Accounting 401

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  1. The global character of today’s business environment presents challenges for ...
    • a. corporate managers
    • b. corporate and professional accountants
    • c. financial analysts
  2. For a diversified corporation, headquartered
    in the United States with foreign divisions or subsidiaries and subject to GAAP, two major problems exist:
    • –      Controlling wide-ranging, geographically
    • dispersed operations, and

    • –      Measuring the financial position and
    • performance of its various global divisions/subsidiaries (Parts of THIS COURSE)
  3. Other difficulties for management include:
    • –      Headquarters are a great distance from
    • international operations

    • –      Accounting records are maintained in
    • different currencies

    • –      Interest, inflation, and growth rates vary
    • widely among the different countries

    • –      Political conditions and regulatory
    • institutions differ from country to country

    • –      Language and cultural differences are
    • barriers to communication

    • –      There are alternative accounting and
    • reporting procedures – IFRS and many country specific rules which most foreign
    • countries require companies use to prepare financials using their local
    • currency.
  4. To prepare worldwide consolidated financial statements a U. S. parent must:
    • a.    convert the foreign GAAP financial statements of its foreign operations into U.S. GAAP 
    • b.      translate the financial statements from the foreign currency into U.S. dollars.
  5. The conversion and translation process is required whether…
    • The foreign operation is a branch, joint
    • venture, majority-owned subsidiary, or affiliate accounted for under the equity
    • method.
  6. Since International subsidiaries prepare
    their financial statements in their local currency, the subsidiary’s accounts
    a. Be converted to U.S. dollars (as the REPORTING currency of the U.S. parent, and then

    b. Consolidate (integrate all companies as if one economic unit) the subsidiary’s accounts with the parent
  7. What are the two things we need to know in order to START the Conversion Process?
    a. Which exchange rate to use (Always Direct instead of Indirect)

    b. Which conversion/translation method to use (Temporal or Current Rate)
  8. Direct Rate
    • amount of U.S. dollars needed to buy one unit of foreign currency
    • (example: :  If the direct rate is $1.05/ Canadian dollar (C$), then $1.05 is needed to buy one Canadian dollar.
  9. Indirect Rate:
    • amount of foreign currency needed to buy one U.S. dollar
    • (Example: If the indirect rate is C$0.95, then C$0.95 is needed to buy one U.S.
    • dollar.)
    • (Note: direct rate = 1/indirect rate (1/1.05 =
    • .95) The indirect rate is the inverse of the direct rate)
  10. The                is used for                                                 in converting an international
    subsidiary’s accounts to U.S. dollars.
    • a. direct rate
    • b. both methods (current rate and temporal methods)
  11. The TEMPORAL (Remeasurement) PROCEDURE shows what and how is it calculated?
    a. It Shows the accounts as if the subsidiary had recorded its transactions in the functional currency;

    b. Convert local currency to functional currency
  12. The CURRENT RATE (Translation)   PROCEDURE maintains what and how is it calculated?
    • a. It Maintains the same financial picture as displayed in the subsidiary’s functional currency
    • b. Convert functional currency to reporting currency
  13. Local (foreign) currency is defined as what?
    What is it usually?
    • a. Currency in which the subsidiary reports its accounts
    • b. Usually the currency of the country in which it is located
  14. Functional currency is defined as what?
    What is it usually?
    Sometimes what happens?
    • a. Currency in which the subsidiary conducts most of its business
    • b. Usually the subsidiary's functional currency = the local (foreign currency)
    • c. Sometimes the subsidiary's functional currency = the parent's reporting currency
  15. Reporting Currency is defined as what?
    The parent's currency
  16. If Local Currency  ≠ Functional Currency what do you do and which method do you use to do it
    a. Remeasure

    b. Temporal Method
  17. If Functional Currency ≠ Reporting Currency what do you do and which method do you use to do it?
    a. Translate

    b. Current Rate Method
  18. REMEMBER The                  accounts best represent the financial health of the subsidiary company.
    functional currency
  19. Functional Currency is defined in the Accounting Standardization Codification as what and what is it normally?
    a. The entity’s functional currency is the currency of the primary economic environment in which the entity operates

    b. Normally, it is the currency of the environment in which an entity primarily generates and expends cash.
  20. The ASC lists economic indicators to be
    considered when determining a company’s FUNCTIONAL currency. Which ones are the
    most important?
    a. Currency that Cash flows are incurred

    b. Currency that Sales are made

    c. Currency that Expenses are incurred

    d. Currency Money is borrowed/repaid
  21. Determination of the functional currency is essentially…
    ...a matter of facts.
  22. Other Functional Currency Factors include
    a. An international entity whose operations are relatively self-contained and integrated within the country in which it is located normally uses the local (foreign) currency of that country as its functional currency.

    b. An international entity whose operations are a direct and integral component or extension of a US parent company’s operations normally uses the US dollar as its functional currency.

