Financial Reporting, Foreign Currency, Other Presentaion

Question 1

“current cost/constant dollar” method

Answer 1

includes both specific and general price level changes.
“historical cost/nominal dollar” method includes no price level changes.
“current cost/nominal dollar” method includes specific price level changes (specific price indexes).
“historical cost/constant dollar” method includes general price level changes.

Question 2

Holding monetary liabilities

Answer 2

during periods of inflation results in a purchasing power gain (such as a home mortgage).

Question 3

report total assets

Answer 3

Current cost amounts of inventory and property, plant and equipment are measured at current cost or lower recoverable amount at the measurement date.

Question 4

In general

Answer 4

Purchasing power measures the impact of inflation through index adjusted constant dollar accounting. As the monetary unit decreases in value constant dollar accounting will measure purchasing power gains and losses. Monetary assets, assets fixed in monetary value, will experience a purchasing power loss. Appreciation is measured by evaluating replacement costs using current dollar accounting. In a period of rising prices, we would anticipate that non-monetary assets would appreciate in value.
Constant dollar accounting would measure purchasing power gains and losses. Monetary assets would likely produce a purchasing power loss in a period of rising prices and we would most likely anticipate that non-monetary asset values would appreciate as well.

Question 5

“Translation adjustments”

Answer 5

are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of.
However, gains or losses from remeasuring the foreign subsidiary’s financial statements from the local currency to the functional currency should be included in “income from continuing operations” of the parent company.

Question 6

the remeasurement method

Answer 6

is used and the historical rates should be used only for those balance sheet accounts carried at “cost” (most non-monetary items). Otherwise follow the general rule and use the “current” rate.

Question 7

translated-remeasured

Answer 7

A subsidiary’s financial statements are usually maintained in its local currency. If the subsidiary’s functional currency is its local currency, the subsidiary’s financial statements are simply “translated” to the reporting currency. The resulting adjustment is reported as other comprehensive income. If the subsidiary’s functional currency is not the same as its local currency (the functional currency may be the reporting currency or another currency), the subsidiary’s financial statements must be “remeasured” into the functional currency. The resulting gain or loss on remeasurement is reported in the consolidated income statement.