When Marks converts his forecasted income statement data for Julius into US dollars, the 20X2 gross profit

Question:

When Marks converts his forecasted income statement data for Julius into US dollars, the 20X2 gross profit margin will be closest to:

A. 39.1%.

B. 40.9%.

C. 44.6%.


Romulus Corp. is a US-based company that prepares its financial statements in accordance with US GAAP. Romulus Corp. has two European subsidiaries: Julius and Augustus. Anthony Marks, CFA, is an analyst trying to forecast Romulus’s 20X2 results. Marks has prepared separate forecasts for both Julius and Augustus, as well as for Romulus’s other operations (prior to consolidating the results.) He is now considering the impact of currency translation on the results of both the subsidiaries and the parent company’s consolidated financials. His research has provided the following insights:

• The results for Julius will be translated into US dollars using the current rate method.

• The results for Augustus will be translated into US dollars using the temporal method.

• Both Julius and Augustus use the FIFO method to account for inventory.

• Julius had year-end 20X1 inventory of €340 million. Marks believes Julius will report €2,300 in sales and €1,400 in cost of sales in 20X2.

Marks also forecasts the 20X2 year-end balance sheet for Julius (Exhibit 1). Data and
forecasts related to euro/dollar exchange rates are presented in Exhibit 2.

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Related Book For  book-img-for-question

International Financial Statement Analysis CFA Institute Investment Series

ISBN: 9780470287668

1st Edition

Authors: Thomas R. Robinson, Hennie Van Greuning CFA, Elaine Henry, Michael A. Broihahn, Sir David Tweedie

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