Alpha Computer Systems (ACS) designs, manufactures, sells, and services networked computer systems; associated peripheral equipment; and related network, communications, and software products.
Exhibit 8.35 presents geographic segment data. ACS conducts sales and marketing operations outside the United States, principally through sales subsidiaries in Canada, Europe, Central and South America, and the Far East; by direct sales from the parent corporation; and through various representative and distributorship arrangements. The company's international manufacturing operations include plants in Canada, the Far East, and Europe. These manufacturing

plants sell their output to the company's sales subsidiaries, the parent corporation, or other manufacturing plants for further processing.
ACS accounts for intercompany transfers between geographic areas at prices representative of unaffiliated-party transactions.
Sales to unaffiliated customers outside the United States, including U.S. export sales, were $5,729,879,000 for Year 5, $4,412,527,000 for Year 4, and $3,179,143,000 for Year 3, which represented 50%, 47%, and 42%, respectively, of total operating revenues. The international subsidiaries have reinvested substantially all of their earnings to support operations. These accumulated retained earnings, before elimination of intercompany transactions, aggregated $2,793,239,000 at the end of Year 5, $2,070,337,000 at the end of Year 4, and $1,473,081,000 at the end of Year 3.
The company enters into forward exchange contracts to reduce the impact of foreign currency fluctuations on operations and the asset and liability positions of foreign subsidiaries. The gains and losses on these contracts increase or decrease net income in the same period as the related revenues and expenses; for assets and liabilities, in the period in which the exchange rate changes.
REQUIRED
Discuss whether ACS should use the U.S. dollar or the currencies of its foreign subsidiaries as its functional currency.

Transcribed Image Text:

Exhibit 8.35 Alpha Computer Systems Geographic Segment Data amounts in thousands) Problem 8.27) Year 3 Year 4 Year 5 Revenues United States Customers Intercompany $ 4,472,195 1,354,339 5,826,534 2,259,743 82,649 2,342,392 $ 858,419 577,934 1,436,353 $(2,014,922) 7,590,357 $ 5,016,606 1,921,043 6,937,649 3,252,482 114,582 3,367,064 1,120,356 659,204 1,779,560 $(2,694,829) 9,389,444 $ 5,810,598 2,017,928 7,828,526 $ 4,221,631 137,669 4,359,300 1,443,217 912,786 $ 2,356,003 $ (3,068,383) $11,475,446 Total Europe Customers Intercompany Total Canada, Far East, Americas Customers Intercompany Total Eliminations Net Revenue Income United States Europe Canada, Far East, Americas Eliminations Operating Income Interest Income Interest Expense Income before Income Taxes $ 342,657 405,636 207,187 (126,771) S 828,709 116,899 (88,079) $ 857,529 $ 758,795 634,543 278,359 (59,690) 1,612,007 122,149 (45,203) 1,688,953 $ 512,754 770,135 390,787 (38,676) 1,635,000 143,665 (37,820) 1,740,845 Exhibit 8.35 (Continued) Assets United States Europe Canada, Far East, Americas Corporate Assets (temporary cash investments) Eliminations Total Assets 3,911,491 1,817,584 815,067 2,035,557 (1,406,373) 7,173,326 4,627,838 2,246,333 843,067 1,979,470 (1,289,322) 8,407,386 5,245,439 3,093,818 1,293,906 2,057,528 (1,579,135) $10,111,556