Chapter 8 - Advanced Financial Accounting

Comparability of financial statements across companies within an industry is made more difficult by

some companies identifying local currencies as functional currency and other companies identifying the U.S. dollar as functional currency.

The translation adjustment that results from the use of the temporal method is a realized (cash) gain or loss that is caused by changes in exchange rates.

False

Net cash from operations reported in the translated statement of cash flows will be the same regardless of whether a foreign entity's financial statements have been translated using the current rate method or remeasured using the temporal method.

True

When the amount of assets translated at the current exchange rate is lower than the amount of liabilities translated at the current exchange rate

a net liability balance sheet exposure exists.

A depreciation in the value of a foreign currency will result in a negative translation adjustment when a foreign subsidiary has a net _____ balance sheet exposure.

asset

The _____ exchange rate is the exchange rate that exists at the balance sheet date.

current

The functional currency of a foreign entity located in a highly inflationary country

does not need to be identified because the entity's foreign currency financial statements must be translated using the temporal method.

The primary currency of a foreign entity's operating environment is its ____ currency.

functional

Some of the ratios calculated from a foreign entity's foreign currency financial statements will have the same value in parent company currency when the foreign financial statements are translated using

the current rate method.

The current rate method of translation assumes that a foreign subsidiary is

a net asset that is exposed to foreign exchange risk.

Foreign currency balance sheet accounts that are translated at the current exchange rate are _____ to translation adjustment.

exposed

The primary currency of a foreign entity's operating environment is its _____ currency.

functional

Determining the functional currency of a foreign subsidiary

is a matter of fact but may require management judgment in evaluating the facts.

The indicators provided by the FASB for determining the functional currency of a foreign entity include

whether sales prices are directly affected by short-term fluctuations in the exchange rate. the currency in which the foreign entity obtains its financing. whether the foreign entity's cash flows directly affect the parent's cash flows.

The reporting currency for a U.S.-based company is the

U.S. dollar.

Under the temporal method, expenses are translated using

the average-for-the-year and historical exchange rates.

Under the temporal method, revenues that are earned evenly throughout the year are translated using

the average-for-the-year exchange rate.

Under the temporal method of translation, assets carried on the foreign entity's balance sheet at a current or future value are translated using

the current exchange rate.

Determining the functional currency of a foreign entity might require management to exercise considerable judgment in considering relevant facts.

True

The translation adjustment that results from applying the temporal method

can be realized in cash only if the foreign entity's liabilities are paid using parent company currency.

Under the temporal method of translation, foreign entities generally will

have a net liability balance sheet exposure.

The Canadian subsidiary of a U.S.-based company has an account receivable in British pounds. To report this account receivable in the U.S.-parent's consolidated balance sheet, the

British pound receivable should translated into Canadian dollars using the current exchange rate. the Canadian dollar translated amount for the British pound receivable should be translated into U.S. dollars using the current exchange rate.

The translation adjustment arising under the current rate method becomes a realized (cash) gain or loss when

a foreign subsidiary is sold and the sales proceeds are converted into parent company currency.

The use of different functional currencies by companies in the same industry distorts the intra-industry ____ of financial statements.

comparability

The translation adjustment arising under the current rate method becomes a realized gain or loss when the foreign subsidiary is sold and the foreign currency proceeds from the sale are _____ into U.S. dollars.

converted

The translation adjustment arising under the current rate method becomes a realized gain or loss when the foreign subsidiary is sold and the foreign currency proceeds from the sale are ______ into U.S. dollars.

converted

When the temporal method of translation is used, inventory carried at foreign currency cost on the foreign entity's balance sheet under the lower of cost or net realizable value rule

could be carried at cost in parent currency on the parent's consolidated balance sheet. could be carried at net realizable value in parent currency on the parent's consolidated balance sheet.

The _____ exchange rate is the exchange rate that existed when a transaction occurred sometime in the past.

historical

A net asset balance sheet exposure will generate a positive translation adjustment when the foreign currency

increases (appreciates) in value.

Translating an asset on a foreign subsidiary's balance sheet at the current exchange rate results in

a positive translation adjustment when the foreign currency has appreciated. a negative translation adjustment when the foreign currency has depreciated.

