Global Finance 379grouped first, and those with credit balances, liabilities, equities, and rev-
enues, are grouped second.
The totals of the two groupings of account balances must be equal,
that is, in balance. Notice that this is only achieved in the U.S. dollar trial
balance through introduction of a translation adjustment account, with a
balance just sufficient to establish this equality. Without the addition of
the $87 translation adjustment account balance, the total of the trans-
latedassets and expenses, $2,224, exceeds the total of the translatedlia-
bilities, shareholders’ equity and sales accounts by $87. This translation
adjustment can also be directly calculated as shown next:
Beginning net assets (assets minus liabilities) FC1,000
times change in exchange rate from 1/1/02 to
12/31/02 (0.66−0.58) 0.08 $80
Net income FC180
times difference between end of year and
average exchange rates (0.66−0.62) 0.04 7
Translation adjustment $87The $80 component represents the growth in the beginning net assets due
to appreciation in the value of Sub’s foreign currency. The $7 component is the
additional net assets due to the translation of the income statement balances at
the average rate for the year of $0.62 and balance sheet amounts at the end of
year rate of $0.66. There is no retained earnings balance in the above trial bal-
ance because 2002 is the first year of operation and the net income for the year
is added to retained earnings through a later process of closing the books.
The translated balance sheet and income statements are presented in
Exhibits 12.16 and 12.17. They can be constructed from the translated data
above. The translation of the FC data is presented again in these statements
simply to reinforce the nature of the translation process.
EXHIBIT 12.16 Translated income statement, year
ending December 31, 2002.
Income Statement FC Exchange Rates U.S.$
Sales $1,000 $0.62 $620
Less cost of sales 600 0.62 372
Gross margin 400 248
Less SG&A 100 0.62 62
Pretax profit 300 186
Less tax provision 120 0.62 74
Net income $ 180 $112
Other comprehensive income 87
Comprehensive income $199