In the Process of Consolidating the Translated Financial Statements of a Foreign

question 6

Multiple Choice

In the process of consolidating the translated financial statements of a foreign operation,what will be the form of the journal entry required to eliminate the foreign currency effect of a purchase of inventory by the subsidiary from the parent entity? Assume that the value of the foreign currency of the foreign operation has increased relative to the reporting currency.

• A) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Foreign currency loss (P\&L) } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Cost of goods sold } & & \mathrm{X} \\
• \hline
• \end{array}\)
• B) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Foreign currency gain (P\&L) } & & \mathrm{X} \\
• \hline
• \end{array}\)
• C) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Foreign currency translation reserve } & & \mathrm{X} \\
• \hline
• \end{array}\)
• D) \[\begin{array} { | l | l | r | r | }
• \hline \text { Dr } & \text { Foreign currency translation reserve } & \mathrm { X } & \\
• \hline \mathrm { Cr } & \text { Inventory } & & \mathrm { X } \\
• \hline
• \end{array}\]

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Definitions:

Cash Generated

The amount of money produced by a company's normal business operations after accounting for operational expenses and working capital.

Additional Funds Needed

Estimated funds required beyond what is currently available to the business to finance projected growth.

Payout Ratio

A financial metric used to measure the percentage of earnings paid to shareholders in dividends, indicating how much money a company is returning to shareholders versus reinvesting.

AFN Equation

Additional Funds Needed equation, a financial formula used to estimate the additional amount of funding a firm would require to support its increased level of sales.