chapter6 CONSOLIDATED FINANCIAL STATEMENTS

C o n s o l i d a t e d f i n a n C i a l s t a t e m e n t sI. CONSOLIDATED FINANCIAL STATEMENTSA. Control (over 50%)Consolidated financial statements are prepared when a parent-subsidiary relationship hasbeen formed. An investor is considered to have parent status when control over an investeeis established or more than 50% of the voting stock of the investee has been acquired.Under U.S. GAAP, all majority-owned subsidiaries (domestic and foreign) must beconsolidated except when significant doubt exists regarding the parent's ability to control thesubsidiary, such as when:1. The subsidiary is in legal reorganization, orBankruptcy and/or the subsidiary operates under severe foreign restrictions.2.B. Acquisition Method—Fundamental PrinciplesThe acquisition method is required to be used to record the acquisition of a subsidiary underboth U.S. GAAP and IFRS. The main principles for applying the acquisition method are:1. Recognition PrincipleThe acquirer recognizes all of the subsidiary's assets and liabilities, includingidentifiable intangible assets.2. Measurement PrincipleThe acquirer measures each recognized asset and liability and any noncontrollinginterest at its acquisition date fair value.a C q U i s i t i o n m e t h o dI. ACQUISITION METHODIn a business combination accounted for as an acquisition, the subsidiary may beacquired for cash, stock, debt securities, etc. The investment is valued at the fair value of theconsideration given or the fair value of the consideration received, whichever is the more clearly evident. The accounting for an acquisition begins at the date of acquisition.Journal entry to record the acquisition for cash:Investment in subsidiary $XXXCash $XXXJournal entry to record the acquisition for parent common stock (use FV at date transaction closes):Investment in subsidiary $XXXCommon stock (parent at par) $XXXA.P.I.C. (parent/FV – par) XXXA. Application of the Acquisition MethodThe acquisition method has two distinct accounting characteristics: (1) 100% of the net assets acquired (regardless of percentage acquired) are recorded at fair value with any unallocated balance remaining creating goodwill, and (2) when the companies areconsolidated, the subsidiary's entire equity (including its common stock, A.P.I.C., and retained earnings) is eliminated (not reported).An acquiring corporation should adjust the following items during consolidation:1. Common Stock, A.P.I.C. and Retained Earnings of Subsidiary are EliminatedThe pre-acquisition equity (common stock, A.P.I.C. and retained earnings) of thesubsidiary is not carried forward in an acquisition. Consolidated equity will be equal tothe parent's equity balance (plus any Noncontrolling Interest). The subsidiary's equityis eliminated by debiting each of the subsidiary's equity accounts in the EliminatingJournal Entry (EJE) on the consolidating workpapers.2. Investment in Subsidiary is eliminatedThe parent company will eliminate the "Investment in Subsidiary" account on its balancesheet as part of the Eliminating Journal Entry (EJE). This credit will be postedon the consolidating workpapers.3. Noncontrolling Interest (NCI) is CreatedAs part of the Eliminating Journal Entry (EJE) on the consolidating workpapers, the fairvalue of any portion of the subsidiary that is not acquired by the parent must bereported as noncontrolling interest in the equity section of the consolidated financialstatements, separately from the parent's equity.4. Balance Sheet of Subsidiary is Adjusted to Fair ValueAll of the subsidiary's balance sheet accounts are to be adjusted to fair value on theacquisition date. This is accomplished as part of the Eliminating Journal Entry (EJE) onthe consolidating workpapers. This adjustment is done, regardless of the amount paidto acquire the subsidiary. The adjustment is for the full (100%) fair value of thesubsidiary's assets and liabilities, even if the parent acquires less than 100% of thesubsidiary.5. Identifiable Intangible Assets of the Subsidiary are Recorded at their Fair ValueAs part of the Eliminating Journal Entry (EJE) on the consolidating workpapers, it isrequired that the parent record the fair value of all Identifiable Intangible Assets of thesubsidiary. This is done, even if no amount was incurred to acquire these items in theacquisition.6. Goodwill (or Gain) is RequiredIf there is an excess of the fair value of the subsidiary (acquisition cost plus anynoncontrolling interest) over the fair value of the subsidiary's net assets, then theremaining/excess is debited to create Goodwill. If there is a deficiency in theacquisition cost compared to the subsidiary's fair value, then the shortage/negativeamount is recorded as a gain.7. The year-end consolidating journal entry known as the consolidating workpaper eliminating journal entry (EJE) is:DR Common stock – subsidiary $XXX DR A.P .I.C. – subsidiaryXXX DRRetained earnings – subsidiaryXXXCR Investment in subsidiary $XXX CR Noncontrolling interest XXXDR Balance sheet adjustments to FV $XXX DR Identifiable Intangible assets to FV XXX DRGoodwillXXXJOURNAL ENTRY FLOW CHART—ACQUISITION DATE CALCULATIONC ommon stock – Suba .P .I.C. – SubR etained earnings – Sub<<i nvestment in Subn oncontrolling interest>>diffeRenCe– b alance Sheet FV AdjustmentdiffeRenCe– i dentifiable Intangible AssetsG ainThe following diagram illustrates the relationships between the fair value of the subsidiary, the fair value of the subsidiary's net assets and the book value of the subsidiary's net assets.aC q U i s i t i o n m e t h o dFair Value of SubsidiaryNet AssetsBook Value of SubsidiaryNet AssetsDifference is Asset Fair Value Difference(s)B. "CAR"—Subsidiary Equity Acquired 1.CAR FormulaThe following formula is used to determine the book value of the assets acquired fromthe subsidiary:Assets - Liabilities = Equity Assets - Liabilities = Net book value Assets - Liabilities = CAR2. Acquisition Date Calculation (of CAR)The determination of the difference between book value and fair value is computed as of the acquisition date.When the subsidiary's financial statements are provided for a subsequent period, it is necessary to reverse the activity (income and dividends) in the subsidiary's retained earnings in