    • c. An international entity located in one
    • country but generating most of its cash flows in the currency of another country (not US) normally uses the currency of the other country as its functional currency.
  23. Functional currency changes occur when…
    ...significant new economic facts and circumstances clearly justify it
  24. Functional Currency changes are reported prospectively because ...
    ...the change is caused by changes in facts and circumstances, not a change in accounting principle
  25. Today’s rate or the rate on any specific date
    is called the …
    ...SPOT Rate
  26. Current Exchange Rate:
    The spot rate at the end of the current accounting period.
  27. Historical Exchange Rate:
    • a past spot rate in existence when a particular
    • transaction occurred.
  28. Average Exchange Rate:
    The average spot rate over a period of time.
  29. TRANSLATION ADJUSTMENT essentially is…
    … Exchange rate Gains and Losses
  30. Because ­­­­­­­­­­­­­_________ vary over time in relationship to the US dollar,there are ___________that will be recognized in the financial statements according to this fluctuation.
    a. exchange rates

    b. gains and losses
  31. To determine the ________we must determine
    the ___________of the financial statements we are converting/translating.

  32. The ____________depends upon the METHOD used to convert the statements (temporal or current rate).
  33. In calculating Gains and Losses, Non-monetary
    assets and liabilities are generally what?
    • a. PPE (Property, Plant, & Equip.)
    • b. Intangibles
    • c. Inventories at cost
    • d. most equity accounts
  34. In calculating Gains and Losses, Non-monetary assets and liabilities are valued at
    what? Also known as what? What happens to them?
    • a. These are valued at HISTORICAL COST
    • b. AKA the Spot rate ON DATE OF TRANSACTION
    • c. HISTORICAL RATES do not change over time.
  35. In calculating Gains and Losses, Monetary
    assets and liabilities are generally what?
    • a. Cash
    • b. Receivables
    • c. Investments
    • d. inventories at fair value
    • e. most liabilities
  36. In calculating Gains and Losses, Monetary
    assets and liabilities are valued at what? Also known as what? These are valued
    at what? What happens to them?
    • b. AKA the Spot rate on FINANCIAL STATEMENTS DATE
    • c. CURRENT RATES change over time
  37. In Calculating Gains and Losses with monetary
    assets and liabilities, change over time is the source of the ____________and, consequently, the same source of gains/losses; also known as the________.
  38. The procedures used in the Current Rate and
    Temporal Rate Methods are performed where?
    Only on WORKPAPERS.
  39. The journal entries of the Current Rate and
    Temporal Rate Methods are only recorded in ____________to _____________for a
    company or group of companies.
    • a. a set of working papers
    • b. derive GAAP financial statements
  40. REMEMBER, the functional currency accounts
    best represent the…
    … financial health of the subsidiary company.
  41. IF foreign (local) currency ≠ functional
    currency then must perform
    TEMPORAL (Remeasurement) METHOD
  42. The Objective of the TEMPORAL (Remeasurement) Method is to...
    ... Show the financial statements as if all transactions occurred in the functional currency.
  43. Explain the TEMPORAL (Remeasurement) METHOD in STEPS. Also tell which accounts are affected in each step.
    • 1. Monetary assets and liabilities are remeasured at the end of year (current) rate:
    • (This affects Cash, Receivables, HTM Investments, Other Investments and Inventories carried at Fair Value, and all Liabilities.)

