Chapter 8 Translation of Foreign Currency Financial Statements Flashcards
What is meant by the “translation” of foreign currency financial statements?
B. Converting financial statements of a foreign currency into a domestic currency
Companies must choose between which exchange rates for consolidating foreign subsidiaries?
C. Current rate and historical rate
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
When would the balance sheet exposure arising from the current rate method become realized?
C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.
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?
C. This allows the use of the current method, which defers recognizing translation gains or losses in income.
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
Nonmonetary assets DO NOT include:
C. accounts receivable.
Which of the following is true of monetary assets?
B. Monetary assets are those assets whose values do not fluctuate over time.
Which of the following statements is true of nonlocal currency balances in the foreign currency financial statements of foreign operations?
C. Any loss is reflected in the measurement of consolidated net income.
What is the cause of balance sheet exposure?
D. None of the above
What is another term for “balance sheet exposure?”
C. Translation exposure
Which of the following items in the balance sheet is subject to accounting exposure?
D. All accounts translated at current exchange rates
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.
What is the primary difference between transaction exposure and accounting exposure?
B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
Excellent 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?
C. When there is net liability exposure, the translation adjustment will be positive.
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?
D. Temporal method
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?
C. Temporal method
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?
B. Current rate
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?
B. Historical rate
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?
C. Historical rate
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?
B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.
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?
D. None of the above