order to squeeze back into the book value (Assets – Liabilities = CAR) at the acquisition date.Beginning retained earnings Add: incomeSubtract: dividendsEnding retained earningsC.The original carrying amount of the investment in subsidiary account on the parent's books is: 1. Original cost —Measured by the fair value (on the date the acquisition is completed) of the consideration given (Debit: investment in sub).2.Business combination costs/expenses in an acquisition are treated as follows:a. Direct out-of-pocket costs such as a finder's fee or a legal fee are expensed (Debit: expense).b.Stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issued (Debit: additional paid-in capital account).c. Indirect costs are expensed as incurred (Debit: expense).d.Bond issue costs are capitalized and amortized (Debit: bond issue costs)..I.C. – subsidiary $300,000D.Business combinations that do not establish 100% ownership of a subsidiary by a parent will result in a portion of the subsidiary's equity (net assets) being attributed to noncontrolling interest shareholders. Noncontrolling interest must be reported at fair value in the equity section of the consolidated balance sheet, separately from the parent's equity. This will include the noncontrolling interest's share of any goodwill (even though there is no cost basis).a. Balance SheetThe consolidated balance sheet will include 100% of the subsidiary's assets and liabilities (not the sub's equity/CAR). The noncontrolling interest's share of the subsidiary's net assets should be presented on the balance sheet as part ofstockholders' equity, separately from the equity of the parent company (seeAppendix 1: Illustrative Consolidated Financial Statements).(1) Acquisition Date ComputationThe noncontrolling interest is calculated by multiplying the total subsidiaryfair value times the noncontrolling interest percentage:Fair value of subsidiary× Noncontrolling interest %Noncontrolling interest(2) Noncontrolling Interest after the Acquisition DateAfter the acquisition date, the noncontrolling interest reported on theconsolidated balance sheet is accounted for using the equity method: Beginning noncontrolling interest+ NCI share of subsidiary net income- NCI share of subsidiary dividendsEnding noncontrolling interest(3) Allocation of Subsidiary Net LossesSubsidiary net losses are allocated to noncontrolling interest even if theallocation exceeds the equity attributable to the noncontrolling interest(negative carrying balance).b. Income StatementThe consolidated income statement will include 100% of the subsidiary'srevenues and expenses (after the date of acquisition). The consolidated income statement should show, separately, consolidated net income, net incomeattributable to the noncontrolling interest, and net income attributable to theparent (see Appendix 1: Illustrative Consolidated Financial Statements).(1) Computation of Net Income Attributable to the Noncontrolling InterestCompute by multiplying the subsidiary's net income times thenoncontrolling interest percentage.Subsidiary's income< Subsidiary's expenses >Subsidiary's net income× Noncontrolling interest %Net income attributable tothe noncontrolling interestc. Comprehensive IncomeThe statement of comprehensive income should show, separately, consolidated comprehensive income, comprehensive income attributable to the noncontrolling interest, and comprehensive income attributable to the parent company (seeAppendix 1: Illustrative Consolidated Financial Statements).d. Statement of Changes in EquityBecause noncontrolling interest is part of the equity of the consolidated group, it is presented in the statement of changes in equity. The consolidated statement of changes in equity should present a reconciliation at the beginning and ending of the period of the carrying amount of total equity, equity attributable to theparent, and equity attributable to the noncontrolling interest (see Appendix 1:Illustrative Consolidated Financial Statements).E.Adjustment to Fair Value, and Goodwill (gain)1.Fair Value of Subsidiary (Acquisition Cost + Noncontrolling Interest) Reconciliation to Book Value of Subsidiary Net AssetsUnder the acquisition method, the fair value of the subsidiary is equal to the acquisition cost plus any noncontrolling interest at fair value. On the acquisition date, the fair value of the subsidiary must be compared to the respective assets and liabilities of thesubsidiary. Any difference between the fair value of the subsidiary and the book value acquired will require an adjustment to the following three areas:a. Balance Sheet Adjustment of the subsidiary's records from book value to fair value.b. Identifiable Intangible Assets related to the acquisition of the subsidiary are recorded at fair value.c.Goodwill is recognized for any excess of the fair value of the subsidiary over the fair value of the subsidiary's net assets. If the fair value of the subsidiary is less than the fair value of the subsidiary's net assets, a gain is recognized.。

ACCA知识点：consolidated financial statements本文由高顿ACCA整理发布，转载请注明出处-Relevant to Paper F3Exam tipsRemember that at Paper F3/FFA,despite the current exam format testing MCQ only,a good solid platform of understanding the principles of consolidation is required.Although you are only being asked for extracts and calculations of typically one figure,learning standard consolidation workings can help with your exam approach.Practicing full length consolidation questions will help you grasp a better understanding of consolidation.It is important to understand how each calculation fits into the consolidated financial statement,and this will also benefit your future studies when you revisit consolidation in your later Paper F7 and Paper P2 studies.When answering MCQs,remember to:read the questions requirement carefully and understand what is being asked for think about relevant consolidation workings or extracts that may help youcalculate what you think the correct figure is before you look at MCQ answer options–be careful not to let the distracters catch you out,so think carefully about your calculationre-read the question to ensure you understand it and check you are answering the question set if your initial calculation does not match any of the answer options.更多ACCA资讯请关注高顿ACCA官网：X。