Translation adjustments included in other comprehensive income are

accumulated in a stockholders' equity account on the consolidated balance sheet.

Under the current rate method of translation, the balance sheet items translated at the current exchange rate are

all assets and all liabilities.

Under the current rate method of translation,

all assets are translated at the current exchange rate.

Under the current rate method of translation,

all liabilities are translated at the current exchange rate.

Current U.S. GAAP recognizes that some foreign entities

are closely integrated with their parent company and therefore primarily conduct business using parent company currency. are relatively self-contained and integrated with the local economy and therefore primarily conduct business using foreign currency.

The methods used in valuing assets on the foreign currency financial statements of a foreign entity are maintained in the translated parent company currency financial statements when

the temporal method is used to translate the foreign financial statements.

Translating a foreign currency balance sheet account at the current exchange rate gives rise to

balance sheet exposure to foreign exchange risk.

Under both the current rate and temporal methods of translation the parent currency amount of retained earnings at the end of the year is determined by translating the

current year's net income and dividends in foreign currency separately and combining these with beginning retained earnings.

Under the temporal method, cost of goods sold (COGS) in foreign currency (FC) is translated into parent company currency by

decomposing COGS in FC into components and then multiplying each of these components by its appropriate historical exchange rate.

The accounting system must keep track of the acquisition date exchange rates related to those assets that are translated at

historical exchange rates under the temporal method.

Under the temporal method, expenses related to assets that are translated at historical exchange rates (such as depreciation expense) are translated using

historical exchange rates.

Conceptually, translation adjustments that result from applying either the current rate method or the temporal method could be

included in consolidated net income as a translation gain or loss. included in consolidated other comprehensive income as a deferred translation gain or loss.

Balance sheet accounts translated using the same exchange rate under both the current rate and temporal methods include

long-term debt. cash and receivables. additional paid in capital.

In determining the remeasurement gain or loss that results when the temporal method of translation is used the beginning net ____ asset or liability position is translated using the beginning-of-the-year exchange rate.

monetary

The foreign currency financial statements of a foreign entity located in a highly inflationary economy

must be translated using the temporal method.

Balance sheet exposure under the current rate method of translation is equal to a foreign operation's

net asset position.

Each of the ratios calculated from a foreign entity's foreign currency financial statements will have a different value in parent company currency when the foreign financial statements are translated using

the temporal method.

Under the temporal method, depreciation expense and accumulated depreciation on property, plant, and equipment are translated

using the historical exchange rate when the property, plant, and equipment was acquired.

Under both the current rate and temporal methods of translation the retained earnings of a foreign entity are translated into parent company currency by multiplying ending retained earnings in foreign currency by the average-for-the-period exchange rate.

False

True or false: Under the temporal method, inventory reported at cost on the foreign currency balance sheet could be reported at either cost or at net realizable value on the parent currency balance sheet.

True

Translating a liability on a foreign subsidiary's balance sheet at the current exchange rate results in

a positive translation adjustment when the foreign currency has depreciated. a negative translation adjustment when the foreign currency has appreciated.

There is no need to keep record of the acquisition date exchange rates related to

assets translated at the current exchange rate under the temporal method. assets translated under the current rate method.

Sales revenue recognized evenly throughout the year by a foreign subsidiary should be translated under the current rate method using the

average-for-the-period exchange rate.

A U.S.-based company has a foreign subsidiary that has the Mexican peso as its functional currency. The Mexican subsidiary recognizes in its Mexican peso income statement a foreign exchange gain on a Colombian peso account receivable. In preparing its consolidated income statement, the U.S. parent company should translate the Mexican subsidiary's foreign exchange gain into U.S. dollars using the

average-for-the-year exchange rate between the Mexican peso and U.S. dollar.

In determining remeasurement gains and losses under the temporal method, the focus is on determining the impact that exchange rate changes have on the

beginning balance and changes in net monetary assets and liabilities.

In determining the remeasurement gain or loss that results when the temporal method is used, the beginning-of-the-year net monetary asset or liability position of the foreign entity is translated using the

beginning-of-the-year exchange rate.

In determining the translation adjustment when the current rate method is used, the foreign entity's net asset balance at the beginning of the year is translated using the

beginning-of-the-year exchange rate.

