Redline Products, Inc. is a U.S.-based multinational with subsidiaries around the world. One such subsidiary, Acceletron, operates
Question:
Redline Products, Inc. is a U.S.-based multinational with subsidiaries around the world. One such subsidiary, Acceletron, operates in Singapore, which has seen mild but not excessive rates of inflation. Acceletron was acquired in 2000 and has never paid a dividend. It records inventory using the FIFO method.
Chief Financial Officer Margot Villiers was asked by Redline’s Board of Directors to explain how the functional currency selection and other accounting choices affect Redline’s consolidated financial statements. She gathers Acceletron’s financial statements denominated in Singapore dollars (SGD) and the U.S. dollar/Singapore dollar exchange rates in the tables below. She does not intend to identify the functional currency actually in use, but rather to use Acceletron as an example of how the choice of functional currency affects the consolidated statements.
Selected Financial Data for Acceletron | ||
31 December 2016 (in SGD millions) | ||
Cash | SGD | 125 |
Accounts receivable | 230 | |
Inventory | 500 | |
Fixed assets | 1,640 | |
Accumulated depreciation | (205) | |
Total assets | SGD | 2,290 |
Accounts payable | 185 | |
Long-term debt | 200 | |
Common stock | 620 | |
Retained earnings | 1,285 | |
Total liabilities and equity | 2,290 | |
Total revenues | SGD | 4,800 |
Net Income | SGD | 450 |
Exchange Rates Applicable to Acceletron | ||
Exchange Rate in Effect at Specific Times | USD per SGD | |
Rate when first 1,000 of fixed assets were acquired | 0.568 | |
Rate when remaining 640 of fixed assets were acquired | 0.606 | |
Rate when long-term debt was issued | 0.588 | |
31 December 2015 | 0.649 | |
Weighted average rate when inventory was acquired | 0.654 | |
Average rate in 2016 | 0.662 | |
31 December 2016 | 0.671 |
30. Compared to using the Singapore dollar as Acceletron’s functional currency for 2016, if the U.S. dollar were the functional currency, it is most likely that Redline’s consolidated:
- inventories will be higher.
- receivable turnover will be lower.
- fixed asset turnover will be higher.
31. If the U.S. dollar were chosen as the functional currency for Acceletron in 2016, Redline could reduce its balance sheet exposure to exchange rates by:
- issuing SGD 30 of long-term debt to buy fixed assets.
- selling SGD 30 of fixed assets for cash.
- issuing SGD 30 in short-term debt to purchase marketable securities.
32. Redline’s consolidated gross profit margin for 2016 would be highest if Acceletron accounted for inventory using:
- LIFO, and its functional currency were the U.S. dollar.
- FIFO, and its functional currency were the Singapore dollar.
- FIFO, and its functional currency were the U.S. dollar.
33. If the current rate method is used to translate Acceletron’s financial statements into U.S. dollars, Redline’s consolidated financial statements will most likely include Acceletron’s:
- $118 in long-term debt.
- negative translation adjustment to shareholder equity.
- $3,178 in revenues.
34. If Acceletron’s financial statements are translated into U. S. dollars using the temporal method, Redline's consolidated financial statements will most likely include Acceletron’s:
- $336 in inventory.
- $956 in fixed assets.
- $152 in accounts receivable.
35. When translating Acceletron’s financial statements into U.S. dollars, Redline is least likely to use an exchange rate of USD per SGD:
- 0.588.
- 0.671.
- 0.654.
Auditing and Assurance Services Understanding the Integrated Audit
ISBN: 978-0471726340
1st edition
Authors: Karen L. Hooks