Accounting for Multinational Operations (II)

Summaries

LTD-to-capital ratio= Long term debt to long term capital ratio

Long term capital = long term debt + shareholder’s equity

Total-asset-turn-over: revenue/ total asset

Inventory turn over: COGS/Inventory

A/R turn over: revenue/ A/R

For all-current method:

1)      Pure balance sheet and income statements are unchanged

2)      Mixed rate will change but usually not very significant (depends on whether the local currency is appreciating or depreciating)

For temporal method: have to analysis carefully. COGS and depreciation uses historical rate (or average rate, or blended rate). So, if the local currency is appreciating, they will be smaller than in the all-current method.

Income statement flow effect:

= exchange rate effect + operational effect

= income statement item x change of average rate + change in income statement item x previous average rate

(Just like new_income x new_rate – old_income x old_rate = new_income x rate_change + new_income x old_rate = exchange rate effect + operational effect)

This is the effect seen in consolidated parent’s income statement. So the “flow effect” is the changed of values in the parent’s statement (parent’s currency). Must convert to local currency in order to use this equation and use new_income.

Hyperinflation: cumulative 3-year inflation > 100% => use temporal method because non-monetary asset uses historical rate instead of current rate.