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International Financial Statement Analysis Workbook, 2nd Edition by Michael A. Broihahn CFA, Anthony T. Cope CFA, Wendy L. Pirie CFA, Elaine Henry CFA, Thomas R. Robinson CFA

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CHAPTER 15

MULTINATIONAL OPERATIONS

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Distinguish among presentation currency, functional currency, and local currency.
  • Analyze the impact of changes in exchange rates on the translated sales of the subsidiary and parent company.
  • Compare and contrast the current rate method and the temporal method, evaluate the effects of each on the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios.
  • Calculate the translation effects, evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s currency, and analyze the different effects of the current rate method and the temporal method on the subsidiary’s financial ratios.
  • Analyze the effect on a parent company’s financial ratios of the currency translation method used.
  • Analyze the effect of alternative translation methods for subsidiaries operating in hyperinflationary economies.

SUMMARY OVERVIEW

  • The local currency is the national currency of the country where an entity is located. The functional currency is the currency of the primary economic environment in which an entity operates. Normally, the local currency is an entity’s functional currency. For accounting purposes, any currency other than an entity’s functional currency is a foreign currency for that entity. The currency in which financial statement amounts are presented is known as the presentation ...

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