Question 14 of 45 Score As You Go: 80.00% (16/20) with 40 to go. Question ID#: 8990 T-Table F-Table 5% F-Table 2.5% Chi-Table Durbin-Watson Z-Table Z-Table Alt -------------------------------------------------------------------------------- The U.S. dollar has been appreciating relative to the local currency over the past year. Using current-rate method to translate a foreign subsidiary’s financial statements to U.S. dollars will most likely have which of the following effects on the long-term debt to equity ratio (LTD/E) relative to what the ratio would have been without the effects of translation? A) The effect of translation on the ratio is indeterminate. B) The ratio will not change. C) The ratio will rise. D) The ratio will fall.
B Both LTD will be translated at current rate, so the ratio will not change.
LTD no change, equity side temporal is mixed in with some ave, some historical. AC is current. US$ appreciating, so say we had 100F/US and now end of year it’s 200F/US. LTD/eq, numerator same but even though it won’t be totally historical, under temporal we’d have whatever foreign eq number/100 something vs AC foreign eq/200… so AC makes a smaller denominator, ratio should rise? C i hope i didn’t flip this backwards somewhere.
B These are pure ratios. so it would not change
bannisja, for the current method all the asset and liabilities are set to the current exchange rate. The net result would be no change. If it was mixed ratios like ROE, ROA, then there would be a difference in the ratios.
you’re right… why did i think this said AC vs temporal… whoops. agree then if it’s just AC then it’s current/current, ratios should be the same.
but then if it were AC vs temporal here- would the ratio be higher or lower in AC vs temporal?
The answer was B. Note use current rate method for valuing equity. Historical when equity is broken out. Here is another one. Stinson Motors is attempting to make itself look more profitable. To accomplish this, the company is most likely to: A) understate assets. B) overstate sales. C) overstate equity. D) understate tax benefits.
thepinkman Wrote: ------------------------------------------------------ > > Stinson Motors is attempting to make itself look > more profitable. To accomplish this, the company > is most likely to: > > A) understate assets. > This would reduce equity (assuming liabilites are held constant) and ROE would increase. > B) overstate sales. This seems like the obvious choice > > C) overstate equity. Not good. > > D) understate tax benefits. Don’t see why this would increase profitablity This seems like a trick. What is the context of this question?
The answer is A. ROA a measure of profitability would improve. B was wrong as somehow they related it didn’t neccessarily mean NI would increase. Yeah.
I thought I felt a trap.
bannisja Wrote: ------------------------------------------------------- > but then if it were AC vs temporal here- would the > ratio be higher or lower in AC vs temporal? Assuming the reporting currency appreciated, Temporal would be higher since Equity is based at the historical rate under the temporal method. Since your equity would be lower under temporal, I would say your LTD/E ratio would be higher under temporal than AC
ok, i think i’m losing my mind. but say you had equity of i dunno, 1000 in FC. it says that the USD is appreciating vs the FC during the year. so beg rate 100FC/1, end rate 200FC/1. if you looked LTD/E ratio, then temporal isn't going to be perfectly historical rate but a blended sort of rate but definitely more historical than AC method. so let's say equity translates over at 125FC/1. then if LTD is let’s say 1000FC, LTD in USD = 1000FC x 1/100FC = 10. Equity- AC would be current rate so 1000FC x 1/200 = 5$USD Temporal 1000FC x 1$/125FC = $8USD. so then temporal would have the higher denominator, ratio higher under AC not temporal if $USD appreciating? if i’m bacwards, smack me and tell me where i’m backwards- i’d rathr be wrong here vs on test day!
Sorry, I got it backwards, Reporting currency appreciating means that the equity value of the FC would be lower so the ROA would be higher AC method.