Question

10. Multinational working capital management Aa Aa Multinational companies are exposed to complex management and allocation of their resources. A multinational company's cash management, credit management, inventory management, and so on, need to have several additional elements factored in compared with those of a purely domestic corporation. Consider this case: Multinational Inventory Management Streep Inc. is a U.S.-based multinational firm with a subsidiary in Switzerland. Last week, Streep created its periodic financial statements, and the subsidiary had Decisions related to amount of investment in inventory and inventory policy need to factor in the following: SFr 60,000 worth of inventory on its balance sheet. Streep translated the value of inventory using the spot Exchange rates exchange rate at that time of $0.8153 / SFr and recorded that value on its consolidated balance sheet. Possibility of import and export quotas or tariffs However, this week the exchange rate changed Tax consequences dramatically to $0.8925 / SFr. The subsidiary still has the Possibility of at-sea storage same amount of inventory (valued at SFr 60,000). If the firm were to create a new consolidated balance sheet and translate the value of its inventory at the new spot exchange rate, what would happen to the dollar value of inventory? It would decrease by $5,558. It would increase by $4,632. It would decrease by $4,632. It would increase by $5,095 The change in inventory value was created purely by accounting and exchange rate factors, because the subsidiary still has the same inventory and assets in place. However, this change would affect Streep's consolidated financial statements and ratios. Assuming no other changes occurred, what effect would this have on Streep's quick ratio? The quick ratio increases with increase in inventory value. The quick ratio does not change.

Answer 1

Swiss subsidiary had Inventory worth SFr 60000

Last week $ vs SFr spot rate was = $0.8153 / SFr  

So, Last week Inventory was worth in $ = 60000 $\times$ $0.8153 = $48918

[** Calculation:-  SFr 1 = $0.8153 ; so, SFr 60000 = 60000 $\times$ $0.8153 = $48918 ]

This week $ vs SFr spot rate was = $0.8925 / SFr  

So, This week inventory is worth in $ =  60000 $\times$ $0.8925 = $53550

So, Inventory value increases in $ this week = $53550 - $48918 = $4632

Ans:- B) It would increase by $4632

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First we need to understand what is Quick Ratio, then we can say what will be the effect due of this change.

$Quick Ratio= \frac{Cash and Equivalents + Marketable Securities + Account Receivables}{Current Liabilities}$

In Quick Ratio, we do not consider "Inventory". Because Inventory can be sold when demand is there. But, the demand for goods is an external thing. It is not in the company's hand. So, inventory is not very liquid in nature. In Quick Ratio, we try to find out how fast a company can pay its current liabilities. That's why Quick Ratio will not change in this case.

Ans:- B) The Quick Ratio does not change