Hewlett-Packard (HP) and Sun Microsystems (Sun) derive similar proportions of their sales from the United States, Europe, Japan, and other countries. Recent annual reports of the two companies...

Hewlett-Packard (HP) and Sun Microsystems (Sun) derive similar proportions of their sales from the United States, Europe, Japan, and other countries. Recent annual reports of the two companies indicate that HP uses the U.S. dollar as its functional currency, whereas Sun uses the currency of each foreign operation as its functional currency That is, Snnthr* local currencies as the functional currencies. As discussed in the chapter, choice of the functional currency impacts how the financial statements are translated into the U.S. dollar for firms headquartered in the United States, such as HP and Sun. Required a. The shareholders’ equity section of the balance sheet of Sun and the corresponding note discussing accumulated other comprehensive income reveal the following (amounts in millions): Did the U.S. dollar likely increase or decrease in value on average during the year ended June 30, Year 4, against the foreign currencies of the countries in which Sun conducts its operations? Explain. b. Sun uses a FIFO cost-flow assumption for inventories and cost of goods sold. Would the gross margin in U.S. dollars (that is, sales minus cost of goods sold) of Sun likely have increased or decreased for the year ended June 30, Year 4 if it had used the U.S. dollar as its functional currency instead of the currency of its foreign operations? Explain. c. HP also uses a FIFO cost-flow assumption for inventories and cost of goods sold. Both companies maintain net monetary asset positions in their foreign operations. HP generated a positive pretax return from foreign operations of 9.49 percent for the year ended June 30, Year 4, whereas Sun generated a negative pretax return of 0.17 percent. Would the profit margin of HP likely increase or decrease if it had used the currency of its foreign units as the functional currency? Explain. View Solution:

Hewlett Packard HP and Sun Microsystems Sun derive similar proportions of