    • 2.Assets carried at cost/amortized
    • cost/depreciated cost are remeasured at the rate when they were acquired
    • (historical rate):
    •   Plant
    • assets, intangible assets

    • 3.Capital stock accounts remeasured
    • at the rate when the subsidiary was acquired (historical rate)

    4.Dividends are remeasured at the spot rate when declared

    5.  Revenues & expenses are remeasured at historical rates:

    a.Revenues, out of pocket expenses: historical rate can be approximated by average rates

    b.Depreciation, amortization, impairment: use the rate when the related asset was acquired

    6.  COMPUTE Ending retained earnings =   beginning remeasured RE + remeasured income   – remeasured dividends
  44. One of the Effects of the TEMPORAL Method is
    that it matches _______ to _______ and ­­­­_____  to ________.
    a. Current rates to Current prices

    b. Historical rates to Historical prices
  45. When dealing with the effects of the Temporal
    Method, Local currency ratios are not the same as _______.
    Functional currency ratios
  46. When dealing with the effects of the Temporal
    Method, Functional currency ratios best represent ____________ , since they do business in the functional currency.
    the subsidiary’s financial picture
  47. When dealing with the Temporal Method, accounts which are measured at current money
    prices are remeasured at ________.
    The Current Rate
  48. When dealing with the Temporal Method, accounts which are measured at historical
    prices are remeasured at _______.
    Historical Rates
  49. When dealing with the Temporal Method, Revenues and Expenses are remeasured at
    Historical Rates
  50. ____________occur when the rate at which assets and liabilities are converted changes over time. Therefore these translation gains and losses arise from accounts that are
    converted using ____________.
    • a. Temporal (remeasurement) translations gains and losses
    • b. The (CURRENT) rate.
  51. Exposed position =
    Assets converted at the current rate less liabilities converted at the current rate
  52. Nonmonetary balance sheet items and related
    revenue, expense, gain, and loss are remeasured using the  __________. What are some examples?
    • a.HISTORICAL rate.
    • b.Examples                                          
    •    i. Marketable securities carried at cost
    •    ii. Inventories carried at cost
    •    iii. Cost of Goods Sold
    •    iv. Prepaid Expenses
    •    v. PPE
    •    vi. Depreciation
    •    vii. Intangible Assets
    •    viii. Amortization Expense
    •    ix. Deferred Income
    •    x. Common Stock
    •    xi.Preferred stock carried at issuance price
    •    xii. Any noncontrolling interest
  53. Monetary items are remeasured at the _______. What are some examples:
    • a. CURRENT rate
    • b. Examples                                                  i. Cash
    •     ii. Receivables
    •     iii. Payables
    •     iv.  Inventories carried at market
    •     v. Marketable securities carried at fair value
  54. Draw the EXPOSED POSITION TEMPORAL Method Grid
    Image Upload
  55. TEMPORAL (Remeasurement) exposure =
    • Cash + receivables + HTM investments and other assets (eg inventory) carried at market
    • prices less liabilities
  56. Exposure is usually ______ because _________.
    • a. Negative
    • b. There are usually more monetary liabilities than monetary assets
  57. Temporal Translation gains and losses are reported in ...
    ... NET INCOME.
  58. Companies using the remeasurement (temporal) method: Usually report a ______when the U.S. dollar ________ (net liability exposure).
    • a. Loss on translation
    • b. Weakens
  59. Companies using the remeasurement (temporal) method: Usually report a ______ when the U.S. dollar ________ (net asset exposure)
    • a. Gain on translation
    • b. Strengthens
  60. Gains and losses are reported where?
    On the income statement
  61. Image Upload
    • a. Asset
    • b. FC Falls
    • c. FC Falls
    • d. Gain
    • e. Weakens
    • f.  FC Rises
    • g. Gain
    • h. Liability
    • i.  FC Rises
    • j.  Loss
    • Image Upload
  62. Economic consequences occur _______ actually occurs.
    • Only if a conversion of dollars to/from a
    • foreign currency
  63. What we are computing are ________.
  64. Onlywhen the actual transactions occur  _______ will our accounting records record these gains and losses.
    (Chapter 7)
  65. The WORKPAPER Adjustments are ________ and therefore are _______ until _______ .
    • b. Potential Amounts
    • c. They are realized
  66. Assume Multiple Methods’  functional currency is the US dollar Foreign (£) ≠ Functional ($). Therefore we _________ its financial statements into U.S. dollars with the _________.
    • a. Remeasure
Card Set:
Accounting 401
2014-03-27 21:07:14

Accounting 401 Advanced Accounting
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