QUESTION 2 Not complete Points out of 10.00 Flag question Effect of Translation

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QUESTION 2 Not complete Points out of 10.00 Flag question Effect of Translation and Remeasurement on Ratios The following data relate to the Bainbridge Company's South African subsidiary, which maintains its records in the South African rand (R), its local currency. Translated amounts in when functional currency Sales Operating income Average total assets R10,000,000 $ 1,500,000 253,500 3,800,000 1,500,000 292,500 2,660,000 1 15,200,000 a. Using the "DuPont Analysis," compute and disaggregate the subsidiary's return on assets into its return on sales and total asset turnover components under the three alternatives shown. Round percentages to one decimal place. For example, 99.96. ROA ROS X X A Rands $ (remeasurement) S(translation) b. Explain whether the exchange rate (S/R) has been increasing or decreasing and how that change might affect the usefulness of these ratios. Assume that remeasured operating income does not include the remeasurement gain or loss. The direct exchange rate appears to be faling, meaning that the dollar is strengthening and the rand is weakening. The declining exchange rate causes the DuPont analysis ratios to be distorted by the changing exchange rate. If performance measured in the local currency, translation does a much better job of preserving the local currency results than remeasurement. The direct exchange rate appears to be rising, meaning that the dollar is strengthening and the rand is weakening. The rising exchange rate causes the DuPont analysis ratios to be distorted by the changing exchange rate. If performance measured in the local currency, translation does a much better job of preserving the local currency results than remeasurement. The direct exchange rate appears to be faling, meaning that the dollar is weakening and the rand is strengthening. The declining exchange rate causes the DuPont analysis ratios to be distorted by the changing exchange rate. If performance measured in the local currency, remeasurement does a much better job of preserving the local currency results than translation. The direct exchange rate appears to be rising, meaning that the dollar is weakening and the rand is strengthening. The rising exchange rate causes the DuPont analysis ratios to be distorted by the changing exchange rate. If performance measured in the local currency, translation does a much better job of preserving the local currency results than remeasurement.

Explanation / Answer

ROA = ROS x AT

When in RANDS

ROS = operating income x 100 / sales = 1,950,000 x 100 / 10,000,000 = 19.5%

AT = opeating income x 100 / Average total assets = 1,950,000 x 100 / 15,200,000 = 12.83%

ROA = 19.5% x 12.83% = 2.5%

When in $ remeasurement

ROS = 253,500 x 100 / 1,500,000 = 16.9%

AT = 253,500 x 100 / 3,800,000 = 6.67%

ROA = ROS X AT = 16.9% x 6.67% = 1.1272%

When in $ translation

ROS = 292,500 x 100 / 1,500,000 = 19.5%

AT = 292,500 x 100 / 2,660,000 = 10.99%

ROA = 19.5% x 10.99% = 2.14%

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