The Proper Analysis of Foreign Operations by Financial Statement Users

question 40

Essay

The proper analysis of foreign operations by financial statement users requires that financial statements of the foreign operations be expressed in a common currency.For a U.S.company with a French subsidiary,this means converting the subsidiary's financial statements from francs to U.S.dollars.
One of the major issues in translating the financial statements of a foreign branch,division,or subsidiary is determining the functional currency of the foreign entity.The term "functional currency" has been defined by the Financial Accounting Standards Boards (FASB)as the currency of the primary economic environment in which the entity operates; normally,the currency of the environment in which the entity primarily generates and expends cash.Although the definition may seem relatively straightforward,the Financial Accounting Standards Board found it necessary to list various factors to guide management in determining the functional currency.
Required:
Identify the factors FASB identified that might be helpful in making the functional currency decision.

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Definitions:

Dishonored

refers to a financial instrument, such as a check or bill of exchange, that has been refused acceptance or payment.

Overdue

Overdue refers to a situation where a payment or obligation has not been met by its specified due date.

Cashier's Check

A check issued by a bank, drawn from the bank’s own funds and signed by a cashier or teller, guaranteed by the bank.

Payable

The amounts of money that a company owes to vendors or creditors for goods or services received that have not yet been paid.