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