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The cosmetics industry is one of the most competitive industries around the globe. This can be attributed to the increased demand of cosmetic products especially among women. As such, business organizations operating in the industry, must equip themselves with strategies aimed at giving them competitive advantage against rivals in the industry. As such, strategies crafted and executed by organizations such as Icelandic Enterprises, Inc., as well as International Cosmetics, must take advantage of opportunities created by international financial policies and the available market. Businesses must lay significant emphasis on feasible pricing policies to be able to be profitable in such a competitive and dynamic industry (Robinson et al., 2012, p.134). The purpose of this paper is to provide a critical analysis of financial reporting and changing prices, with regard to the cases of Icelandic Enterprises, Inc., and International Cosmetics Ltd.
International Cosmetic’s policy of recouping its investment in Icelandic in terms of dollar, and making the dollar the functional currency of Icelandic Enterprises, enabled them to minimize the impacts of inflation and the devaluation of Icelandic Krona, amid loss of market share by the organization. This policy enabled the organization to effective handle the impacts of changing prices with regard to the organization’s monetary assets and liabilities, as well as nonmonetary items. The policies adopted by International Cosmetics also enabled the organization to maintain its income and expense accounts despite the depreciating value of Icelandic Krona against the dollar. As a result, International Cosmetics was able to maintain a rising profit level or rather earning in the 2001 and 2002 financial years (Choi, Frost, & Meek, 2002, p. 246).
The decision by International Cosmetics to translate their financial reports into dollars instead of Icelandic Krona, effectively and immediately approximated the impact of the inflation and the devaluation of Icelandic Krona, on their original equity investment and the general performance of the organization. Therefore, the management of International Cosmetics was correct in stating this claim. This is because International Cosmetics’ original equity investment in Icelandic enterprises was not extensively affected by the inflation and the devaluation of the Icelandic Krona. As can be noted from both the balance sheet and the income statement, the value of the organization was much higher in terms of dollar as compared to Icelandic Krona in both 2001 and 2002 (Choi, Frost & Meek, 2002, p.246).
In order for International Cosmetics to continue approximating the impact of inflation and the devaluation of the Icelandic Krona, income and expense accounts should be translated not at an average exchange rate prevailing during the year, but should be deregulated and left to freely respond to the prevailing exchange rates in the markets. This is because the prevailing exchange rates do not remain constant all the time, but are determined by various financial and market factors (Robinson et al., 2012, p.134). Depreciation and amortization charges that relate to the organization’s assets, translated at historical exchange rates, should also be let to confirm to the current prevailing exchange rates in the market. In this way, International Cosmetics will not have to adjust their figures to approximate inflation but will still likely to make profitable earnings.
In conclusion, the financial policies adopted by business organizations such as International Cosmetics, have significant impact on how they respond to prevailing market and financial conditions such as inflation and currency devaluation. These financial and market conditions can have devastating implications on the financial earnings of a business organization.
References
Choi, F.D.S., Frost, C.A., & Meek, G.K. (2002). International Accounting. Upper Saddle River, NJ: Prentice Hall.
Robinson, T.R. et al. (2012). International Financial Statements Analysis. Hoboken, NJ: John Wiley & Sons, Inc.
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