 Hello and welcome to this session. This is Professor Farhad and this session we would look at a translation of financial statement I'll work a comprehensive example showing you both the current and the temporal method and this is part four of four What does that mean? It means there are three prior parts Before the section explaining the details and I'll put the link in the description this way if you'd like to look at the Lecture prior to this this topic is covered in advanced accounting as well as an international accounting in my international accounting course I do have few examples as well. You could also look at those if you have not connected with me only then please do so YouTube is where I host my 1500 plus accounting, auditing, finance, finance and tax. These are all the courses that I cover I don't only cover one course. I cover many courses check out my YouTube also on my website It's not only I have the lectures on my website. I have additional resources Exercises through false multiple choice. For example the PowerPoint The exercises that I that I use the exercise and I'm gonna be working with the day will be available on my Website, please check it out Studypal.co is an artificial intelligence study by the platform that will match you with the CPA or CFA candidate in your area They're available in 85 countries 2500 cities if you are interested Just one more time the prerequisite if you're interested in viewing the prior session I'm gonna put the prerequisite in the description if it's not if it's not please email me, okay, but it should be there Let's take a look at this example And you know if you don't have access to my notes if you're on access to my website, you know Please copy the information down that this way you can follow. Okay on January 1st 2012 P a US company acquired 100% of an Italian chocolate company So US company acquiring an Italian company. It was determined that the functional currency is the euro So they made it easy for us at the time of the combination The Italian companies retained earnings was 150,000 euros. That's as they began beginning retained earnings of the chocolate Italian company The Italian company has been has all been purchased at its incorporation. That's fine January 12 2010 and had a book value of 400,000 70,000 non-monetary asset at the beginning of 2010 So the book value that we started with is 400,000 net monetary asset was $70,000 relevant exchange rate are listed below The Italian companies is the FIFO method of inventory and it's ending inventory in both of 2011 and 2012 What's purchased during the last quarter, which is makes sense Because if you're using FIFO first and first out, it means the most recent inventory was purchased recently and if you foretalk it at the end of 2012 at the beginning of 2012 it was bought at the end of 2011 and here are the exchange rate and The Italian company declared 40,000 of dividend September 1st And here's the date the information that we are giving we are giving the exchange rate on the date of acquisition The exchange rate at the beginning of the year in question the exchange rate. I believe this is for the dividend The exchange rate at the end of the year in question the average rate for the whole year Which is we're gonna see how we're gonna be using those different rate Where do we use them if you don't know where to use them? Just stop right now and go to those pre-requisites I'm gonna show you but the point is if you're not sure like why are they giving us all this rate the average for the three month and the 2012 and the average for the last three month of 2011 You'll see how we will use those so again if you don't have the information you can access it through my website or Take note take a picture of it. Whatever you have to do And this is the trial balance in euros in the in the Italian currency well obviously it's the euros It's no no more the lira. So this is what we're looking at We're looking at sales of 280,000 costs of goods sold of 100,000 the appreciation expense of 20,000 Other expenses of 80 income tax of 30,000 they made the profit in euros of $50,000 The beginning retained earnings as we said is 150 net income plus beginning retained earnings gives us 200,000 minus minus the dividend gives us ending retained earnings Now ending retained earnings will go to the balance sheet down the balance sheet They had 30,000 in euros 50,000 in receivable 20,000 inventory land building equipment Total asset 580 they have liabilities accounts payable bonds payable common stock Additional paid in capital retained earning of 160 all in all assets equal liabilities plus a plus equity here We have a translation adjustment, which we're gonna be working with shortly. Okay. That is that now The next thing we're gonna do is Is to actually work this exercise and to work this exercise? I like to use Excel I can write on the screen but Excel it's cleaner I want to make sure you understand where everything is coming from so the first method We're gonna be using to translate and by the way this Excel sheet would also be available on my website So the first thing you We're gonna work is the current method so it's very important to understand how we translate the current method Well, what the current method will start with the income statement You might be saying well, isn't that normal? We start with the income statement Well, you're gonna see when we use the temporal method. We don't we don't start with the income statement