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Flashcards in Chapter 8 Deck (57):
1

What is meant by the "translation" of foreign currency financial statements?


A. Converting financial statements prepared under foreign GAAP into domestic GAAP

B. Converting financial statements of a foreign currency into a domestic currency

C. Converting the language used in financial statements from foreign to domestic

D. Converting historic cost financial statements into current cost financial statements

B. Converting financial statements of a foreign currency into a domestic currency

2

Companies must choose between which exchange rates for consolidating foreign subsidiaries?


A. Spot rate and forward rate

B. Spot rate and closing rate

C. Current rate and historical rate

D. Domestic rate and international rate

C. Current rate and historical rate

3

When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?


A. Current rate method

B. Current/noncurrent method

C. Monetary/nonmonetary method

D. Temporal method

A. Current rate method

4

When would the balance sheet exposure arising from the current rate method become realized?


A. It is realized once the financial statements of the foreign operation and the parent are consolidated.

B. It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date.

C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.

D. It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.

5

In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency. What reason did the researchers give for this management decision?


A. It was easier than proving to the FASB that a subsidiary's functional currency was the U.S. dollar.

B. Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements.

C. This allows the use of the current method, which defers recognizing translation gains or losses in income.

D. This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

C. This allows the use of the current method, which defers recognizing translation gains or losses in income.

6

Which of the following is NOT among the four methods which have been used to translate foreign currency financial statements globally?


A. The historic/non-historic method

B. The monetary/nonmonetary method

C. The temporal method

D. The current/noncurrent method

A. The historic/non-historic method

7

Nonmonetary assets DO NOT include:


A. fixed assets.

B. inventory.

C. accounts receivable.

D. customer deposits.

C. accounts receivable.

8

Which of the following is true of monetary assets?


A. Monetary assets are translated at historical exchange rates under all translation methods.

B. Monetary assets are those assets whose values do not fluctuate over time.

C. Monetary assets include current assets like marketable securities.

D. Monetary assets are always translated at current exchange rates.

B. Monetary assets are those assets whose values do not fluctuate over time.

9

Which of the following statements is true of nonlocal currency balances in the foreign currency financial statements of foreign operations?


A. These are not reported in the consolidated financial statements.

B. Any gain is shown in the balance sheet of the company as an asset.

C. Any loss is reflected in the measurement of consolidated net income.

D. No gain or loss is reported in the financial statements.

C. Any loss is reflected in the measurement of consolidated net income.

10

What is the cause of balance sheet exposure?


A. Converting subsidiary account balances to balances denominated in the parent company's currency at historical exchange rates

B. Completing international transactions in currency other than the currency of the home company

C. Translating subsidiary account balances to amounts denominated in the parent company's currency

D. None of the above

D. None of the above

11

What is another term for "balance sheet exposure?"


A. Transaction exposure

B. Exchange exposure

C. Translation exposure

D. Negative exposure

C. Translation exposure

12

Which of the following items in the balance sheet is subject to accounting exposure?


A. Only assets

B. Only liabilities and owners' equity

C. All accounts translated at historical exchange rates

D. All accounts translated at current exchange rates

D. All accounts translated at current exchange rates

13

Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko's financial statements?


A. When there is net asset exposure, the translation adjustment will be positive.

B. When there is net liability exposure, the translation adjustment will be positive.

C. The direction of the adjustment is indeterminate.

D. There will be no adjustment necessary unless the difference is realized.

A. When there is net asset exposure, the translation adjustment will be positive.

14

What is the primary difference between transaction exposure and accounting exposure?


A. Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.

B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.

C. Transaction exposure must be hedged, but accounting exposure does not need to be hedged.

D. Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.

15

xcellent Inc. is located in the U.S., but it has subsidiaries in Japan. When the yen depreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements?


A. When there is net asset exposure, the translation adjustment will be positive.

B. There will be no adjustment necessary unless the difference is realized.

C. When there is net liability exposure, the translation adjustment will be positive.

D. The direction of the adjustment is indeterminate.

C. When there is net liability exposure, the translation adjustment will be positive.

16

Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a foreign subsidiary had actually used the parent company's currency for all its transactions?


A. Current/Noncurrent method

B. Monetary/Nonmonetary method

C. Current rate method

D. Temporal method

D. Temporal method

17

Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?


A. Current rate method

B. Current/Noncurrent method

C. Temporal method

D. Monetary/Nonmonetary method

C. Temporal method

18

Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a "lower of cost or market" rule. When consolidating Essco's balance sheet into Peako's balance sheet using the current rate method, what exchange rate should be used for the inventory under the temporal method?


