Multinational Operations Flashcards
Given ops, fin pos, cf are measured in functional currency, how is functional currency determined
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
What are two methods of consolidation
Temporal method (remeasurement) Current rate method (translation)
How to determine method of consolidation
If functional = local, use current rate
If functional = parents, use temporal
Which rates to use for temporal method
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
Which rates to use for current rate method
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
What do translation gains or losses result from
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
How do ratios change post translation using current rate method
Pure BS and IS ratios same
If local currency depreciating, mixed ratios larger and vice versa
There should be a stable relationship between which two measures
Operating cash flow and earnings; without support of op cash flow growth, earnings growth is not sustainable
Name three types of hedges
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
How can disaggregating income be used to improve predictive ability
By separating into cash and accrual components and applying lower weight to accrual component
Allows less persistent revenue to be weighted lower
What are two ratios used to evaluate earnings quality
Balance sheet based accruals ratio
Cash flow based accruals ratio
How to calc balance sheet based accruals ratio
(NOAend + NOAbeg)/2
Higher ratio = lower earnings quality
How to calc cash flow based accruals ratio
(NOAend + NOAbeg)/2
Higher = lower earnings quality
What are four manipulation techniques
Revenue recognition (misstate, accelerate, misclassify) Expense recognition (understate, delay, misclassify) Balance sheet manipulation (off BS fin) CF statement manipulation (misclassify, ignore)
How to detect revenue recognition errors
Large receivable/unearned changes
Increased DSO
Compare rev to cash collected
How to identify expense recognition issues
Large changes in FA and inv Increasing DOH LIFO liquidation Dep exp comparison Core op margin = (sales - COGS - SG&A)/sales
How to identify recognition issues on BS and CF statements
Capitalize op leases
Lack of goodwill impairment
Op lease growth to firms asset growth
Decrease in discretionary spending at ye
Basic financial analysis framework
Establish objectives Collect data Process data Analyze data Develop/communicate conclusions Follow up
How to integrate FSA techniques
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
