Question #41

Neslarone is based in Switzerland and generates the majority of its cash in CHF, meaning the local and functional currencies are both CHF. The firm issues financial reports in USD, so the dollar is the reporting currency. The process of converting from the functional currency to the reporting currency is translation and the correct method to use is the current rate method. When using the current rate method, the foreign currency adjustment is recorded in the equity section of the balance sheet. (Module 10.1, LOS 10.a) Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2012 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents) and is the historical rate applicable for fixed assets and common stock. One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO) inventory assumption and was bought and sold evenly throughout the year. Scud Co. Int'l Balance Sheet (in SF thousands) Dec. 31, 2012 Dec. 31, 2013 Cash & accounts receivables (A/R) 400 600 Inventory 500 500 Net Fixed Assets 700 600 Total Assets 1,600 1,700 Accounts payable (A/P) 100 200 Long-term debt 200 100 Common Stock 1,300 1,300 Retained Earnings 0 100 Total Liabilities 1,600 1,700 Income Statement (in SF thousands) December 31, 2013 In SF Sales 7,000 Cost of Goods Sold (COGS) (6,800) Depreciation (100) Translation Gain/Loss -- Net Income 100 Assume that the functional currency is the U.S. dollar when answering the following questions.