Under the temporal method of translation, a foreign entity

can have a net asset or a net liability balance sheet exposure.

The gain on the sale of an asset is translated under the temporal method by first translating the _____ received from the sale using the exchange rate on the date of sale.

cash

Under the temporal method of translation, balance sheet accounts translated at the current exchange rate include

cash and receivables. accounts and notes payable.

Consistent with the underlying assumption of the current rate method that the net investment in a foreign operation is exposed to foreign exchange risk, all assets and liabilities of the foreign operation are translated into parent company currency using the ______ exchange rate.

current

Consistent with the underlying assumption of the current rate method that the net investment in a foreign operation is exposed to foreign exchange risk, all assets and liabilities of the foreign operation are translated into parent company currency using the exchange rate.

current

The accounts of a foreign subsidiary are translated into the parent's currency using a combination of

current and historical exchange rates.

Assuming that all expenses are incurred evenly throughout the year, those expenses translated using a different exchange rate under the current rate method than under the temporal method include

depreciation expense. cost of goods sold.

When an asset carried at historical cost on a foreign currency balance sheet is translated into parent company currency using the current rate method the resulting parent currency amount for that asset

does not represent either the historical cost nor the fair value of that asset in parent currency.

In determining the translation adjustment when the current rate method is used, dividends declared by the foreign entity in the current year are translated using the

exchange rate on the date the dividends are declared.

A positive translation adjustment will arise when a foreign currency decreases in value (depreciates) and the foreign subsidiary

has a net liability balance sheet exposure.

Under the temporal method, cost of goods sold (COGS) in foreign currency is decomposed into beginning inventory, purchases, and ending inventory and then each component is translated into U.S. dollars using the appropriate _____ exchange rate.

historical

Under the temporal method, depreciation expense and accumulated depreciation are translated using the _____ exchange rate when the related property, plant, and equipment was acquired.

historical

A net liability balance sheet exposure coupled with an appreciation in the value of a foreign currency will result in a ______ translation adjustment.

negative

Translating a foreign currency asset at the current exchange rate when the foreign currency has appreciated gives rise to a ________ translation adjustment.

positive

The functional currency of a foreign entity is defined as the

primary currency of the foreign entity's operating environment.

A basic objective of the temporal method of translation is to

produce a set of translated financial statements as if the foreign operation had used the parent company's currency in its daily operations.

In assessing the indicators provided by the FASB for determining the functional currency of a foreign entity, the FASB

provides no guidance with regard to how the indicators should be weighted.

When the temporal method of translation is appropriate, the resulting translation adjustment must be

recognized as a gain or loss in net income.

Consistent with the basic objective of the temporal method, land held on the balance sheet of a foreign subsidiary should be translated into the parent company's currency so that the translated amount

reflects the amount of parent company currency that would have been paid to acquire the land.

When the current rate method of translation is appropriate, the resulting translation adjustment must be

reported in accumulated other comprehensive income on the balance sheet.

The U.S. dollar is the ____ currency for a U.S.-based company.

reporting

The U.S. dollar is the ______ currency for a U.S.-based company.

reporting

Current U.S. GAAP recognizes that

some foreign entities primarily conduct their operations in parent company currency. some foreign entities primarily conduct their operations in foreign currency.

Under the temporal method, a gain on the sale of land in foreign currency (FC) is translated into parent company currency by multiplying the cash proceeds from the sale in FC by the exchange rate in effect on the date of sale and

subtracting the product of multiplying the cost of the land in FC by the exchange rate in effect when the land was acquired.

Translation using the temporal method with remeasurement gains and losses recognized in net income is appropriate for those foreign entities

that are located in highly inflationary economies. that have the U.S. dollar as their functional currency.

A U.S.-based company must use the temporal method to translate the financial statements of a foreign subsidiary whose functional currency is

the U.S. dollar.

A net asset balance sheet exposure exists when

the amount of assets translated at the current exchange rate is higher than the amount of liabilities translated at the current exchange rate.

Under the current rate method of translation, revenues and expenses generally are translated at

the average-for-the-period exchange rate.

Exposure to translation adjustment exists for those foreign currency balances that are translated at

the current exchange rate.