W.W.Grainger,Inc.and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember31,2009,2008and2007NOTE1–BACKGROUND AND BASIS OF PRESENTATIONINDUSTRY INFORMATIONW.W.Grainger,Inc.is the leading broad-line supplier of facilities maintenance and other related products and services in North America,with operations primarily in the United States,Canada,Japan and Mexico.In this report,the words “Company”or“Grainger”mean W.W.Grainger,Inc.and its subsidiaries.PRINCIPLES OF CONSOLIDATIONThe consolidated financial statements include the accounts of the Company and its subsidiaries.All significant intercompany transactions are eliminated from the consolidated financial statements.INVESTMENTS IN UNCONSOLIDATED ENTITIESFor investments in which the Company owns or controls from20%to50%of the voting shares,the equity method of accounting is used.Changes in interest arising from the issuance of stock by an investee are accounted for as additional contributed capital.See Note6to the Consolidated Financial Statements.MANAGEMENT ESTIMATESIn preparing financial statements in conformity with accounting principles generally accepted in the United States of America,management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities,revenues and expenses,and the disclosure of contingent liabilities.Actual results could differ from those estimates.FOREIGN CURRENCY TRANSLATIONThe financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional exchange gains or losses resulting from the translation of financial statements of foreign operations and related long-term debt are recorded as a separate component of other comprehensive earnings.See Notes2and14 to the Consolidated Financial Statements.SUBSEQUENT EVENTSThe Company has evaluated subsequent events through February25,2010,the date the financial statements were issued.NOTE2–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESREVENUE RECOGNITIONRevenues recognized include product sales,billings for freight and handling charges and fees earned for services provided.The Company recognizes product sales and billings for freight and handling charges primarily on the date products are shipped to,or picked up by,the customer.The Company’s standard shipping terms are FOB shipping point.On occasion,the Company will negotiate FOB destination terms.These sales are recognized upon delivery to the customer.Fee revenues,which account for less than1%of total revenues,are recognized after services are completed.COST OF MERCHANDISE SOLDCost of merchandise sold includes product and product-related costs,vendor consideration,freight-out and handling costs.The Company defines handling costs as those costs incurred to fulfill a shipped sales order.VENDOR CONSIDERATIONThe Company receives rebates and allowances from its vendors to promote their products.The Company utilizes numerous advertising programs to promote its vendors’products,including catalogs and other printed media,Internet and other marketing programs.Most of these programs relate to multiple vendors,which makes supporting the specific,identifiable and incremental criteria difficult,and would require numerous assumptions and judgments.Based on the inexact nature of trying to track reimbursements to the exact advertising expenditure for each vendor,the Company treats most vendor advertising allowances as a reduction of Cost of merchandise sold rather than a reduction of operating(advertising)expenses.Rebates earned from vendors that are based on product purchasesare capitalized into inventory as part of product purchase price.These rebates are credited to cost of merchandise sold based on sales.Vendor rebates that are earned based on products sold are credited directly to Cost of merchandise sold.ADVERTISINGAdvertising costs are expensed in the year the related advertisement is first presented.Advertising expense was $114.6million,$120.7million and$122.4million for2009,2008,and2007,respectively.Most vendor-provided allowances are classified as an offset to Cost of merchandise sold.For additional information see VENDOR CONSIDERATION above.Catalog expense is amortized equally over the life of the catalog,beginning in the month of its distribution.Advertising costs for catalogs that have not been distributed by year-end are capitalized as Prepaid expenses.Amounts included in Prepaid expenses at December31,2009,2008,and2007were$48.1million,$39.5million,and$32.1million, respectively.WAREHOUSING,MARKETING AND ADMINISTRATIVE EXPENSESIncluded in this category are purchasing,branch operations,information services,and marketing and selling expenses,as well as other types of general and administrative costs.STOCK INCENTIVE PLANSThe Company measures all share-based payments using fair-value-based methods and records compensation expense related to these payments over the vesting period.See Note12to the Consolidated Financial Statements. INCOME TAXESIncome taxes are recognized during the year in which transactions enter into the determination of financial statement income,with deferred taxes being provided for temporary differences between financial and tax reporting.OTHER COMPREHENSIVE EARNINGS(LOSSES)The Company’s Other comprehensive earnings(losses)include foreign currency translation adjustments and unrecognized gains(losses)on postretirement and other employment-related benefit plans.See Note14to the Consolidated Financial Statements.CASH AND MARKETABLE SECURITIESThe Company considers investments in highly liquid debt instruments,purchased with an original maturity of ninety days or less,to be cash equivalents.For cash equivalents,the carrying amount approximates fair value due to the short maturity of these instruments.The Company’s investments in marketable securities consist of commercial paper to be held to maturity.These investments have an original maturity date of more than90days.The investments are issued from high credit quality issuers.The marketable securities are recorded at cost,which approximates fair value.CONCENTRATION OF CREDIT RISKThe Company places temporary cash investments with institutions of high credit quality and,by policy,limits the amount of credit exposure to any one institution.The Company has a broad customer base representing many diverse