A. Historical rate

B. Current rate

C. Average rate

D. Cannot be determined with the information given

B. Current rate

19

What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?


A. Current rate

B. Historical rate

C. Average rate

D. Cannot be determined with the information given

B. Historical rate

20

Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?


A. Average rate

B. Current rate

C. Historical rate

D. Forward rate

C. Historical rate

21

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted?


A. The U.S. parent would have to pay $16,300,000 to acquire the building today.

B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.

C. The building is worth $13,200,000 to the U.S. parent today.

D. None of the above

B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.

22

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted?


A. The U.S. parent would have to pay $16,300,000 to acquire the building today.

B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.

C. The building is worth $13,200,000 to the U.S. parent today.

D. None of the above

D. None of the above

23

Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?


A. Current rate method

B. Temporal method

C. Current/noncurrent method

D. None of the above

D. None of the above

24

Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?


A. It is equal to the amount of assets recorded by the subsidiary.

B. It is equal to the amount of liabilities recorded by the subsidiary.

C. It is equal to the foreign operation's net asset position.

D. It is equal to total assets plus total liabilities.

C. It is equal to the foreign operation's net asset position.

25

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's dividends into parent company currency?


A. Current rate

B. Historical rate

C. Average rate

D. Any of the above methods can be used under both the temporal and current method.

B. Historical rate

26

Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?


A. Spot rate at the end of the year

B. Average rate during the year

C. Spot rate mid-year

D. There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

B. Average rate during the year

27

Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?


A. Spot rate at the end of the year

B. Average rate during the year

C. Spot rate mid-year

D. There is no single rate that can be used for this purpose

D. There is no single rate that can be used for this purpose

28

Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the "lower of cost or market" rule for inventory valuation?


A. Lower of parent currency cost or parent currency market at current exchange rate

B. Lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate

C. Lower of parent currency cost or parent currency market at appropriate exchange rate

D. Lower of subsidiary currency cost or parent currency market at current exchange rate

C. Lower of parent currency cost or parent currency market at appropriate exchange rate

29

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31

Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?


A. The translated asset and liability amounts have no meaningful interpretation.

B. The translation adjustment will usually have a negative impact on income.

C. Financial ratios after translation will be distorted.

D. All of the above are limitations of the temporal method.

C. Financial ratios after translation will be distorted.

32

What is one problem in translating retained earnings using either the temporal or current rate method?


A. There is no problem, since both methods use the historic rate method for stockholders' equity accounts.

B. Dividends are based on an average cost method.

C. Net income is calculated differently, depending upon which method is used.

D. Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

C. Net income is calculated differently, depending upon which method is used.

33

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's additional paid-in capital into parent company currency?


A. Closing rate

B. Current rate

C. Average rate

D. Historical rate

D. Historical rate

34

Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?


A. Temporal method for all subsidiaries

B. Current rate method for all subsidiaries

C. U.S. parent companies may choose between the temporal method and the current rate method

D. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

D. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

35

Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?


A. As gains or losses on the current period consolidated income statement

B. As prior period adjustments to retained earnings of the parent

C. As part of other comprehensive income on the consolidated balance sheet

D. None of the above because the temporal method is not allowed under FASB ASC 830.

A. As gains or losses on the current period consolidated income statement

36

Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?


A. As gains or losses on the current period consolidated income statement

B. As prior period adjustments to retained earnings of the parent

C. As part of other comprehensive income on the consolidated balance sheet

D. None of the above because the temporal method is not allowed under FASB ASC 830.

C. As part of other comprehensive income on the consolidated balance sheet

37

Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency?"


A. The primary currency used by the parent company

B. The currency that minimizes the translation adjustment on the consolidated financial statements

C. The currency in which the subsidiary does its financial reporting

D. The primary currency of the foreign entity's operating environment

D. The primary currency of the foreign entity's operating environment

38

Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary for many cases?


A. Financial Accounting Standards Board

B. International Accounting Standards Board

C. Securities and Exchange Commission

D. Parent company management

D. Parent company management

39

What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters?


A. This refers to the accelerated depreciation methods that are popular for fixed asset valuation.

B. High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

C. Cheap foreign currency results in U.S. companies moving factory operations offshore.

D. Investment in fixed assets was not being reported on foreign subsidiary financial statements.

B. High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

40

How does FASB ASC 830, Foreign Currency Matters define a "highly inflationary economy?"


A. Inflation rate over 50% annually

B. Inflation rate over 10% annually

C. Cumulative three-year inflation over 26%

D. Cumulative three-year inflation over 100%

D. Cumulative three-year inflation over 100%

41

Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?


