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:

Current Ratio

Current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.

Payables

Financial obligations or amounts owed by a business to its creditors or suppliers for goods and services received.

Equity

The total value of a company's ownership interest by its shareholders, calculated as assets minus liabilities.

Profitability Ratios

Those ratios—gross profit rate, return on sales, return on total assets, and return on common stockholders’ equity—which measure a company’s ability to earn a profit.