industries doing business in all regions of the United States,Canada,Mexico,Panama,India,Japan,and China.Consequently,no significant concentration of credit risk is considered to exist.ALLOWANCE FOR DOUBTFUL ACCOUNTSThe Company establishes reserves for customer accounts that are potentially uncollectible.The method used to estimate the allowances is based on several factors,including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables.These analyses also take into consideration economic conditions that may have an impact on a specific industry,group of customers or a specific customer.INVENTORIESInventories are valued at the lower of cost or market.Cost is determined primarily by the last-in,first-out(LIFO) method,which accounts for approximately74%of total inventory.For the remaining inventory,cost is determined by the first-in,first-out(FIFO)method.PROPERTY,BUILDINGS AND EQUIPMENTProperty,buildings and equipment are valued at cost.For financial statement purposes,depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives,principally on the declining-balance and sum-of-the-years-digits methods.The principal estimated useful livesfor determining depreciation are as follows:Buildings,structures and improvements........................................................................10to30yearsFurniture,fixtures,machinery and equipment................................................................3to10yearsImprovements to leased property are amortized over the initial terms of the respective leases or the estimated service lives of the improvements,whichever is shorter.The Company capitalized interest costs of$0.5million,$1.3million and$1.4million in2009,2008and2007, respectively.LONG-LIVED ASSETSThe carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired.An impairment loss is recognized when estimated undiscounted future cash flows resulting from use of the asset,including disposition,are less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.During2009,the Company recognized impairment charges of$9.0million included in Warehousing,marketing and administrative expenses,to reduce the carrying value of certain long-lived assets to their estimated fair value pursuant to impairment indicators for property currently held for sale,lease terminations,idle assets,and branch closures.GOODWILL AND OTHER INTANGIBLESGoodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed.Goodwill is not amortized,but rather tested for impairment on an annual basis and more often if circumstances require.Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights,or whenever it can be separated or divided from the acquired entity and sold,transferred, licensed,rented or exchanged,either individually or in combination with a related contract,asset or liability.Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite.Amortizable intangible assets are being amortized over useful lives of one to20years.Impairment lossesare recognized if the carrying amount of an intangible,subject to amortization,is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.The Company also maintains intangible assets with indefinite lives,which are not amortized.These intangibles are tested for impairment on an annual basis and more often if circumstances require.Impairment losses are recognized whenever the implied fair value of these assets is less than their carrying value.FAIR VALUE OF FINANCIAL INSTRUMENTSThe carrying amounts of cash and cash equivalents,receivables,and accounts payable approximate fair value due to the short-term nature of these financial instruments.The carrying value of long-term debt also approximates fair value due to the variable interest rates that are tied to LIBOR.INSURANCE RESERVESThe Company purchases insurance for catastrophic exposures and those risks required to be insured by law.It also retains a significant portion of the risk of certain losses related to workers’compensation,general liability and property losses through the utilization of high deductibles and self-insured retentions.Reserves for these potential losses are based on an external analysis of the Company’s historical claims results and other actuarial assumptions.WARRANTY RESERVESThe Company generally warrants the products it sells against defects for one year.For a significant portion of warranty claims,the manufacturer of the product is responsible for expenses.For warranty expenses not covered by the manufacturer,the Company provides a reserve for future costs based primarily on historical experience.The reserve activity was as follows(in thousands of dollars):For the Years Ended December31,200920082007Beginning balance..............................................................................$3,218$3,442$4,651 Returns................................................................................................(11,727)(12,917)(12,781) Provisions............................................................................................11,74712,69311,572Ending balance...................................................................................$3,238$3,218$3,442NEW ACCOUNTING STANDARDSIn December2008,the Financial Accounting Standards Board(FASB)issued authoritative guidance regarding employer’s disclosures about postretirement benefit plan assets,codified primarily in ASC715.ASC715requires expanded disclosures about investment policies and strategies for the plan assets of a defined benefit pension orother postretirement plan,including information regarding major categories of assets,input and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within the plans.The Company has applied the provision of ASC715and the adoption did not have a material effect on the Company’s results of operations or financial position.In May2009,the FASB issued authoritative guidance regarding subsequent events,codified primarily in ASC855, which provides authoritative accounting guidance for subsequent events.ASC855addresses events that occur after the balance sheet date but before the issuance of the financial statements.It distinguishes between subsequentevents that should be recognized in the financial statements and those that should not.Also,it requires disclosure of the date through which subsequent