Multinational Operations

Question 0

Given ops, fin pos, cf are measured in functional currency, how is functional currency determined

Answer 0

Self contained, independent subs located in local market use local currency

Subs integrated with parent or in highly inflationary env use parent’s functional currency

Question 1

What are two methods of consolidation

Answer 1

Temporal method (remeasurement)
Current rate method (translation)

Question 2

How to determine method of consolidation

Answer 2

If functional = local, use current rate

If functional = parents, use temporal

Question 3

Which rates to use for temporal method

Answer 3

Current rate: monetary assets/liabs
Historical rate: non monetary A/L, common stock, COGS, dep
Average rate: revenues, SG&A

Exchg rate G/L on IS
Exposure on net monetary assets

Question 4

Which rates to use for current rate method

Answer 4

Current rate: monetary&non A/L, equity
Historical rate: common stock
Average rate: revenues, SG&A, COGS, dep, net income

Exchg rate G/L in equity
Exposure on sh equity

Question 5

What do translation gains or losses result from

Answer 5

Balance sheet accounts translated at current rate (exposed to changes in int rates)
C.R. - sh equity - shown on bs
T - net monetary assets - shown on is

Question 6

How do ratios change post translation using current rate method

Answer 6

Pure BS and IS ratios same

If local currency depreciating, mixed ratios larger and vice versa

Question 7

There should be a stable relationship between which two measures

Answer 7

Operating cash flow and earnings; without support of op cash flow growth, earnings growth is not sustainable

Question 8

Name three types of hedges

Answer 8

Fair value hedge (of A/L) - G/L in IS
Cash flow hedge (var) - G/L in BS/IS
Net investment hedge of a foreign subsidiary - G/L in equity

Question 9

How can disaggregating income be used to improve predictive ability

Answer 9

By separating into cash and accrual components and applying lower weight to accrual component

Allows less persistent revenue to be weighted lower

Question 10

What are two ratios used to evaluate earnings quality

Answer 10

Balance sheet based accruals ratio

Cash flow based accruals ratio

Question 11

How to calc balance sheet based accruals ratio

Answer 11

(NOAend + NOAbeg)/2

Higher ratio = lower earnings quality

Question 12

How to calc cash flow based accruals ratio

Answer 12

(NOAend + NOAbeg)/2

Higher = lower earnings quality

Question 13

What are four manipulation techniques

Answer 13

Revenue recognition (misstate, accelerate, misclassify)
Expense recognition (understate, delay, misclassify)
Balance sheet manipulation (off BS fin)
CF statement manipulation (misclassify, ignore)

Question 14

How to detect revenue recognition errors

Answer 14

Large receivable/unearned changes
Increased DSO
Compare rev to cash collected

Question 15

How to identify expense recognition issues

Answer 15

Large changes in FA and inv
Increasing DOH
LIFO liquidation 
Dep exp comparison 
Core op margin = (sales - COGS - SG&A)/sales

Question 16

How to identify recognition issues on BS and CF statements

Answer 16

Capitalize op leases
Lack of goodwill impairment
Op lease growth to firms asset growth
Decrease in discretionary spending at ye

Question 17

Basic financial analysis framework

Answer 17

Establish objectives 
Collect data
Process data
Analyze data 
Develop/communicate conclusions 
Follow up

Question 18

How to integrate FSA techniques

Answer 18

DuPont equ'n - look at earnings source 
Remove equity income from associates 
Examine change in BS composition 
Can cap structure support future obligations and plans 
Segmentation 
Remove off BS financing
Disaggregate earnings 
Compare w/CF
Find standalone market value