Specify line items on this income statement that could be subject to transaction

Question

Specify line items on this income statement that could be subject to transaction, translation, or operating exposures and explain why.

Annual Income Statement (values in 000's) Period Ending Total Revenue Trend 3/31/2017 3/31/2016 3/31/2015 3/31/2014 $68,233,000 $72,118,000 $68,508,000 $75,421,000 $50,823,000 $54,047,000 $51,350,000 $57,836,000 $17,411,000 $18,071,000 $17,159,000 $17,586,000 Cost of Revenue Gross Profit Operating Expenses Research and Development Sales, General and Admin. Non-Recurring Items Other Operating Items Operating Income Add'l income/expense items Earnings Before Interest and Tax Interest Expense Earnings Before Tax $0 $14,852,000 $15,473,000 $16,620,000 $17.257,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 L-$2,591,000 $2,618,000 $572,000 $257,000 ($202,000 $317,000 ($43,000) $220,000 $2,389,000 $2,934,000 $528,000 $478,000 $131,000 $225,000 $197,000 $228,000 $2,258,000 $2,709,000 $331,000 $250,000 $1,113,000 $843,000 $740,000 $918,000 Income Tax Minority Interest I($487,000 ($55000 ($642,000) ($578,000) $32,000 $690,000 $1,335,000 ($1,018,000) ($1,318,000) $658,000 $1,315,000 ($1,050,000) (1,246,000) $658,000 $1,315,000 ($1,050,000) (1,246,000) ($72,000) Equity Earnings/Loss Unconsolidated Subsidiary $20,000 $33,000 Net Income-Cont. Operations Net Income Net Income Applicable to Common Shareholders

Explanation / Answer

1. Transaction exposure refers to exposure to currency risk faced by companies involved in international trade. The underlying assumption is that currency price will change after parties have entered into a contract and prices have been pre determined. Hence the contracting company who is paying suffers heavily and incur heavy loss due to this constant fluctuation of currency rates. However if the company anticipates such change in currency rates in near future it can choose to protect itself by implementing a hedging strategy such as entering into a forward contract.

Items subject to transaction exposure could be Revenue and profit figures.

2. Translation exposure also known as accounting exposure is risk associated with company's assets and liabilities if a portion of them are denominated in foreign currency. The risk here is of the assets and liabilites changing their values due to fluctuations in currency rates.

None of the items here are quoted in any foreign currency hence this exposure is non existent here.

3. Operating exposure is again caused by change in currency rates. It affects the future cash flows or present values of such cash flows when such change is unanticipated.

Revenues determine the cash flows obtained and this item is subject to operating exposure.

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