Question #104

The translation adjustment will affect the book value of equity and therefore the return on equity ratio. The other ratios are pure ratios (both component of the ratio come from the income statement) and are not affected by translation. (Module 10.6, LOS 10.f) Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris. The following information is relevant to Geocorp's subsidiaries: Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency. All domestic U.S. operations report their results in U.S. dollars (USD). Consolidated financial statements are reported in USD. Geocorp's Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency. Geocorp's European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency. Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency. The following table is a summary of selected financial results from Geocorp's foreign operations: All values are in millions CAD JPY GBP EUR Revenues 50 5,000 150 700 Cost of goods sold (COGS) 20 2,700 100 480 Gross profit 30 2,300 50 220 Selling, general & administrative (SGA) expenses 18 1,000 29 200 EBIT 12 1,300 21 10 Cash 35 4,200 102 400 Accounts receivable 12 1,400 45 170 Inventory 20 3,900 123 300 Fixed assets 62 7,680 370 450 Accounts payable 27 3,300 68 350 Long-term debt 0 8,450 320 550 Common stock 10 2,000 50 350 The following exchange rates apply (USD per foreign currency unit): Currency Historical Rate Average Rate December 31, 20X2 CAD USD 0.7013 USD 0.6803 USD 0.6592 JPY USD 0.0094 USD 0.0088 USD 0.0082 EUR USD 0.9801 USD 1.0318 USD 1.0834 GBP USD 1.4803 USD 1.5506 USD 1.6209