Ch. 11

If an imbalance results from the accounting method used for​ translation, the imbalance is taken either to​ ________ or​ ________. A. ​depreciation; the market for foreign exchange swaps B. current​ liabilities; equity reserves C. current​ income; equity reserves D. the​ bank; the post office

C

Historical exchange rates may be used for​ ________, while current exchange rates may be used for​ ________. A. equity accounts and current​ liabilities; current assets and fixed assets B. fixed assets and current​ assets; income and expense items C. current assets and​ liabilities; equity accounts and fixed assets D. equity accounts and fixed​ assets; current assets and liabilities

D

If a​ firm's subsidiary is using the local currency as the functional​ currency, which of the following is NOT a circumstance that could justify the use of a balance sheet​ hedge? A. The foreign subsidiary is about to be​ liquidated, so that the value of its Cumulative Translation Adjustment​ (CTA) would be realized. B. The firm has debt covenants or bank agreements that state the​ firm's debt/equity ratio will be maintained within specific limits. C. The foreign subsidiary is operating is a hyperinflationary environment. D. All of the above are appropriate reasons to use a balance sheet hedge.

D

Exchange rate imbalances that are passed through the balance sheet affect a​ firm's reported​ income, but imbalances transferred to the income statement do not.

False

One possible reason for a balance sheet hedge could be because the firm has debt covenants or bank agreements that state the​ firm's debt/equity ratios will be maintained within specific limits.

True

One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be​ liquidated, so that value of its Cumulative Translation Adjustment​ (CTA) would be realized.

True

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

True

The current rate method and the temporal method are two basic methods for translation that are employed worldwide

True

Under U.S. accounting and translation​ practices, use of the current rate method is termed​ "translation" while use of the temporal method is termed​ "remeasurement."

True

If the European subsidiary of a U.S. firm has net exposed assets of euro€​750,000, and the euro drops in value from​ $1.30/euro to ​$1.20/euro€ the U.S. firm has a​ translation: A. loss of euro€​576,923. B. gain of​ $625,000. C. gain of​ $75,000. D. loss of​ $75,000.

D

The temporal rate method is the most prevalent method today for the translation of financial statements.

False

Under the temporal rate​ method, specific assets and liabilities are translated at exchange rates consistent with the timing of the​ item's creation.

True

A foreign​ subsidiary's ________ currency is the currency used in the​ firm's day−to−day operations. A. notational dollar B. integrated C. functional D. local

C

Consider two different foreign subsidiaries of Georgia−Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia−Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely​ a/an ________ foreign entity with most of its cash flows in U.S.​ dollars, and the second subsidiary is more of​ a/an ________ foreign entity. A. ​domestic; integrated B. selfminus−​sustaining; domestic C. ​integrated; self−sustaining D. selfminus−​sustaining; integrated

C

Which of the following primary principles of U.S. translation procedures in NOT​ true? A. If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional​ currency, they are remeasured by the temporal method. B. If the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S.​ dollars, translation is not required. C. If the financial statements of the foreign subsidiary are maintained in the local currency and the local currency is the functional​ currency, they are translated by the temporal method. D. All of the above are true.

C

​________ gains and losses are​ "realized" whereas​ ________ gains and losses are only​ "paper." A. ​Translation; transaction B. ​Translation; operating C. ​Transaction; translation D. none of the above

C

​________ occur as a result of changes in the value of​ currency, whereas​ ________ occur as a result of ongoing business activities. A. Operating gains or​ losses; translation gains or losses B. Swap​ losses; translation gains or losses C. Translation gains or​ losses; operating gains or losses D. all of the above

C

If the British subsidiary of a European firm has net exposed assets of pound£​250,000, and the pound drops in value from euro€​1.35/pound£ to euro€​1.30/pound£​, the European firm has a​ translation: A. loss of euro€​12,500. B. gain of euro€​12,500. C. loss of pound£​12,500. D. gain of pound£​12,500.

A

If the European subsidiary of a U.S. firm has net exposed assets of euro€​200,000, and the euro increases in value from ​$1.22/euro€ to ​$1.26/euro€ the U.S. firm has a​ translation: A. gain of​ $8,000. B. gain of​ $252,000. C. loss of​ $8,000. D. loss of euro€​252,000.