events were evaluated and disclosures for certain non-recognized events.ASC 855was effective on a prospective basis for interim or annual financial periods ending after June15,2009.The Company has applied the provision of ASC855and disclosed the date through which it has evaluated subsequent events and the basis for choosing that date.The adoption of ASC855did not have a material effect on the Company’s results of operations or financial position.In June2009,the FASB issued“The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles,”codified in ASC105,which established the FASB Accounting StandardsCodification as the source of authoritative U.S.generally accepted accounting principles to be applied by non-governmental entities.The Accounting Standards Codification superseded all existing non-SEC accounting and reporting standards.ASC105was effective for interim or annual financial periods ending after September15,2009. The Company has applied this statement and the adoption did not have a material effect on its results of operationsor financial position.NOTE3–BUSINESS ACQUISITIONSDuring2009,the Company acquired three companies for approximately$134million,less cash acquired.The totalcost of the acquisitions has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the respective dates of acquisition.The estimated purchase price allocations are preliminary and subject to revisions based on additional valuation work related to intangibles.Purchased identifiable intangible assets totalled approximately$49million and will be amortized on a straight-line basis over a weighted average lifeof15years(lives ranging from one to20years).Acquired intangibles primarily consist of product line copyrights, proprietary software,customer relationships and trade names.The Company recorded approximately$108million of goodwill and other intangibles associated with these acquisitions.The goodwill is partially deductible for tax purposes. In September2009,the Company acquired380,000common shares of MonotaRO Co.,Ltd.(MonotaRO)for approximately$4million increasing its interest from48percent to53percent.As a result of the Company obtaining controlling voting interest over MonotaRO,the Company consolidated MonotaRO’s balance sheet as of September30, 2009.MonotaRO’s earnings are reported on a one month lag which began in October2009.The Company previously accounted for its48percent interest in MonotaRO as an equity method investment.Upon obtaining the controlling interest,the previously held equity interest was remeasured to fair value resulting in a pre-tax gain of$47million($28million after tax)reported as other income in the Company’s consolidated statement of earnings.The gainincludes$3million reclassified from Accumulated other comprehensive earnings.Both the gain on the previouslyheld equity investment and the fair value of the noncontrolling interest in MonotaRO of$61million were based onthe closing market price of MonotaRO’s common stock on the acquisition date.The Company has recordedseparately identifiable intangible assets totalling$66million.The amortizable intangibles primarily consist of customer relationships which will be amortized on a straight-line basis over15years.The indefinite-lived intangible($32million) is related to the MonotaRO trade name.The estimated purchase price allocations are preliminary and subject to revisions based on additional valuation work of intangibles.The goodwill recognized in the transaction amounted to approximately$58million and is not deductible for tax purposes.In June2009,the Company acquired the remaining50.1%of its joint venture in India,Grainger Industrial SupplyIndia Private Limited,formerly known as Asia Pacific Brands India Private Limited,for$1million.See Note6to the Consolidated Financial Statements for additional information regarding this acquisition.During2008,the Company acquired two companies for approximately$34million and during2007,the Company acquired one company for approximately$5million.The results of these acquisitions are included in the Company’s consolidated results from the respective dates of acquisition.Due to the immaterial nature of these transactions,both individually and in the aggregate,disclosures of amounts assigned to the acquired assets and assumed liabilities and pro forma results of operations were not considered necessary.NOTE4–ALLOWANCE FOR DOUBTFUL ACCOUNTSThe following table shows the activity in the allowance for doubtful accounts(in thousands of dollars):For the Years Ended December31,200920082007Balance at beginning of period...........................................................$26,481$25,830$18,801 Provision for uncollectible accounts....................................................10,74812,92415,436 Write-off of uncollectible accounts,net of recoveries.........................(12,254)(11,501)(8,755) Foreign currency translation impact....................................................875(772)348Balance at end of period.....................................................................$25,850$26,481$25,830NOTE5–INVENTORIESInventories primarily consist of merchandise purchased for resale.Inventories would have been$333.3million,$317.0million and$287.7million higher than reported at December31,2009,2008and2007,respectively,if theFIFO method of inventory accounting had been used for all Company earnings would have increased by$10.0million,$18.1million and$10.8million for the years ended December31,2009,2008and2007,respectively, using the FIFO method of accounting.Inventory values using the FIFO method of accounting approximatereplacement cost.NOTE6–INVESTMENTS IN UNCONSOLIDATED ENTITIESThe table below summarizes the activity in the investments of unconsolidated entities(in thousands of dollars):GraingerMonotaRO MRO Korea Industrial SupplyCo.,Ltd.Co.,Ltd.India Private Ltd.TotalBalance at December31,2006............................$8,492$—$—$8,492 Cash investments...............................................—2,138—2,138 Equity earnings...................................................1,401615—2,016 Reinstatement to equity method of accounting..—1,372—1,372 Foreign currency gain........................................620121—741Balance at December31,2007............................10,5134,246—14,759 Cash investments...............................................