Page 449 - Introduction to Business

CHAPTER 12 Financial Reporting 423

Current Rate Method
When the current rate method is used, all assets and liabilities are translated using
the current rate (i.e., exchange rate on the balance sheet date). Owners’ equity and
dividends are translated at historical rates (exchange rate at the time the asset was
acquired, liability incurred, or element of paid-in capital was issued or reacquired).
Income statement items can be translated using the average exchange rate (the
average of the exchange rate at the beginning of the accounting period and the
current rate).

Temporal Rate Method

When the temporal rate method is used, the objective is to measure each subsidiary
transaction as though the transaction had been made by the parent. Monetary
items like cash, receivables, inventories carried at market, payables, and long-term
debt are remeasured using the current exchange rate. Other items, like prepaid
expenses, inventories carried at cost, fixed assets, and stock, are remeasured using
historical exchange rates.
Exhibit 12.8 (on p. 424) provides an example of how a foreign firm’s financial
statements would be translated from British pounds to U.S. dollars using the cur-
rent rate method.

reality Why do you think multinational business firms have to deal with for-
CH ECK eign currency translation?

The Impact of Technology

LEARNING OBJECTIVE 5
Discuss the impact of technology, particularly resources on the Web, on accounting.
Not long ago, an advance in information technology turned the world upside down.
This new technology was quickly put to use in every advanced country. Conse-
quently, the cost of information declined to only a tiny percentage of its previous
cost. Soon, average citizens had more information in their homes than wealthy
persons once had in their costly personal libraries. The new technology facilitated
the rapid spread of knowledge. News about events in one place would be almost
instantly communicated to distant locations. Information that had once been care-
fully controlled and monitored by governments and powerful organizations was
now in the hands of nearly everyone. Ordinary people suddenly had power that
they had not previously experienced. The new technology played a key role in the
reshaping of the political structure of some of Europe’s most powerful countries.
Intense conflicts occurred. New approaches to government and business enter-
prise were necessary to deal with the new technology.
What was this new technology? The invention that shook the world was not the
computer, but movable type. On a printing press invented by Johann Gutenberg in
1455, a book was produced mechanically for the first time in history. Almost every-
one has heard of the Gutenberg Bible, but most people probably do not realize how
modern printing, starting with the Gutenberg Bible, radically changed the course of
history.
Advances in information technology profoundly affect the operations of
the accounting information system and financial reporting. How will the world
of tomorrow be different from that of today? Shakespeare called the future the

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