Accounting Case Study: Foreign Currency Translation Analysis

This case study presents a detailed analysis of a company's financial statements, focusing on the impact of foreign currency translation. The assignment includes an income statement and a balance sheet, both presented in US dollars and their equivalent in Australian dollars, highlighting the application of exchange rates. The analysis delves into the calculation of profit, retained earnings, and the effects of depreciation and income tax. Furthermore, the case study explores the reasons behind the foreign currency translation reserve, particularly focusing on the differences arising from exchange rate fluctuations in assets like plant and land, as well as liabilities like loans. It also provides references to relevant academic sources.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Authors Note:

2ACCOUNTING
Table of Contents
Case Study B....................................................................................................................................3
Answer to Question 1......................................................................................................................3
Answer to Question B......................................................................................................................5
Reference.........................................................................................................................................6

3ACCOUNTING
Case Study B
Answer to Question 1
Income Statement
Particulars US$ US$
Applic
able
Excha
nge
Rate AUD AUD
Sales revenues
1600000.0
0 1.75
2800000.0
0
Cost of sales:
Opening inventories 140000.00 2
280000.
00
Purchases 840000.00 1.75
1470000
.00
980000.00
1750000
.00
Closing inventories 280000.00 1.5
420000.
00
700000.00
1330000.0
0
Gross Profit 900000.00
1470000.0
0
Expenses:
Depreciation 90000.00 1.75
157500.
00
Other 270000.00 1.75
472500.
00
360000.00 630000.00
Profit before Income Tax 540000.00 840000.00
Income tax expense 200000.00 1.75 350000.00
Profit 340000.00 490000.00
Retained earnings as at 1 July
2017 200000.00 200000.00
540000.00 690000.00
Dividend Paid 120000.00 2
240000.
00
200000.00 1.75
350000.
00
320000.00 590000.00
Retained earnings as at
30/06/2018 220000.00 100000.00

4ACCOUNTING
Balance Sheet
Particulars US$
Applicable
Exchange Rate AUD
Current assets:
Inventories 280000.00 1.50 420000.00
Accounts receivable 20000.00 1.50 30000.00
Cash 20000.00 1.50 30000.00
Total current assets 320000.00 480000.00
Non-current assets:
Patent 80000 1.50 120000.00
Plant 720000 1.50 1080000.00
Accumulated depreciation -130000 1.50 -195000.00
Land 500000 1.50 750000.00
Buildings 920000 1.50 1380000.00
Accumulated depreciation -120000 1.50 -180000.00
Total non-current assets 1970000 2955000
Total Assets 2290000.00 3435000.00
Current liabilities:
Provisions 500000.00 1.50 750000.00
Accounts payable 320000.00 1.50 480000.00
Total current liabilities 820000.00 1230000.00
Non-current liabilities:
Loan from Westland Ltd 530000.00 1.50 795000.00
Total Liability 1350000.00 2025000.00
Net Assets 940000.00 1410000.00
Equity
Share capital 720000.00 2.00 1440000.00
Retained earnings 220000.00 100000.00
Translation Reserve -130000.00
Total Equity 940000.00 1410000.00

5ACCOUNTING
Answer to Question B
The difference in the exchange rate is the main reason for the foreign currency translation
reserve. It can be seen that new plan was acquired on 01/01/2018 and it is to be depreciated over
5 years (Ahmed and Ali 2015). However, the exchange rate of 30/06/2018 is used for translating
in the balance sheet. The depreciation translated using the average exchange rate. The calculation
of all the difference are provided below:
Difference due to Translation
Particular Amount Amount Translation Difference
Plant 180000.00 204000.00 24000.00
Depreciation 15000.00 18000.00 3000.00
Land 300000.00 320000.00 20000.00
Loan 795000.00 1060000.00 265000.00
Total 312000.00

6ACCOUNTING
Reference
Ahmed, K. and Ali, M.J., 2015. Has the harmonisation of accounting practices improved?
Evidence from South Asia. International Journal of Accounting & Information
Management, 23(4), pp.327-348.
Bonini, S., Dallocchio, M., Raimbourg, P. and Salvi, A., 2016. Do firms hedge translation
risks?. Journal of Financial Management, Markets and Institutions, 4(2), pp.155-178.
Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association
with market risk. Accounting & Finance, 56(3), pp.727-748.