You have been recently hired as a staff accountant at Global Design, Inc., a small chain of retail home furnishing stores. You report directly to the Chief Financial Officer (CFO). The company specializes in home products with high-quality “European” design, but reasonable prices. Most of the firm’s products are manufactured in foreign countries, but purchased from US wholesalers; these transactions are therefore denominated in U.S. dollars. The company’s president is considering the possibility of acquiring subsidiaries in several foreign countries to ensure a reliable supply chain. They also believe that the exchange rates of some foreign currencies will rise about 10% in the next year and they are keen on reporting a gain in Global Design’s income statement when this happens.
The president has asked you to prepare a memo outlining the effects of their plan, including
1) the financial reporting effects of acquiring a foreign subsidiary;
2) how changes in the foreign currency exchange rate will affect Global Design’s financial statements; and,
3) under what circumstances Global Design could record a gain from a foreign subsidiary.
The president has also asked you to make a clear recommendation on whether they should proceed with their plan.
Note: The company president has never taken an accounting class and does not understand journal entries, so please do not include any in your memo.
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