10. Multinational working capital management

Multinational companies are exposed to complex management and allocation of their resources. A multinational companys cash management, credit management, inventory management, and so on, need to have several additional elements factored in compared with those of a purely domestic corporation.

Multinational Inventory Management

Decisions related to amount of investment in inventory and inventory policy need to factor in the following:

	Exchange rates
	Possibility of import and export quotas or tariffs
	Tax consequences
	Possibility of at-sea storage

Consider this case:

Streep Inc. is a U.S.-based multinational firm with a subsidiary in Switzerland. Last week, Streep created its periodic financial statements, and the subsidiary had SFr 80,000 worth of inventory on its balance sheet. Streep translated the value of inventory using the spot exchange rate at that time of $0.8153 / SFr and recorded that value on its consolidated balance sheet.

However, this week the exchange rate changed dramatically to $0.7878 / SFr. The subsidiary still has the same amount of inventory (valued at SFr 80,000).

If the firm were to create a new consolidated balance sheet and translate the value of its inventory at the new spot exchange rate, what would happen to the dollar value of inventory?

It would increase by 2,640.

It would decrease by $2,200.

It would increase by $2,200.

It would decrease by 2,420.

The change in inventory value was created purely by accounting and exchange rate factors, because the subsidiary still has the same inventory and assets in place. However, this change would affect Streeps consolidated financial statements and ratios. Assuming no other changes occurred, what effect would this have on Streeps quick ratio?

A. The quick ratio does not change.

B. The quick ratio increases with increase in inventory value.