2 what amount of its total tax expense did or will

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2. What amount of its total tax expense did (or will) Merck pay in cash (that is, what amount is currently payable)? 3. Explain how Merck calculates its income tax expense. The solution is on page 5-60. Foreign Currency Translation Effects Many companies conduct international operations and transact business in currencies other than $US. It is common for companies to purchase assets in foreign currencies, borrow money in foreign currencies, and transact business with their customers in foreign currencies. Increas- ingly many companies have subsidiaries whose balance sheets and income statements are pre- pared in foreign currencies. Financial statements prepared according to U.S. GAAP must be reported in $US. Thi means that the financial statements of any foreign subsidiaries must be translated into $U before consolidation with the U.S. parent company. This translation process can markedly alter both the balance sheet and income statement. We discuss income statement effects of foreign currency translation in this module; we discuss the effects on stockholders' equity in Module 8. Effects of Foreign Currency Transactions on Income A change in the strength of the $US vis-a-vis foreign currencies has a direct effect on the $US equivalent for revenues, expenses, and income of the foreign subsidiary because revenues and expenses are translated at the average exchange rate for the period. Exhibit 5.8 shows those financial effects. I EXHIBIT 5.8 Income Statement Effects from Foreign Currency Movements Revenues Expenses Net Income (or Loss) $US Weakens Increase $US Strengthens . . . .. Decrease Increase Decrease Increase Decrease Specifically, when the foreign currency strengthens (implying $US weakens), the subsidiary' revenues and expenses translate into more $US and, thus, reported income is higher than if the currencies had not fluctuated. On the other hand, when the $US strengthens, the subsidiary' revenues, expenses, and income decrease in $US terms. (The profit effect assumes that rev- enues exceed expenses; if expenses exceed revenues, a loss occurs, which increases if the $US weakens and decreases if the $US strengthens.) Pfizer discusses how currency fluctuations affect its income statement in the following excerpt from footnotes to the company's 2010 lO-K. Revenues by Segment & Geographical Area ($ rnil.) Worldwide us International $25,962 2,981 103 $29,046 $32,561 5,985 217 $38,763 Biopharmaceutical Diversified Corporate and Other $58,523 8,966 320 $67,809 Revenues increased ... [partly due to] the favorable impact of foreign exchange, which increased revenues by approximately $1.1 billion, or 2%. Worldwide Biopharmaceutical revenues in 2010 were $58.5 billion, an increase of 29% compared to 2009, due to the weakening of the U.S. dollar relative to other currencies, primarily the Canadian dollar, Australian dollar, Japanese yen and Brazilian real, which favorably impacted Biopharmaceutical revenues by approximately $900 million, or 2%.
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Module 5 I Revenue Recognition and Operating Income 5-28 -S weakened against many foreign currencies for several years preceding and including Thus, each unit of foreign currency purchased more $US. Therefore,
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