Let's walk through it though again, if you feel I'm not going over specific information The reason is because I already went in the prior session just in case. Okay, so the first thing we're gonna do We're gonna go ahead and translate the income statement. That's the first thing we're gonna do Well, how do we translate the income statement? Simply put what I'm asking you is which of these rates on the right-hand side? Right here. I'm highlighting back and forth. Which of these rates are we gonna be using? Well To be 100% accurate Do we to be 100% accurate? None of these rates will be used because revenues and expenses they will need to be translated at The transaction date so if they took place April the second at 11 o'clock. We need to know what was the euro at April the second 11 o'clock What was that sale for if the sale took place on January 6? What was the euro on January 6? But we can do that because we can do that for the income statement We assume we assume that transaction takes place throughout the year therefore for the income statement We're gonna be using the average rate again The reason we use the average rate is because it is not practical for companies to keep track of the transaction constantly So for this I'm gonna put capital a here For the ink for the revenues and for the expenses. Let me just A and drag it a means I'm gonna be using the average rate for 2012 and the average rate for 2012 is 1.1 106 That's the rate So I'm gonna go ahead and translate oops. Sorry should be the same So it's this rate. I'm gonna be using Equal sign. I'm just using formulas Okay, so this is the rate I'm gonna be using For the income statement accounts, so simply put I'm gonna take the euro Multiply it by the rate the US dollar average rate. It's gonna give me my Revenue in US dollar and this is I'm gonna drag the formula down. Let me just change the format So it looks a little bit a little bit better number Number your separator no decimal negatives. Okay, so So now net income now if I can just get net income now I'm gonna copy the formula from here so net income is 55,000 530 55,000 530 again what we're using again just It's the average. It's the average we're using the average rate Okay, so we're up to this point the next thing we're gonna do is we're gonna translate We're gonna translate retained earnings. Remember, let me just now now we're moving into a new territory in a sense Now what we're leaving the income statement. We completed the income statement. Now, we're gonna be looking at retained Earnings starting retained earnings is 150. Well for retained earnings. We're gonna go back to the rate At the beginning of the year the rate at the beginning of the year the rate at the beginning of the year is 104 1.045 5 1.04512 so simply put I'm gonna try I'm gonna bring this right here This is the rate that I will translate translate my retained earning at so I'm gonna translate retained earnings I'll take 150 times the rate So I'm gonna be using the rate on Simply put the rate will be on one one the rate on one one One let me just make sure this will show one dash One okay one one. That's the rate 156 now my net income 55,530 plus my retained earning translated will give me 212 295 Then I'm gonna then gonna translate my dividend Again my dividend the dividend was on a specific date. The dividend was 9 1 well I do have you have to translate the dividend on that date because it's a one transaction I have a specific date. Therefore the date when I declare the dividend it was 1.5 572 the rate was 1.5 7 2. I'm gonna translate my dividend At that rate and my dividend is see 1.15 sorry, I have this rate incorrect the rate is 1.1 1.15 7 2 that's the rate. Okay, so the rate is that let me just Take the 40,000 the dividend in euros translated into US dollar and now I'm gonna get ending retained earning Which is 212 295 minus E 12 And that's gonna give me my Plus actually because it's a minus already so the difference between okay, so it's gonna give me my ending retained earnings So my ending retained earnings. Let me just make sure this looks more a little bit more like a financial statement So this way You know where we are once we do Some computation give me one second please So here I'm just gonna double underline here Double underline here And double underline here. It's not a big deal. But just so this way you're not You're not overwhelmed and let me change the format of these numbers So now what we did is we find net income And the statement of retained earnings in US dollar. Okay, which method are we using the current method? So hopefully you were able to follow. What did we use? Which rate for what purpose now once again if you're not sure where the rates are coming from Why are we using those rates again? Go back to the lecture, but hopefully you followed So this is the rate on 9 1. This is the rate on 9 1. Now Well, we're gonna go now to the balance sheet and here's what's gonna happen So once you're done with the income statement retained earning under the current method, you go to the balance sheet under the balance sheet We're using the current rate. Therefore on the balance sheet the balance sheet is 12 31 I know it's obvious, but let me put it there 12 31 2012 the balance sheet We're gonna be using for most of it the current rate. C is the current rate Okay, see we're gonna be using see the current rate. Now. What is the current rate on 12 31 the current rate is right here Current rate is 1.1762. That's the