Question #92
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 51
Status: Unattempted
Correct Answer: A
Question
Gortal Inc., a U.S. company has a wholly owned subsidiary, Fortina GmBh, based in Germany. The U.S. dollar has been appreciating relative to the Euro over the past year. The use of the temporal method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/F
Answer Choices:
A. The ratio will be lower
B. There will be no effect on the ratio
C. The ratio will be higher
Explanation
Since the dollar has appreciated, the local currency has depreciated, so each foreign
currency unit bought more dollars in the past relative to the present. Fixed assets are
remeasured at the historical rate and sales are remeasured at the average rate under the
temporal method. Since the historical rate is buying more dollars relative to the average
rate, the denominator is staying the same whereas the numerator is getting smaller. Thus,
the ratio is lower.