Assume that your company owns a subsidiary operating in Germany. The subsidiary
ID: 2593812 • Letter: A
Question
Assume that your company owns a subsidiary operating in Germany. The subsidiary conducts most of its business in the European Economic Union and maintains its books using the Euro as its functional currency. Following are the subsidiary’s financial statements (in €) for the most recent year:
Subsidiary (in €)
Income statement:
Sales…………………………………………………………………………..€1,095,000
Cost of goods sold…………………………………………………………… (657,000)
Gross profit…………………………………………………………………… 438,000
Operating expenses…………………………………………………………… (284,700)
Net income…………………………………………………………………… €153,300
Statement of retained earnings:
Beginning of year retained earnings………………………………………….. €574,875
Net income……………………………………………………………………. 153,330
Dividends………………………………………………………………………. (15,330)
Ending retained earnings………………………………………………………. €712,845
Balance Sheet
Assets
Cash……………………………………………………………………………. €311,637
Accounts receivable……………………………………………………………. 254,040
Inventory……………………………………………………………………….. 326,310
PPE, net………………………………………………………………………… 603,564
Total assets……………………………………………………………………... €1,495,551
Liabilities and Stockholders’ equity
Current liabilities………………………………………………………………. €185,712
Long-term liabilities…………………………………………………………… 432,744
Common stock…………………………………………………………………. 73,000
APIC …………………………………………………………………………… 91,250
Retained earnings………………………………………………………………. 712,845
Cumulated translation adjustment……………………………………………....
Total liabilities & equity………………………………………………………... €1,495,551
Statement of cash flows:
Net income……………………………………………………………………… €153,330
Change in accounts receivable………………………………………………….. (42,340)
Change in inventories…………………………………………………………… (54,385)
Change in current liabilities……………………………………………………… 30,952
Net cash flows from operating activities………………………………………… 87,527
Purchase of PPE…..………………………………………………………………. (56,064)
Net cash flows from investing activities…………………………………………. (56,064)
Proceeds from long-term debt……………………………………………………. 72,174
Payment of Dividends……………………………………………………………. (15,330)
Net cash flows from financing activities…………………………………………. 56,794
Net Change in cash……………………………………………………………….. 88,257
Effect of exchange rate on cash……………………………………………………
Beginning cash……………………………………………………………………. 223,380
Ending cash……………………………………………………………………….. €311,637
The relevant exchange rate are as follows:
Beginning of year rate…………………………………………………………….. $0.95
Ending of year rate………………………………………………………………… $1.04
Average rate……………………………………………………………………….. $1.01
PPE purchase date rate…………………………………………………………….. $0.99
LTD borrowing date rate…………………………………………………………... $1.03
Dividend declaration date rate……………………………………………………… $1.02
Historical rate (common stock and APIC)…………………………………………. $0.63
Required:
Translate the subsidiary’s income statement, statement of retained earnings, balance sheet and statement of cash flow into the $US statements using the current rate method (assume that the beginning of year Retained Earnings is $437,543).
Explanation / Answer
1. Income Statement
Euro
Exchange Rate
US Dollars
Sales
1,095,000
1.01
1,105,950
Cost of goods sold
(657,000)
1.01
(663,570)
Gross Profit
438,000
442,380
Operating Expenses
(284,700)
1.01
(287,547)
Net Profit
153,300
154,833
2. Statement of retained earnings
Euro
Exchange Rate
US Dollars
Beginning of year Retained Earnings
574,875
437,543
Net Income
153,300
1.01
154,833
Dividends
(15,330)
1.02
(15,637)
Ending retained earnings
712,845
576,739
3. Balance Sheet
Euro
Exchange Rate
US Dollars
Asstes
Cash
311,637
1.04
324,102
Accounts receivable
254,040
1.04
264,202
Inventory
326,310
1.04
339,362
PPE, net
603,564
1.04
627,707
Total Assets
1,495,551
1,555,373
Liabilities & stockholder's Equity
Current Liabilities
185,712
1.04
193,140
Long term liabilities
432,744
1.04
450,054
Common stock
73,000
0.63
45,990
APIC
91,250
0.63
57,488
Retained earnings
712,845
576,739
Cumulated transaction adjusment
231,962
Total Liabilities & Equity
1,495,551
1,555,373
4. Cashflow statement
Euro
Exchange Rate
US Dollars
Net Income
153,300
1.01
154,833
Changes in accounts receivable
(42,340)
1.01
(42,763)
Changes in Inventory
(54,385)
1.01
(54,929)
Changes in current liabilities
30,952
1.01
31,262
Net cashflow from operating activities
87,527
88,402
Purchase of PPE
(56,064)
0.99
(55,503)
net cashflow from investing activities
(56,064)
(55,503)
Proceeds from long term debts
72,124
1.03
74,288
Payment of dividends
(15,330)
1.02
(15,637)
Net cashflow from financing activities
56,794
58,651
Net Change in Cash
88,257
91,550
Effect of exchange rate on cash
20,341
Beginning Cash
223,380
0.95
212,211
Ending Cash
311,637
1.04
324,102
Note: Proceed from long term debts given in the question is Euro 72174
which I think is wrong as it does not give the correct net cash flow
1. Income Statement
Euro
Exchange Rate
US Dollars
Sales
1,095,000
1.01
1,105,950
Cost of goods sold
(657,000)
1.01
(663,570)
Gross Profit
438,000
442,380
Operating Expenses
(284,700)
1.01
(287,547)
Net Profit
153,300
154,833
2. Statement of retained earnings
Euro
Exchange Rate
US Dollars
Beginning of year Retained Earnings
574,875
437,543
Net Income
153,300
1.01
154,833
Dividends
(15,330)
1.02
(15,637)
Ending retained earnings
712,845
576,739
3. Balance Sheet
Euro
Exchange Rate
US Dollars
Asstes
Cash
311,637
1.04
324,102
Accounts receivable
254,040
1.04
264,202
Inventory
326,310
1.04
339,362
PPE, net
603,564
1.04
627,707
Total Assets
1,495,551
1,555,373
Liabilities & stockholder's Equity
Current Liabilities
185,712
1.04
193,140
Long term liabilities
432,744
1.04
450,054
Common stock
73,000
0.63
45,990
APIC
91,250
0.63
57,488
Retained earnings
712,845
576,739
Cumulated transaction adjusment
231,962
Total Liabilities & Equity
1,495,551
1,555,373
4. Cashflow statement
Euro
Exchange Rate
US Dollars
Net Income
153,300
1.01
154,833
Changes in accounts receivable
(42,340)
1.01
(42,763)
Changes in Inventory
(54,385)
1.01
(54,929)
Changes in current liabilities
30,952
1.01
31,262
Net cashflow from operating activities
87,527
88,402
Purchase of PPE
(56,064)
0.99
(55,503)
net cashflow from investing activities
(56,064)
(55,503)
Proceeds from long term debts
72,124
1.03
74,288
Payment of dividends
(15,330)
1.02
(15,637)
Net cashflow from financing activities
56,794
58,651
Net Change in Cash
88,257
91,550
Effect of exchange rate on cash
20,341
Beginning Cash
223,380
0.95
212,211
Ending Cash
311,637
1.04
324,102
Note: Proceed from long term debts given in the question is Euro 72174
which I think is wrong as it does not give the correct net cash flow