current rate Okay, now I'm gonna go ahead and pull my current rate. So I can translate my financial statements Okay 1.1762 These are all on the based on the current rate Again, because we are using the current method. So that's why it's kind of we can we can we can say so So basically I'm gonna take my cash Multiplied by the current rate and hopefully it makes sense. Yes The cash will be translated to the current rate as well as all the other assets. Let me Figure out the change the format This way I have the numbers. They look a little better In here's what I have now. I'm gonna add my total asset. I'm just gonna copy this formula Adding my total asset. My total assets is 682196. Once you get to this point, this number is important This number is important. You will see why in a moment. So I know my assets are 682196 Now I'm going to do the same thing for my Liabilities my liabilities also will be translated at the current rate So I'm going to take I'm going to use the same rate I'm going to use in the same rate. So I'm going to take this 30 000 times this figure 140 Times this figure. So that's my liabilities. You know what matter of fact, I'm gonna do one I'm gonna go a step further and what you should do at this point if I was in your shoes I'm gonna take my assets and subtract my liabilities subtract my liabilities and this is gonna give me my equity If you hear if you hear footsteps, it's my son my three-year-old son Running okay, so okay, so my equity should be my total equity should be okay 482 242 just just just keep that on the side. Okay, you'll see how I'm gonna be using this Okay, so because I have all my assets all my liabilities now I'm gonna translate my common stock additional paid in capital Okay, I'm gonna translate those okay for one thing. I have retained earning Let me bring down retained earning retained earning is 166 10 so notice retained earning is coming from up there. So I'm done with retained earning So I'm gonna translate my common stock and additional paid in capital But what rate you will translate those at the rate of the when you bought the company at the rate that you when you bought the company when you bought the company January 1st 2012 This was the rate So you're gonna be using that rate for those two At what rate at the when you acquire the company? Okay So this is gonna be the same for both Okay, this is the rate now. I'm gonna translate. I'm gonna go ahead and Take 200,000 times the rate 50,000 times the rate Let me change this to decimals. So this way Format Okay, I changed it. Okay. Now I have my assets and my liabilities now I already computed my latin. Sorry. I already computed my asset already computed my liabilities And I find out my equity should be that much. Let me add up my equity So I'm gonna add up my equity and see how much my equity is equal to so I'm gonna add up my equity Matter of fact, I'm just gonna highlight it and it's gonna give me the sum. It's not showing Okay, let me just add my equity. So if I take this number Plus this number plus this number my equity is 427290. This is my equity But my equity should be this number in red 482242. What does that mean? What's the difference? I am missing. I am missing from equity 54952. Well What is that 54952? Guess what that 54952 is my what we called translation adjustment Translation adjustment. Let me just double check the number 35286164668 209 this is 209 It should be 209. This is rounding little bit. That's fine. Um Okay, that's fine simply put simply put what I'm missing is this translation adjustment This is cumulative translation adjustment. So the adjustment goes on the balance sheet. Okay, this is adjustment now If I add I'm gonna add them manually my liabilities all my liabilities watch. I'm gonna add all my liabilities I'm gonna I'm adding all the liabilities then equity Then my adjustment which is e28 e28. It should equal to my total assets. So notice here now my liabilities End equities. This is liabilities Plus Equity that's equal to total assets 682 196 And simply put simply put what I did is I figured out my net income first I figured out my retained earning and whatever is needed and whatever was needed. Let me let me be let me be specific with you That was needed. It's right here. Let me just have a draw That's that's the number that was needed. That's the number that that I needed to add To my equity to come up with 682 196. So my equity should be this much Okay, I needed 54 952 as a result once I do so my total assets my total assets right here Will equal to total let me put liabilities and equity here with equal to With equal to total liabilities and equities, okay, so Basically, this is what we did. This is the current. This is the current method now The question is is there another way to verify the translation adjustment using the current method? Yes There is another way to verify the The adjustment how do we verify the adjustments? Let me show you it's not a shortcut It's basically it's a proof and hopefully you will understand it But let's I did not put the number down. Let me put it down the beginning asset net asset remember that was given in the problem was 400,000 400,000 Then what's gonna what's gonna affect what's gonna affect net asset net income so net income was net income was in euros 50,000 Plus 50,000 the dividend we paid dividend of 40,000 dividend of 40,000 So our our exposed net asset position exposed asset position Um at year end was 410 410 basically how it's 410 10 