——6,4876,487 Equity earnings(losses).....................................4,303(205)(456)3,642 Write-off..............................................................——(6,031)(6,031) Foreign currency gain(loss)...............................3,008(1,035)—1,973Balance at December31,2008............................17,8243,006—20,830 Cash investments...............................................4,013—1,1945,207 Equity earnings...................................................1,249248—1,497 Dividends...........................................................(878)—«—(878) Foreign currency(loss)gain..............................(468)254—(214) Gain(loss)on previously held equity interest....44,275—(77)44,198 Investment eliminated in consolidation..............(66,015)—(1,117)(67,132)Balance at December31,2009............................$—$3,508$—$3,508 Ownership interest at December31,2009............52.9%49.0%100.0%In September2009,the Company acquired380,000common shares of MonotaRO Co.,Ltd.(MonotaRO)for approximately$4million,increasing its interest from48percent to53percent.The results of MonotaRO are now included in the Company’s consolidated results from the date of obtaining a controlling voting interest.The Company previously accounted for its48percent interest in MonotaRO as an equity method investment.Upon obtaining the controlling interest,the previously held equity interest was remeasured to fair value,resulting in a pre-tax gain of$47million($28million after-tax)reported in the Company’s consolidated statement of earnings.The gain includes$3million reclassified from Accumulated other comprehensive earnings.In July2008,the Company acquired a49.9%interest in Grainger Industrial Supply India Private Limited(Grainger India), formerly known as Asia Pacific Brands India Private Limited,from its sole shareholder for$5.4million.In addition,the Company and the joint venture partner each made a$1.1million capital infusion intended to help grow the business.In the fourth quarter2008,the Company wrote-off its investment due to the economic slowdown in India and the loss of a major supplier that accounted for approximately25%of the joint venture’s annual revenue.These conditions severely affected Grainger India’s ability to secure additional financing to meet its current obligations and continue as a going concern.The Company accounted for this investment using the equity method until it was written-off.During2009, Grainger India’s business improved.It was able to streamline its operations,strengthen its management and enhance its supplier base.As a result,the Company acquired the remaining50.1%of this joint venture in June2009for$1.2million. The results of Grainger India are now included in the Company’s consolidated results from the date of acquisition.In2007,the Company and the other business partner in the joint venture agreed to significantly change the business model and fund the expansion of MRO Korea Co.,Ltd.,which was previously written-off.The Company contributed $2.1million to MRO Korea Co.,Ltd.,maintaining its49%ownership,and resumed the equity method of accounting.In conjunction with the reinstatement of the equity accounting method,a credit was recorded to retained earnings for $1.4million,which represented the accumulated unrecognized equity earnings during the period the equity method was suspended.NOTE7–CAPITALIZED SOFTWAREAmortization of capitalized software is on a straight-line basis over three and five years.Amortization begins whenthe software is available for its intended use.Amortization expense was$22.7million,$22.7million and$21.0millionfor the years ended December31,2009,2008and2007,respectively.The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.NOTE8–SHORT-TERM DEBTThe following summarizes information concerning short-term debt(in thousands of dollars):As of December31,200920082007 Line of CreditOutstanding at December31...........................................................$34,780$19,960$6,113 Maximum month-end balance during the year................................$35,371$19,960$11,234 Average amount outstanding during the year..................................$33,554$13,022$7,756 Weighted average interest rate during the year............................... 5.22% 6.23% 6.48% Weighted average interest rate at December31............................. 5.06% 4.86% 6.57%Commercial PaperOutstanding at December31...........................................................$—$—$95,947 Maximum month-end balance during the year................................$—$319,860$139,104 Average amount outstanding during the year..................................$—$54,589$28,030 Weighted average interest rate during the year...............................—% 3.08% 5.38% Weighted average interest rate at December31.............................—%—% 4.30%The Company had$83.7million,$29.2million and$31.1million of uncommitted lines of credit denominated in foreign currencies at December31,2009,2008and2007,respectively.At December31,2009,there was$34.8million outstanding under these lines of credit relating to borrowings of foreign subsidiaries.The foreign subsidiaries utilizethe lines of credit to meet business growth and operating needs.Commercial paper was used to fund periodic working capital requirements and the accelerated share repurchase program.Refer to Note13to the Consolidated Financial Statements for further discussion of the Company’s share repurchase program.A portion of the proceeds from the$500million term loan was used to refinance$311million in outstanding commercial paper in May of2008.Refer to Note9to the Consolidated Financial Statements for further discussion on the use of proceeds from the term loan.For2009,2008and2007,the Company had a committed line of credit totaling$250.0million for which the Company pays a commitment fee of0.04%for each year.There were no borrowings under the committed line of credit.The Company had$24.7million,$18.8million,and$15.8million of letters of credit at December31,2009,2008and2007,respectively,primarily related to the Company’s insurance program.The Company also had$5.6million, $6.0million and$3.2million at December31,2009,2008and2007,respectively,in letters of credit to facilitate the purchase of products from foreign sources.NOTE9–LONG-TERM DEBTLong-term debt consisted of the following(in thousands of dollars):As of December31,200920082007Bank term loan....................................................................................