International Financial Statement Analysis, 3rd Edition

CHAPTER 16

MULTINATIONAL OPERATIONS

Timothy S. Doupnik, Phd

Elaine Henry, CFA

LEARNING OUTCOMES

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

• distinguish among presentation (reporting) currency, functional currency, and local currency;
• describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses;
• analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company;
• compare the current rate method and the temporal method, evaluate how each affects the parent company's balance sheet and income statement, and determine which method is appropriate in various scenarios;
• calculate the translation effects and evaluate the translation of a subsidiary's balance sheet and income statement into the parent company's presentation currency;
• analyze how the current rate method and the temporal method affect financial statements and ratios;
• analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios;
• describe how multinational operations affect a company's effective tax rate;
• explain how changes in the components of sales affect earnings sustainability;
• analyze how currency fluctuations potentially affect financial results, given a company's countries of operation.

1. INTRODUCTION

According to the World Trade Organization, merchandise exports worldwide were nearly US$15 trillion ...