beginning Beginning asset position, which is beginning equity Plus net income minus dividend I did plus because it's a minus will give us 410 10 so far so good now Here's what's gonna happen I am going to go ahead and translate basically what does it mean translate? Basically, I'm gonna go ahead and it Basically it translate basically translate the financial statements based on the appropriate rate, okay My exposed position when I when I started the year the rate was 1.0452. So the translation rate for this number is 1.0404512 why it's the beginning of the year. This is one one So this number will translate into us dollar when The date one one when I bought this company will translate to 418. Let me just Change the format here for all these numbers. Okay right Okay, 418 418 now I have to also translate my net income. Remember net income You would use the average rate because net income took place throughout the year 1 1 0 6 so Average 2012 1 1 0 6 So this number the 50 000 will be translated at 1.1106 And the dividend will be translated based on the dividend rate. Let me just get the dividend rate from here one Okay, so dividend rate Is 40 000 times. Whoops The 40 000 times this rate So all in all, let me just kind of copy and paste here net beginning asset position plus Plus plus net income minus dividend gives me this number. Well If it gave me this number, let's see. What's the 427, okay But no, let me see Okay, let's do it one more time beginning Beginning asset beginning asset asset position plus Plus net income minus dividend reason I'm putting plus because the number is negative It's 427 290 427 290. Well, if I translate My asset 12 12 asset if I translated based on 12 12 31 means 12 12 31 is 12 12 12 31 2012 1.1762 So if I translate this position, let me first put the rate at 1.1762 I will come up with I will come up with 482 242. Well What does that mean? It means when I went through the the When I went and I translated everything at the appropriate appropriate rate beginning inventory I'm beginning net asset at the appropriate rate net income at the average rate and dividend at At the dividend rate. I came up with at net asset position 427 290 now hold on a second but If I take my net asset position at 12 31 which is 410 and I translated at 12 31 which is 1.1762 I come up with let me change my pen here I come up with 482 242. Well, how much am I missing? Well, let's find the difference between them How much am I missing 54 952 54 952 54 952 that's the adjustment so simply put This Will confirm Will confirm your adjustment. This is what we're talking about. So what you do is you complete if you can complete this you would say, yes, my cumulative My cumulative translation is 54 952. Then you can go back and just double check. So this way just to double check yourself That's basically what it is. This is all what I did here Is to kind of verification. It's a verification process of the translation adjustment because think about it What changes what effect the asset position net asset position what effect equity income and dividend So if we translate income and dividend if we take beginning retained earning at the beginning rate Translate income and dividend income on average the dividend on that specific date and we translate the ending At the ending rate. Well, guess what anything that's missing. It's a plug and this is what we find out It's the plug. So this is basically this method was the current method Now we're going to work the same example using the temporal method I have the temporal method here using the same using the same exact data However, this company uses the temporal method now You might be saying why the temporal why the current method if you're interested go back and view the lecture Why we use one method over the other under what circumstances one method is better than the other and And you will find out why if you have any questions, obviously you could always email me Now under the Temporal method. Let me change this under the temporal method Under the temporal method. Guess what we're going to be starting with the adjustment of balance sheet Hold on a second. Why am I starting with the balance sheet? You're going to find out why so rather than starting with the income statement Rather than starting with the income statement notes, we start with the income statement Now we're going to start with the balance sheet and you will know why in a moment. So here's what's going to happen The monetary assets which is cash receivable inventory. They're going to be converted at the current rate. What's the current rate? The current rate is the rate on 1231. What's the current rate? December December 31st 2020 2012 the rate was 1.1762 so those will be translated at the current rate. So whoops I can't just drop the drag the formula So let me translate those I'm going to take this number multiplied by this number Okay, so those are Assets the monetary assets let me just Change the format for everything so it's easier with the numbers. Okay now Land land will be based on the historical rate Um based on the historical historical rate. Okay when we bought it now to be more specific If we can find out exactly when we bought it it will even be better But now all we have is when we bought the company itself So we're going to be using that rate But it's better if you know the rate that you bought that company the rate that you bought that company Went and sorry the rate when the company bought the asset