A

The basic advantage of the​ ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the​ parent's consolidated statement while the most important advantage of the​ ________ method is that the gain or loss from translation does not pass through the income statement. A. current​ rate; temporal B. ​monetary; current rate C. ​temporal; current rate D. ​temporal; monetary

A

The two basic methods for the translation of foreign subsidiary financial statements are the​ ________ method and the​ ________ method. A. current​ rate; temporal B. ​temporal; proper timing C. current​ rate; future rate D. none of the above

A

Translation exposure may also be called​ ________ exposure. A. accounting B. operating C. transaction D. currency

A

Translation exposure​ measures: A. the potential for an increase or decrease in the parent​ company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. B. an unexpected change in exchange rates impact on short run expected cash flows. C. changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. D. none of the above

A

​A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent. A. integrated foreign entity B. self−sustaining foreign C. foreign D. none of the above

A

A balance sheet hedge requires that the amount of exposed foreign currency assets and​ liabilities: A. have a​ 2:1 ratio of assets to liabilities. B. be equal. C. have a​ 2:1 ratio of liabilities to equity. D. have a​ 2:1 ratio of liabilities to assets.

B

According to your​ authors, the main purpose of translation​ is: A. to help management assess the performance of foreign subsidiaries. B. to prepare consolidated financial statements. C. to act as an interpreter for managers without foreign language skills. D. none of the above

B

Generally​ speaking, translation methods by country define the translation process as a function of what two​ factors? A. ​location; foreign subsidiary independence B. foreign subsidiary​ independence; a​ firm's functional currency C. ​size; location D. a​ firm's functional​ currency; location

B

The main technique to minimize translation exposure is called​ a/an ________ hedge. A. income statement B. balance sheet C. forward D. translation

B

A foreign​ subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows.

True

If the same exchange rate were used to remeasure every line on a financial​ statement, then there would be no imbalances from remeasuring.

True

It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure.

True

It is possible to use different exchange rates for different line items on a financial statement.

True

If a​ firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal​ method, then: A. the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. B. the net exposed position is called monetary balance. C. Both A and B are true. D. none of the above

C

If the British subsidiary of a European firm has net exposed assets of pound£​125,000, and the pound increases in value from euro€​1.40/pound£ to euro€​1.44/pound£​, the European firm has a​ translation: A. loss of euro€​5,000. B. gain of pound£​5,000. C. gain of euro€​5,000. D. loss of pound£​5,000.

C

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the​ parent's reporting currency this will​ ________ exposure but each subsidiary would have​ ________ exposure. A. eliminate​ transaction; translation B. maximize​ translation; no transaction C. eliminate​ translation; transaction D. maximize​ transaction; no translation

C

Under U.S. accounting and translation​ practices, use of the current rate method is termed​ ________ while use of the temporal method is termed​ ________. A. ​remeasurement; the same B. ​remeasurement; translation C. ​translation; remeasurement D. ​translation; the same

C

Under the U.S. method of translation​ procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local​ currency, and the U.S. dollar is the functional​ currency, then: A. translation is accomplished through the current rate method. Your answer is not correct.B. translation is not required. C. translation is accomplished through the temporal method. D. none of the above

C

Under the U.S. method of translation​ procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local​ currency, and the local currency is the functional​ currency, then: A. the translation method to be used is not obvious. B. translation is not required. C. translation is accomplished through the current rate method. D. translation is accomplished through the temporal method.

C

Under the U.S. method of translation​ procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S.​ dollars: A. translation is accomplished through the temporal method. B. translation is accomplished through the current rate method. C. the translation method to be used is not obvious. D. translation is not required.

D

If management anticipates an appreciation of the foreign​ currency, it should decrease net exposed assets to benefit from a gain.

False

If management expects a foreign currency to depreciate​, it could minimize translation exposure by increasing net exposed assets.

False

If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional​ currency, they are remeasured by the temporal method.

False

It is highly unusual for a multinational firm to have both integrated foreign entities AND self−sustaining foreign entities.

False

The current rate method is the most prevalent method today for the translation of financial statements.

True

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

True