Question #51

While sales were flat in terms of local currency, after translation the reported revenue increased 12.5%. 10,000/0.9 = 11,111; 10,000/0.8 = 12,500; 12,500/11,111 = 12.5% increase due to exchange rate effects. (Module 10.2, LOS 10.c) Hise Home Supply is a large, profitable home improvement retailer located in the United Kingdom. Hise has recently been acquiring niche retailers with popular brand names in certain segments of the home improvement market. One of these retailers was Wilson Tile and Stone, a U.S. business that derived a large part of its sales from the UK. The management team for Hise now makes all operating, financing, and investment decisions. Brian Heltzel, a financial analyst for Hise, is responsible for translating Wilson's financial statements from U.S. dollars to the reporting currency. Hise conducts its business and issues financial statements in British pounds (£). Extracts from the financial statements of Wilson are shown below in Exhibit 1. Exhibit 1: Wilson Financial Statement Extracts Wilson Tile and Stone – December 31, 20X7 and 20X8 Balance Sheets 20X7 20X8 Cash $1,200 $1,400 Accounts receivable 6,500 9,900 Inventory 10,400 12,400 Current assets $18,100 $23,700 Fixed assets 40,000 40,000 Accumulated depreciation 10,000 15,000 Net fixed assets $30,000 $25,000 TOTAL ASSETS $48,100 $48,700 Accounts payable $5,000 $6,000 Current portion of LT debt 1,500 1,500 Long term debt 25,000 23,500 Total liabilities $31,500 $31,000 Common stock 10,000 10,000 Retained earnings 6,600 7,700 Total equity $16,600 $17,700 TOTAL LIABILITIES and EQUITY $48,100 $48,700 Wilson Tile and Stone – 20X8 Income Statement Revenue $75,000 Cost of goods sold (60,000) Gross margin $15,000 Other expenses (2,300) Depreciation expense (5,000) Net Income 7,700 Wilson uses the FIFO method for inventory accounting. Applicable exchange rates are as follows: December 31, 20X7: £1.00 = $1.60 December 31, 20X8: £1.00 = $1.80 Average for 20X8 = £1.00 = $1.70 Historical rate for fixed assets, inventory, and equity: £1.00 = $1.50 Dividend declaration date: £1.00 = $1.75. Heltzel is also using some information that has been provided by the accounts department of Wilson. He made the notes shown below in Exhibit 2 from an email the accounts department sent. Exhibit 2: Accounting Department Notes 20X8 income before remeasurement gain/loss £4,138 Dividends paid during the year £2,250 Opening retained earnings £5,150 Ending retained earnings £7,323 Hertzel has also discussed the future of Wilson's role in the group with board members from both Wilson and Hise. These discussions resulted in a concern as outline below. Concern Wilson's board have warned Heltzel that they are likely to engage in transactions next year which will lead to significant deferred revenue balances remaining on the balance sheet at the year end.