specifically. Okay, since we don't have this information We're going to go with the date that we purchased the company historical rate Okay, now we're going to go and translate those those three assets Okay, now we're going to compute total assets. I'm just going to copy the formula 612 uh 278 let me just double check 35,286 58 8 10 23 Okay, it's fine 23 104 5 10 209 and 180 800. Okay, so all in all Total asset is 619 278 now this number once again. This number is important This number is important and the reason it's important because it's going to help us kind of once you have total assets You could figure out total liabilities. The rest will be a plugin So you're going to see why this number is important. Okay now We're going to do the same thing for current for current liabilities liabilities, which are financial liabilities They are also translated at the current rate and what's the current rate 1.1762 1.1762. So let's go ahead and make the translation here Okay All right, okay, we're going to keep on going we're going to keep on going Now we're going to we're going to translate common stock common stock is the acquisition date the on the acquisition date the rate was 1.04512 Additional paid in capital, which is the same thing as common stock 1.0404512 translate them at that rate Okay Translate them at that rate Okay. Now what's left is retained earnings. Okay. Now. Here's what we know. We know that our total assets are six In our total assets 619 278. Okay assets Remember assets minus liabilities Assets if we take total assets, which we know what the number is 619 we know if we know I have the formula here. I know total assets minus Minus liabilities minus liabilities Equal to 419 324. This should be my equity. This should be my equity because assets minus liabilities equal to equity Let's see how much my equity is right now. What's my equity? My equity is common stock Plus That's not common stock Common stock is e13 common stock Plus additional paid in capital. Well, if I look at my equity, I look at my equity, let me see so Okay, if I look at my equity my equity should be 419 324, but it's 261 280 So I'm missing I'm missing 158 044. Guess what the number that you are missing. That's your retained earnings So what you did in this problem retained earning was a Plug, this is the number that's missing to make everything equal to 619 287 So 158 044. This is retained earning, which is a plug. Now. I'm going to add my liabilities accounts payable Plus bonds payable plus common stock plus Additional paid in capital plus my plug of retained earnings will give me 618 619 278, which is equal to the asset So what we did here retained earning. This was the plug. This is the plug and this is what's going to help me prepare the other thing So this was the plug Okay, let me just highlight it in a different color Okay, this was the plug 158 044. Okay now Keep that number and well Before we keep that number in mind. This is going to be so my ending retained earning 158 My ending retained earning 158 044. Just do it one more time. My ending retained earning Okay, 158 044 so I can just bring this down to ending retained earning and it's now it's working Okay, so this is my ending retained earnings. I know this much. Okay. Now. I'm going to translate my My income statement I'm going to be using the average average rate for sales the average rate is For 2012 is 1.1 106 Again, we cannot keep track of every transaction on a regular basis. Therefore, we use the average Now I'm going to translate cost of goods sold now cost of goods sold under the temporal method We cannot just take cost of goods sold and multiply it by by the By the average rate cost of goods sold. Remember the formula for cost of goods sold cost of goods sold equal beginning inventory Cost of goods sold is beginning inventory plus purchases less ending inventory Cost of goods sold to simply put Cost of goods sold is composed of three components beginning inventory Purchases and ending inventory Well, the beginning inventory at the beginning inventory. This is basically this inventory was purchased during the third I'm sorry not third fourth This inventory was purchased fourth quarter 2011 Okay, because we're looking at 2012. We said the inventory was purchased in 20 at the during the last quarter purchases are bought throughout the year throughout The year and the year is 2012. Therefore, we're going to be using the average rate here We're going to be using the average rate here. Yeah, the beginning inventory We're going to be using the average rate for the fourth quarter and ending inventory those were purchased fourth Quarter 2012 therefore we use the the other rate. So notice we're going to be using three different rates to convert to convert to convert To compute cost of goods sold first of all the beginning the the Average last three months of let me just first because we can't see this Let me just see which not which one is 11 which one is 12. Okay, so the beginning inventory Will be translated at The average for the last three months of 2011. Okay, because it was bought in 2011. Therefore, the usd equivalent is 15 000 At three hundred thirty four dollars and fifty fifty cent. That's the beginning inventory. It's translated at that rate Then we have to use the average rate For the purchases because we assume the purchases are done throughout the year the average rate for 2012 is 1.1106 Let me translate that That's us dollar and the ending inventory is translated at