
Balance Sheet (in Russian Rubles)
December 31, 2002
Assets
Liabilities and Equity
Cash
500,000
Accounts Payable
3,450,000
Accounts Receivable
2,500,000
Long Term Debt
5,000,000
Inventory
3,700,000
Common Stock
3,500,000
Net Fixed Assets
6,000,000
Retained Earnings
750,000
Total Assets
12,700,000
Total Liabilities and
Equity
12,700,000
Navratov Corporation
Balance Sheet (in Russian Rubles)
December 31, 2003
Assets
Liabilities and Equity
Cash
1,000,000
Accounts Payable
2,000,000
Accounts Receivable
2,500,000
Long Term Debt
5,000,000
Inventory
3,700,000
Common Stock
3,500,000
Net Fixed Assets
4,800,000
Retained Earnings
1,500,000
Total Assets
12,000,000
Total Liabilities and
Equity
12,000,000
Navratov Corp. did not pay dividends in 2003.
The common stock was acquired on January 1, 2002.
January 1, 2003 retained earnings in USD is $300,000.
Depreciation is being taken on a straight-line basis over ten years for equipment
which was acquired on January 1, 2002, at a cost of 12,000,000 rubles.
Navratov uses FIFO inventory accounting and goods were sold evenly throughout the
year. The average rate applicable to inventory and COGS is $0.37 / ruble.
Exchange rates:
January 1, 2002, $0.40 / ruble
January 1, 2003, $0.40 / ruble
June 30, 2003, $0.37 / ruble (avg. rate)
December 31, 2003, $0.33 / ruble