A. Current rate method

B. Current/noncurrent method

C. Temporal method

D. Monetary/nonmonetary method

C. Temporal method

42

International accounting standards define functional currency as:


A. the currency of the parent company.

B. the currency of the primary economic environment in which the subsidiary operates.

C. the currency of the primary economic environment in which the parent operates.

D. the currency used by a subsidiary for its financial reporting.

B. the currency of the primary economic environment in which the subsidiary operates.

43

According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary's functional currency is the parent company's currency?


A. Active local sales market

B. Sales price not affected by changes in exchange rate in the short-run

C. High volume of intercompany transactions

D. All of the above are indicators that the functional currency is the parent company's currency.

C. High volume of intercompany transactions

44

According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary's functional currency is the foreign currency?


A. Sales price not affected by changes in exchange rate in the short-run

B. High volume of intercompany transactions

C. Sales in the local market not significant

D. Most of the subsidiary's financing comes from the parent.

A. Sales price not affected by changes in exchange rate in the short-run

45

Which of the following methods for translating foreign currency financial statements is required under IAS 21?


A. Current rate method.

B. Temporal method.

C. Current rate method or temporal method, depending on the functional currency of the subsidiary.

D. Current rate method or temporal method must be chosen by management of the parent.

C. Current rate method or temporal method, depending on the functional currency of the subsidiary.

46

When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:


A. appreciation or depreciation of the foreign currency.

B. the nature of the balance sheet exposure.

C. both (A) and (B).

D. None of the above

C. both (A) and (B).

47

Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko. How must Parentco handle this translation adjustment when it records the sale of Subko?


A. As an increase in income (gain on disposal)

B. As a decrease in income (loss on disposal)

C. The cumulative translation adjustment will not be affected by the sale.

D. It will be a prior period adjustment to retained earnings.

B. As a decrease in income (loss on disposal)

48

Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?


A. Temporal method

B. Current/Noncurrent method

C. Current rate method

D. None of the above methods are allowed under GAAP.

B. Current/Noncurrent method

49

Which of the following methods for translating foreign currency financial statements require to be used under IAS 21?


A. Current/Noncurrent method

B. Monetary/Nonmonetary method

C. Temporal method

D. All of the above may be used under IAS 21.

C. Temporal method

50

High inflationary economies, when considering compounding, have an approximate annual inflation rate of:


A. 25% for four years in a row.

B. 100% for three years in a row.

C. 26% for three years in a row.

D. 50% for two years in a row.

C. 26% for three years in a row.

51

How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?


A. IAS 21 requires that the subsidiary's financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.

B. IAS 21 requires that the temporal method be used for translating the foreign currency financial statement.

C. IAS 21 requires the current rate method without taking into consideration any inflation adjustment.

D. U.S. GAAP requires that foreign subsidiary financial statements be restated to account for inflation before applying the current rate method.

A. IAS 21 requires that the subsidiary's financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.

52

Under IAS 21, which of the following is NOT a factor in determining functional currency?


A. It is the currency that influences sales prices for goods and services.

B. It is the currency that mainly influences labor, material and other costs of providing goods and services.

C. It is the currency least likely to experience hyperinflation.

D. It is the currency in which funds from financing activities are generated.

C. It is the currency least likely to experience hyperinflation.

53

Which of the following actions could a company use to hedge balance sheet exposure?


A. Forward contract on foreign currency

B. Foreign currency option

C. Foreign currency borrowing

D. All of the above may be used to hedge balance sheet exposure.

D. All of the above may be used to hedge balance sheet exposure.

54

Which of the following is a nonderivative hedging instrument?


A. Forward contract on foreign currency

B. Foreign currency call option

C. Foreign currency borrowing

D. Foreign currency put option

C. Foreign currency borrowing

55

What is the objective in hedging balance sheet exposure?


A. Controlling the movement of foreign currency exchange rates

B. Creating an equilibrium between foreign currency asset and foreign currency liability balances affected by exchange rates

C. To control the cash flow resulting from changes in the foreign currency exchange rates

D. All of the above

B. Creating an equilibrium between foreign currency asset and foreign currency liability balances affected by exchange rates

56

What is the paradox of hedging balance sheet exposure?


A. Real costs can be incurred to hedge an unrealized translation adjustment.

B. The hedging process rarely works the way management intended.

C. Hedging is a conceptual process that is nearly impossible to undertake in the real world.

D. Markets have yet to be developed that offer the kinds of derivative instruments required for hedging.

A. Real costs can be incurred to hedge an unrealized translation adjustment.

57

Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?


A. Fluctuations in reported income may affect stock price.

B. Management compensation may be tied to accounting income.

C. Hedging can smooth income.

D. All of the above

D. All of the above