Question #48

of 126 Which example least accurately describes pure balance sheet and income statement ratios? A) All pure balance sheet ratios are affected by the all-current translation method. B) The current ratio is a pure balance sheet ratio. C) When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled. The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency. Acer Tool & Die Company Balance Sheet As of December 31, 2005 Chad (millions) Exchange Rate (Chad/US$) U.S. $ (millions) Cash 20 0.25 $80 Accounts receivable 30 0.25 120 Inventory 100 0.3125 320 Fixed assets (net) 500 0.3333 1,500 Total assets 650 $2,020 Accounts payable 50 0.25 $200 Capital stock 380 0.3333 1,140 Retained earnings 220 -- 680 Total liabilities and equity 650 $2,020 Acer Tool & Die Company Income Statement For year ending December 31, 2005 (Amounts in millions of Chad) Revenues 1,000 Cost of sales 700 Depreciation expense 50 Selling expense 30 Translation gain (or loss) Net income 220 Acer has determined that the exchange rate exposure at the beginning of 2005 is −260 Chad. The exchange rate at the beginning of 2005 was 0.3333 Chad/US$ and that is the historical rate applicable to beginning inventory of 90 Chad. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Purchases occurred evenly throughout the year. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method. Assume that retained earnings at year end 2004 were zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid during 2005.