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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 their products are manufactured in foreign countries but purchased from domestic wholesalers; these transactions are therefore denominated in U.S. dollars. However, the company’s president is entertaining the idea of acquiring subsidiaries in several foreign countries to ensure a reliable supply chain. He also believes that the exchange rates of some foreign currencies will rise about 10% in the next year and he is keen on reporting a gain in Global Design’s income statement when it
does.
The president has asked you to prepare a memo outlining the effects of his 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 he should proceed with his plan.