$483,333$500,000$—Industrial development revenue and private activity bonds...............7,2959,4859,485 Less current maturities........................................................................(53,128)(21,257)(4,590)$437,500$488,228$4,895In May2008,the Company entered into a$500million,unsecured four-year bank term loan.Proceeds were used to pay down short-term debt and for general corporate purposes.The weighted average interest rate paid on the term loan during2009was1.1%.The Company at its option may prepay the term loan in whole or in part.The industrial development revenue and private activity bonds include various issues that bear interest at variablerates capped at15%,and come due in various amounts from2010through2021.The weighted average interest rate paid on the bonds during the year was1.09%.Interest rates on some of the issues are subject to change at certain dates in the future.The bondholders may require the Company to redeem certain bonds concurrent with a change in interest rates and certain other bonds annually.In addition,$2.4million of these bonds had an unsecured liquidity facility available at December31,2009,for which the Company compensated a bank through a commitment fee of0.07%.There were no borrowings related to this facility at December31,2009.The Company classified$2.4million, $4.6million,and$4.6million of bonds currently subject to redemption options in current maturities of long-term debtat December31,2009,2008,and2007,respectively.。

INTERNATIONAL FINANCEAssignment Problems (3) Name: Student#: I. Choose the correct answer for the following questions (only ONE correct answer) (2 credits for each question, total credits 2 x 25 = 50)1. Interbank quotations that include the United States dollars are conventionally given in __________, which state the foreign currency price of one U.S. dollar, such as a bid price of SFr 0.85/$.A. indirect quoteB. direct quoteC. American quoteD. European quote2. The spot exchange rate published in financial newspapers is usually the __________.A. nominal exchange rateB. real exchange rateC. effective exchange rateD. equilibrium exchange rate3. The foreign exchange refers to the __________.A. foreign bank notes and coinsB. demand deposits in foreign banksC. foreign securities that can be easily cashedD. all of the above4. The functions of the foreign exchange market come down to __________.A. converting the currency of one country into the currency of anotherB. providing some insurance against the foreign exchange riskC. making the foreign exchange speculation easyD. Only A and B are true.5. Which of the following is NOT true regarding the foreign exchange market?A. It is the place through which people exchange one currency for another.B. The exchange rate nowadays is mainly determined by the market forces.C. Most foreign exchange transactions are physically completed in this market.D. All of the above are true.6. The world largest foreign exchange markets are __________ respectively.A. London, New York and TokyoB. London, Paris and FrankfurtC. London, Hong Kong and SingaporeD. London, Zurich and Bahrain7. The foreign exchange market is NOT efficient because __________.A. monetary authorities dominate the foreign exchange market and everybody knows that by definition, central banks are inefficientB. commercial banks and other participants of the market do not compete with one another due to the fact that transaction takes place around the world and not in a single centralized locationC. foreign exchange dealers have different prices such as bid and ask pricesD. None of the reasons listed are correct because the foreign exchange market is an efficient market8. __________ earn a profit by a bid-ask spread on currencies they buy and sell. __________ on the other hand, earn a profit by bringing together buyers and sellers of foreign exchanges and earning a commission on each sale and purchase.A. Foreign exchange brokers; foreign exchange dealersB. Foreign exchange dealers; foreign exchange brokersC. arbitragers; speculatorsD. commercial banks; central banks9. Most foreign exchange transactions are through the U.S. dollars. If the transaction is expressed as the currencies per dollar, this is known as __________ whereas __________ are expressed as dollars per currency.A. direct quote; indirect quoteB. indirect quote; direct quoteC. European quote; American quoteD. American quote, European quote10. From the viewpoint of a Japanese investor, which of the following would be a direct quote?A. SFr 1.25/€B. $1.55/₤C. ¥ 110/€D. €0.0091/ ¥11. Which of the following is true about the foreign exchange market?A. It is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications system.B. The foreign exchange market is usually located in a particular place.C. The foreign exchange rates are usually determined by the related monetary authorities.D. The main participants in this market are currency speculators from different countries.12. The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is considered to be _________.A. Translation exposureB. economic exposureC. transaction exposureD. accounting exposure13. Which of the following exchange rates is adjusted for price changes?A. nominal exchange rateB. real exchange rateC. effective exchange rateD. equilibrium exchange rate14. Suppose the exchange rate of the RMB versus U.S. dollar is ¥6.8523/$ now. If the RMB were to undergo a 10% depreciation, the new exchange rate in terms of ¥/$ would be:A. 6.1671B. 7.5375C. 6.9238D. 7.613515. At least in a U.S. MNC’s financial accounting statement, if the value of the euro depreciates rapidly against that of the dollar over a year, this would reduce the dollar value of the euro profit made by the European subsidiary. This is a typical __________.A. transaction exposureB. translation exposureC. economic exposureD. operating exposure16. A Japanese-based firm expects to receive pound-payment in 6 months. The company has a (an) __________.A. economic