Question #110 - Reading 10 Multinational Operations

Reading: Reading 10 Multinational Operations

PDF File: Reading 10 Multinational Operations.pdf

Page: 61

Status: Unattempted

Correct Answer: B

Shared Context

- Assuming the current rate method is used to translate Continental's financial statements, as compared to the local currency ratios, which of the following statements about translated operating profit margin and long-term debt to equity ratios is correct? A) Long-term debt-to-equity ratio will be higher. B) Operating profit margin will be higher. C) Neither ratio will change.

Question

When stated in U.S. dollars, would Continental most likely report a higher fixed asset turnover ratio and a higher quick ratio under the temporal method, as compared to the current rate method?

Answer Choices:

A. Both ratios will be higher under the temporal method

B. Only fixed asset turnover will be higher under the temporal method

C. Only the quick ratio will be higher under the temporal method

Explanation

Continental would report a higher fixed asset turnover ratio (sales/fixed assets) under the temporal method because sales are translated at the same rate under both methods (the average rate), but fixed assets would be translated at the lower historical rate (because the euro is appreciating) under the temporal method. Therefore, the ratio will be higher. Continental would not report a higher quick ratio under the temporal method. Actually, the quick ratio would be the same under both methods. Continental's quick assets include cash and accounts receivable. Quick assets and current liabilities are converted at the current rate under both methods.

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