Example1: A U.S. Firm started its opertaions in China in the year 2006 when the exchange rate was Yuan 7.8 = $1
Over the year the Yuan depreciated to Yuan 7.1 = $1, the average exchange rate was Yuan 7.3 = $1
The balance sheet in Yuan is given below, convert the balance sheet in USD.
Beginning Exchange Rate = 7.8
Average Exchange Rate = 7.3
Recent Exchange Rate = 7.1
Balance Sheet
December 31, 2006
Assets Yuan $ Liabilities Yuan $
Cash 500 70 Accounts Payable 250 35
Accounts Receivable 200 28 Long-Term Debt 500 70
Inventory 400 56 Common Stock 900 115
Plant & Equipment 800 113 Retained Earnings 250 34
Translation Adjustment 12
TOTAL 1900 267.61 TOTAL 1900 267.61
Translation Exposure = Total Assets - Total Liabilities
162
Translation Adjustment = (Recent ExCh Rate - Beg. ExCh Rate)*Common Stock + (Recent E
-12.34
Income Statement
Yuan $
Revenue 1650 232.39
COGS 800 112.68
Depreciation of P&E 300 42.25
Office Expenses 134 18.87
Pre-Tax Income 416 58.59
Income Tax 166 23.44
Net Income 250 35.15
e rate was Yuan 7.8 = $1
uan 7.3 = $1
mmon Stock + (Recent ExCh Rate - Avg. ExCh Rate)*Ret. Earnings
Example2: A U.S. Firm started its operations in China in the year 2006 but the operations in China are an integral
The exchange rate at the end of 2006 was Yuan7.8 = $1
The inventory and Plant & Equipment is shown on B/S on historic cost
Exchange Rate = 7.8
Balance Sheet
December 31, 2006
Assets Yuan $ Liabilities Yuan $
Cash 500 64 Accounts Payable 250 32
Accounts Receivable 200 26 Long-Term Debt 500 64
Inventory 400 51 Common Stock 900 115
Plant & Equipment 800 103 Retained Earnings 250 32
TOTAL 1900 243.59 TOTAL 1900 243.59
in 2007, If the Yuan appreciates to 7.1 = $1
Exchange Rate = 7.1
Balance Sheet
December 31, 2007
Assets Yuan $ Liabilities Yuan $
Cash 500 70 Accounts Payable 250 35
Accounts Receivable 200 28 Long-Term Debt 500 70
Inventory 400 51 Common Stock 900 115
Plant & Equipment 800 103 Retained Earnings 250 31
TOTAL 1900 252.44 TOTAL 1900 252.44
Translation Exposure = Total Monetary Assets - Total Liabilities
-7
Translation Adjustment = (Recent ExCh Rate - Beg. ExCh Rate)*Exposure
-1
in China are an integral part of the US firm.