You have been recently hired as a staff accountant at Global Design, Inc., a small chain of retail home furnishing stores. You report directly to the Chief Financial Officer (CFO). The company specializes in home products with high-quality “European” design, but reasonable prices. Most of their products are manufactured in foreign countries but purchased from domestic wholesalers; these transactions are therefore denominated in U.S. dollars. However, the company’s president is entertaining the idea of acquiring subsidiaries in several foreign countries to ensure a reliable supply chain. He also believes that the exchange rates of some foreign currencies will rise about 10% in the next year and he is keen on reporting a gain in Global Design’s income statement when it does.

The president has asked you to prepare a memo outlining the effects of his plan, including 

1) the financial reporting effects of acquiring a foreign subsidiary; 

2) how changes in the foreign currency exchange rate will affect Global Design’s financial statements; 

3) under what circumstances Global Design could record a gain from a foreign subsidiary. The president has also asked you to make a clear recommendation on whether he should proceed with his plan.

The company president has never taken an accounting class and does not understand journal entries, so please do not include any in your memo.

Answer rating: 100% (QA)

1 When a foreign selbsidiary is acquired then it financial information is consalidated with the fina... View the full answer