Fin. 329 Ch. 11

10% foreign exchange loss on the U.S. dollar accounts receivable.

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a:

have a 2:1 ratio of liabilities to equity.

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:

functional

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

integrated foreign entity

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.

to prepare consolidated financial statements.

According to your authors, the main purpose of translation is:

consolidated balance sheet.

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the:

foreign subsidiary independence; a firm's functional currency

Generally speaking, translation methods by country define the translation process as a function of what two factors?

equity accounts and fixed assets; current assets and liabilities

Historical exchange rates may be used for ________, while current exchange rates may be used for ________.

C) Both A and B are 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 net exposed position is called monetary balance. B) the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) Both A and B are true. D) none of the above

current income; equity reserves

If an imbalance results from the accounting method used for translation, the imbalance is taken either to ________ or ________.

loss of €5,000.

If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a translation:

gain of €12,500.

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

gain of $8,000.

If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:

loss of $75,000.

If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:

eliminate translation; transaction

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.

T

T/F: 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.

F

T/F: 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.

F

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

F

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

T

T/F: 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.

T

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

F

T/F: It is highly unusual for a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

T

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

T

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

T

T/F: 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.

T

T/F: 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.

T

T/F: 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.

T

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

T

T/F: The current rate method is the most prevalent method today for the translation of financial statements.

T

T/F: 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.

F

T/F: The temporal rate method is the most prevalent method today for the translation of financial statements.

T

T/F: Translation gains or losses can be quite different from operating gains or losses not only in magnitude but also in sign.

T

T/F: 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."

T

T/F: Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Financial Accounting Standards Board (FASB)

The ________ determines accounting policy for U.S. firms.

current rate; temporal

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.

balance sheet

The main technique to minimize translation exposure is called a/an ________ hedge.

current rate; temporal

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

accounting

Translation exposure may also be called ________ exposure.

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.

Translation exposure measures:

translation; remeasurement

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

translation is not required.

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:

translation is accomplished through the temporal method.

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:

translation is accomplished through the current rate method.

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:

B) 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.

Which of the following primary principles of U.S. translation procedures in NOT true? A) If the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, translation is not required. B) 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. C) 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. D) All of the above are true.

Translation

________ exposure is 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 transaction.

Transaction; translation

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

Translation gains or losses; operating gains or losses

________ occur as a result of changes in the value of currency, whereas ________ occur as a result of ongoing business activities.

D) All of the above are appropriate reasons to use a balance sheet hedge.

f 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.

integrated; self-sustaining

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.