Redline Products, Inc. is a U.S.-based multinational with subsidiaries around the world. One such subsidiary, Acceletron, operates in Singapore, which has seen mild but not excessive rates of inflation. Acceletron was acquired in 2000 and has never paid a dividend. It records inventory using the FIFO method.
Chief Financial Officer Margot Villiers was asked by Redline’s Board of Directors to explain how the functional currency selection and other accounting choices affect Redline’s consolidated financial statements. She gathers Acceletron’s financial statements denominated in Singapore dollars (SGD) in Exhibit 16-13 and the U.S. dollar/Singapore dollar exchange rates in Exhibit 16-14. She does not intend to identify the functional currency actually in use, but rather to use Acceletron as an example of how the choice of functional currency affects the consolidated statements.
EXHIBIT 16-13 Selected Financial Data for Acceletron, 31 December 2007 (SGD millions)
|
Cash |
SGD |
125 |
|
Accounts receivable |
230 |
|
|
Inventory |
500 |
|
|
Fixed assets |
1,640 |
|
|
Accumulated depreciation |
(205) |
|
|
Total assets |
SGD |
2,290 |
|
Accounts payable |
185 |
|
|
Long term debt |
200 |
|
|
Common stock |
620 |
|
|
Retained earnings |
1,285 |
|
|
Total liabilities and equity |
2,290 |
|
|
Total revenues |
SGD |
4,800 |
|
Net income |
SGD |
450 |
EXHIBIT 16-14 Exchange Rates Applicable to Acceletron
|
Exchange Rate in Effect at Specific Times |
USD per SGD |
|
Rate when first 1,000 of fixed assets were acquired |
0.568 |
|
Rate when remaining 640 of Fixed assets were acquired |
0.606 |
|
Rate when long-term debt was issued |
0.588 |
|
31 December 2006 |
0.649 |
|
Weighted average rate when inventory was. acquired |
0.654 |
|
Average rate in 2007 |
0.642 |
|
31 December 2007 |
0.671 |
If the U.S. dollar were chosen as the functional currency for Acceletron in 2007, Redline could reduce its balance sheet exposure to exchange rates by
a. selling SGD 30 of fixed-assets for cash.
b. issuing SGD 30 of long-term debt to buy fixed assets.
c. issuing SGD 30 in short-term debt to purchase marketable securities.