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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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