translated at The average rate for the last three months of 2012 1.1667 So let me let me do this And we'll do the same thing again. We're going to take beginning inventory plus purchases minus Ending it's going to give us cost of goods sold in us number, which is 108 613 0.50. So i'm going to go up here And i'm going to bring that number From here. So i have to prepare a schedule 108 615.30 Yeah, it's rounded. That's fine. Now i'm going to go ahead and compute the remainder. I'm going to compute depreciation Depreciation i'm going i'm not going to be using the average. I'm going to be using the historical cost Once again, the historical cost is not 100 accurate. The reason is the reason is The reason is The reason is you want to know when when the when the asset was purchased But we don't have this information, but we're going to be using the historical for our purposes one point So the the for depreciation expense, we're going to be using that rate Was saying depreciation expense should be translated at historical rate But again, the most accurate thing is to have the rate on that date the rate on The rate on that date in a sense when The asset was purchased, but we don't have this information Other expenses, they're going to be we're going to be using the average rate because we cannot keep track of those expenses On a daily basis income tax would also use the average rate and the average rate was 1.1106. So let me go ahead and Multiply this And it's 33 000. Now, let me compute net income. Let's here's what's going to happen If I take Well, let me just copy the formula from here if I take sales Minus Expenses it show me my net income is 59 286. That's not correct. I just want I just want to tell you this But I just I computed this on purpose. Now. What do we know? Here's what we know. We know We know beginning retained earning 150. We know the rate that we're going to translate it at is the one one rate, which is We're going to translate beginning retained earnings at January 1st rate so this is So now we're preparing the statement of retained earnings. So this is the statement of retained earnings right here So beginning retained earnings um So if we take beginning retained earnings plus net income We have 216 054 Then the dividend the dividend was declared on 9 1. So we know the rate on 9 1 1.572 One point. I'm sorry 1.1572 again. This is a mistake here one point Okay, 1.1572. So if I take 40 000 times The rate that's going to give me 46 288 now. Here's what's going to happen. Let's see if this equal to 158 Remember retained ending retained earning is correct. Now if I take watch if I take Net income, which is that's not the correct net income if I take 59 286 let me just do it. Let me do it here if I take I'm going to do this computation on the side net income that I computed plus My beginning retained earning minus my dividend It gives me 262 minus my dividend. I'm going to put it as a plus because it's a minus It gave me 169 766 So if I use this figure if I use this net income This is my ending retained earning. That's not correct. My ending retained earnings should be this much Well, if it's this much, what am I missing? Well, if it should be this much What's the difference between this 169 766 based on my incorrect income and this ending retained earning There's a 17 7 23. I need to reduce my income. I need to reduce my income by by 1107 23 Let's let me show you what's going to happen. So I'm going to now book my this is the most important and not the most important But this is the entry that I'm looking to do. I'm going to put here. I'm going to put here a loss I'm going to put here a loss of 1107 6 This is not going to work because it's it's a circular. So let me just Delete this I'm going to put minus 1107 23 so simply put I am going to Use this number the difference to reduce it by 11,000 Now my net income is 47,000 my net income now My correct net income is 47 563 My beginning retained earning is correct. Those are equal to 204 332 minus the dividend gives me my Correct retained earning. So my adjustment was my translation adjustment was a loss of 11,723 11,723 Let one more time. Let's walk through this adjustment. How did we come up with this adjustment? What did we do first? Okay, let me walk you through it one more time First we find my total assets Then we find my total liabilities and equities without retained earnings Then we find out retained earnings should be 158 044 So to retain earning and we brought it down here Then we prepare a tentative income statement L the way up until the translation Then we said, okay, let's work with our current net income Which was a different net income than this one, which is around 59,000 We took the incorrect net income plus retained plus the correct retained earning beginning minus the correct dividend It gave us something other than 158 044 We found the difference and we find out we need to reduce our net income by 11,723 to come up with 158 044 So hopefully you are able to follow otherwise view the recording again If you have access to the excel just go in there and start to play with the excel Hopefully it will make more sense Again, if you want to access this excel as well as additional exercises through false multiple choice about this topic Visit my website farhatlectures.com where I have many many more resources and many many more courses Study hard, especially if you're studying for your CPA exam. 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