Translation of Foreign Income Statements Domestic Corporation is a U.S. company that owns all of the common stock of External Corporation. The income statements of External Corporation for 2000 and 2001 are presented below. The currency for the country in which External Corporation is located is the eagle (EG).

a. Translate the income statements for 2000 and 2001 into U.S. dollars.

b. Which year had the higher gross margin stated in eagles?
By what amount?

c. Which year had the higher gross margin translated into U.S. dollars? By what amount?

d. Which measure of gross margin is the more useful in measuring the return to Domestic Corporation? Which measure is the more useful in evaluating the operating activities of External Corporation?

e. Which year had the higher net income stated in eagles? By what amount? P

f. Which year had the higher net income translated into U.S.
dollars? By what amount?
. Why is it important that the management of Domestic Corporation not base its evaluation of the management of External Corporation solely on the financial statements translated into U.S. dollars?

Transcribed Image Text:

External Corporation Income Statements Years Ended December 31 2001 2000 Sales EG 700.000 EG 650,000 Cost of Goods Sold (460,000) (400,000) Gross Margin EG 240,000 EG 250.000 Salary and Wages EG 100,000 EG 60,000 Depreciation Expense 20,000 20,000 Other Operating Expenses 60.000 90,000 Total Operating and Other Expenses EG(180,000) EG(170,000) Net Income EG 60.000 EG 80,000 Relevant exchange rates are as follows: Average rate for year 2000 1 EG = $.30 U.S. Average rate for year 2001 1 EG = $.45 U.S.