exposureB. accounting exposureC. long position in sterlingD. short position in sterling17 The exposure to foreign exchange risk known as Translation Exposure may be defined as __________.A. change in reported owner’s equity in consolidated financial statements caused by a change in exchange ratesB. the impact of settling outstanding obligations entered into before change in exchange rates but to be settled after change in exchange ratesC. the change in expected future cash flows arising from an unexpected change in exchange ratesD. All of the above18 When a firm deals with foreign trade or investment, it usually has foreign exchange risk exposure. So if an American firm expects to receive a dollar-paymentfrom a Chinese company in the next 30 days, the U.S. firm has the possible __________.A. economic exposureB. transaction exposureC. translation exposureD. none of the above19. In order to avoid the possible loss because of the exchange rate fluctuations, a firm that has a __________ position in foreign exchanges can __________ that position in the forward market.A. short; sellB. long; sellC. long; buyD. none of the above20. A forward contract to deliver Japanese yens for Swiss francs could be described either as __________ or __________,A. selling yens forward; buying francs forwardB. buying francs forward; buying yens forwardC. selling yens forward; selling francs forwardD. selling francs forward; buying yens forward21. Dollars are trading at S0SFr/$=SFr0.7465/$ in the spot market. The 90-day forward rate is F1SFr/$=SFr0.7432/$. So the forward __________ on the dollar in basis points is __________:A. discount, 0.0033B. discount, 33C. premium, 0.0033D. premium, 3322. If the spot rate is $1.35/€, 3-month forward rate is $1.36/€, which of the following is NOT true?A. euro is at forward premium by 100 points.B. dollar is at forward discount by 100 points.C. dollar is at forward discount by 55 points.D. euro is at forward premium by 2.96% p.a.23. If the spot C$/$ rate is 1.0305/15, forward dollar is 25/30 premium, the outright forward quote in American term should be __________.A. 1.0330 – 1.0345B. 1.0280 – 1.0285C. 0.9681 – 0.9667D. 0.9728 – 0.972324. If the spot C$/$ rate is 1.0305/15, forward dollar is 25/30 premium, the $/C$ forward quote in terms of points should be __________.A. 30/25B. 25/30C. – (23/28)D. – (28/23)25. The current U.S. dollar exchange rate is ¥85/$. If the 90-day forward dollar rate is ¥90/$, then the yen is selling at a per annum __________ of __________.A. premium; 5.88%B. discount; 5.56%C. premium; 23.52%D. discount; 22.23%II. ProblemsQuestions 1 through 10 are based on the information presented in Table 3.1. (2 credits for each question, total credits 2 x 10 = 20)Table 3.1Country Exchange rate Exchange rate CPI V olume of Volume of (2008) (2009) (2008) exports to U.S imports from U.S. Germany €0.75/$ €0.70/$ 102.5 $200m $350m Mexico Mex$11.8/$ Mex$12.20/$ 110.5 $120m $240mU.S. 105.31. The real exchange rate of the dollar against the euro in 2009 was __________.2. The real exchange rate of the dollar against the peso in 2009 was __________.3. The dollar was __________ against the euro in nominal term by __________.A. appreciated; 6.67%B. depreciated; 6.67%C. appreciated; 7.14%D depreciated; 7.14%4. The Mexican peso was __________ against the dollar in nominal term by __________.A. appreciated; 3.39%B. depreciated; 3.39%C. appreciated; 3.28%D. depreciated; 3.28%5. The volume of the German foreign trade with the U.S. was __________.6. The volume of the Mexican foreign trade with the U.S. was __________.7. Assume the U.S. trades only with the Germany and Mexico. Now if we want to calculate the dollar effective exchange rate in 2009 against a basket of currencies of euro and Mexican peso, the weight assigned to the euro should be __________.8. The weight assigned to the peso should be __________.9. Assume the 2008 is the base year. The dollar effective exchange rate in 2009 was __________.10. Was the dollar generally stronger or weaker in 2009 according to your calculation?11. The following exchange rates are available to you.Fuji Bank ¥80.00/$United Bank of Switzerland SFr0.8900/$Deutsche Bank ¥95.00/SFrAssume you have an initial SFr10 million. Can you make a profit via triangular arbitrage? If so, show steps and calculate the amount of profit in Swiss francs. (8 credits)12. If the dollar appreciates 1000% against the ruble, by what percentage does the ruble depreciate against the dollar? (5 credits)13. As a percentage of an arbitrary starting amount, about how large would transactions costs have to be to make arbitrage between the exchange rates S SFr/$= SFr1.7223/$, S$/￥= $0.009711/¥, and S￥/SFr = ¥61.740/SFr unprofitable? Explain. (7 credits14. You are given the following exchange rates:S￥/A$ = 67.05 – 68.75S￡/A$ = 0.3590 – 0.3670Calculate the bid and ask rate of S￥/￡: (5 credits)15. Suppose the spot quotation on the Swiss franc (CHF) in New York is USD0.9442 –52 and the spot quotation on the Euro (EUR) is USD1.3460 –68. Compute the percentage bid-ask spreads on the CHF/EUR quote. ( 5 credits)Answers to Assignment Problems (3)Part II1. 0.70 x (105.3/102.5) = 0.7 x 1.0273 = 0.71912. 12.2 x (105.3/110.5) = 12.2 x .9529 = 11.62593. B (0.7 /.75) – 1 = -6.67%4. D (1/12.2)/(1/11.8) – 1 = -3.28%5. 5506. 3607. 550/910 = 60.44%8. 360/910 = 39.569. (0.70/0.75)(60.44%) + (12.2/11.8)(39.56%) = .5641 + 0.4090 = .9731 = 97.31%10. weaker, because dollar depreciated by 2.69%.11. Since S￥/$S$/SFr S SFr/￥= 80 x 1/0.8900 x 1/95.00 = 0.946186 < 1, there is an arbitrage opportunity.Steps:①Buy ¥ from Deutsche Bank, SFr10 million x 95.00 = ¥950 million②Buy $from Fuji Bank, $950 m / 80.00 = $11.875 m③Buy SFr from UBS, $11.875 x 0.8900 = SFr10.56875 mProfit (ignoring transaction fees):SFr10.56875 – SFr10 = 0.56875 million = 568,75012. (x – 1) = 1000%; 1/11 – 1 = 90.9%13. S SFr/$ S$/￥S￥/SFr = SFr1.7223/$ x $0.009711/¥ x ¥61.740/SFr = 1.0326If transaction costs exceed $0.0326 (3.26%), the arbitrage is unprofitable.14. Given: S￥/A$ = 67.05 – 68.75S￡/A$ = 0.3590 – 0.3670So, S￥/₤ = 67.05/0.3670 = 182.70 (bid)S￡/₤ = 68.75/0.3590 = 191.50 (ask)15. Given: USD0.9442 – 52/SFrUSD1.3460 – 68/SFrSo, S SRr/€ = 1.3460/0.9452 =1.424 (bid)S SFr/€ = 1.3468/0.9442 = 1.4264 (ask)。