Question

You are an analyst reviewing the impact of three currency translation methods (current / non- current, monetary / non-monetary and temporal) on a Yen subsidiary operations of a parent company with a Dollar home currency. The following information has been gathered from company and market sources.

Excerpts of company financial information:

a.) Calculate the company’s financial information under each of the three currency translation methods.

b.) Based on inventory turnover, return on equity and return on assets, which currency translation method presents the best company results. Justify your answer with calculations.

Answer 1

Current/Non-Current Method Yen Current Year$ Translation Rate Note Asset Type Inventory Value @Dec 31 2018 Total Revenue Jan 1 Dec31, '18 Net Income Jan 1- Dec31, '18 5500 1250 49.85 11.33 110.3400 Jan 1-Dec 31, 2018 av Incomestatement 110.3400 Jan 1-Dec 31, 2018 avg Incomestatement Yen Curreny Year Previous Year Current Year $ 23.04 12.90 Translation Rate 108.5304 108.5304 108.5304 108.5304 108.5304 Note As of Dec 31, 2018 As of Dec 31, 2018 As of Dec 31, 2018 As of Dec 31, 2018 As of Dec 31, 2018 Asset Type Current Balance sheet Cash Accounts Receivable Inventory @Nov 26, 2018 Prepaid Expenses Nov 26, 2018 Fixed Assets (Acq Feb 1, 2010) Total Assets 24.63 13.79 7.39 3.94 44.33 94.09 10 1400 Current 12 13 4500 9550 3.69 41.46 87.99 Current Liabilities Accounts Payable LT Debt (issued Mar 30, 2015) Total Liability 11.52 27.64 39.16 108.5304 108.5304 As of Dec 31, 2018 As of Dec 31, 2018 Current 29.56 41.87 20 21 Capital Stock Feb 1, 2010 Retained Earnings 29.56 33.61 33.99 89.2500 As of Feb 1, 2010 Only Common Stock is translated at historical rate Current Year - Carried Forward Total Equity Cumulative Translation Adjustments Total Liabilities and equity 11.53 22.66 67.60 (18.77) 87.99 Assumes, no dividends. Its vlaue of Net Income converted at avg rate Previous Year Value CommonRetained 24 25 26 1050 9550 94.09 Put same as Total Assets

Monitory Method Note Yen Current Year $ Translation Rate Asset Type Inventory Value @Dec 31 2018 Total Revenue Jan 1 - Dec31, '18 Net Income Jan 1 - Dec31, '18 49.85 110.3400 Jan 1-Dec 31, 2018 avg 110.3400 Jan 1-Dec 31, 2018 avg Avg Rate Avg Rate 11.33 1.21 Adjusted Net Income Yen Previous Year Current Year $ 23.04 Balance sheet Cash Accounts Receivable Inventory @Nov 26, 2018 Prepaid Expenses @Nov 26, 2018 Fixed Assets (Acq Feb 1, 2010) Total Assets Translation Rate 108.5304 108.5304 113.5080 108.5304 89.2500 Curreny Year 24.63 13.79 7.39 3.94 44.33 94.09 Note As of Dec 31, 2018 As of Dec 31, 2018 As of Nov 26, 2018 As of Dec 31, 2018 As of Feb 1, 2010 Asset lype Monitory Monitory Non-Monitory Monitony Non-Monitory 1400 6.61 12 4500 50.42 96.65 9550 Liabilities Accounts Payable LT Debt (issued Mar 30, 2015) Total Liability 11.52 27.64 39.16 108.5304 As of Dec 31, 2018 108.5304 As of Dec 31, 2018 Monitony Monitony 29.56 41.87 4250 20 Capital Stock @Feb 1, 2010 Retained Earnings Total Equity Total Liabilities and equity 33.61 23.87 57.49 96.65 29.56 22.66 89.2500 As of Feb 1, 2010 It's the plug figure to balance the state Non-Monitory 5300 9550 94.09 25 26 Exchange Rate F/X rate as of As of Feb 1, 2010 As of Mar 30, 2015 As of Nov 26, 2018 As of Dec 31, 2018 Jan 1-Dec 31, 2018 avg Retained Earnings - Beginning Balance -Closing Balance Net Income for the year Loss: from Currnecy Translation Yen/S 28 29 30 89.2500 118.9600 113.5080 108.5304 110.3400 22.66 23.87 1.21 10.11

Temporal Method Note Yen Current Year $ Translation Rate Asset lype Inventory Value @Dec 31 2018 Total Revenue Jan 1 - Dec31, '18 Net Income Jan 1 - Dec31, '18 49.85 11.33 5500 110.3400 Jan 1-Dec 31, 2018 avg 110.3400 Jan 1-Dec 31, 2018 avg Avg Rate Avg Rate 1.52 Adjusted Net Income Yen Previous Year Current Year $Translation Rate Note Balance sheet Cash Accounts Receivable Inventory @Nov 26, 2018 Prepaid Expenses@Nov 26, 2018 Fixed Assets (Acq Feb 1, 2010) Total Assets Curreny Year 24.63 13.79 7.39 3.94 44.33 94.09 23.04 12.90 6.91 3.69 50.42 96.95 108.5304 108.5304 108.5304 108.5304 89.2500 As of Dec 31, 2018 As of Dec 31, 2018 As of Dec 31, 2018 As of Dec 31, 2018 As of Feb 1, 2010 Asset lype Monitony Monitony Current Monitony Non-Monitory 1400 12 13 4500 9550 Liabilities Accounts Payable LT Debt (issued Mar 30, 2015) Total Liability 11.52 27.64 39.16 108.5304 108.5304 As of Dec 31, 2018 As of Dec 31, 2018 Monitory Monitory 29.56 41.87 18 Capital Stock @Feb 1, 2010 Retained Earnings Total Equity Total Liabilities and equity 33.61 24.18 57.79 96.95 29.56 22.66 89.2500 As of Feb 1, 2010 It's the plug figure to balance the statement Non-Monitory 9550 94.09 25 26 Exchange Rate F/X rate as of As of Feb 1, 2010 As of Mar 30, 2015 As of Nov 26, 2018 As of Dec 31, 2018 Jan 1-Dec 31, 2018 avg Retained Earnings - Beginning Balance -Closing Balance Net Income for the year Loss: from Currnecy Translation Yen/S 22.66 24.18 28 29 30 89.2500 118.9600 113.5080 108.5304 110.3400 9.81 32

CurrentMonitory Temporal inventory turnover 7.2130657.543883 7.213065 return on equity 16.7578% 2.1133% 2.6266% return on assets 12.8743% 1.2570% 1.5657%

So from above, its clear that company looks good on overall performance if it uses Current/Non-Current Method for currency translation.

Current Method - Used Current Rate as on balance sheet date for all balance sheet items, except common stock which is at historical rate. Income statement items are at average rate for the year

Monetary Method - Uses current rate for all liquid items / monetary items like cash, debt, payable & receivables. Historical rate as on date acquired for non-monitory items like common stock, fixed assets, inventory

Temporal Method - Its same as Monetary method, except here items that can be at fair value are always marked at fair value as on dates. In above example, only inventory was getting translated to fair value.