Introduction to Conversion of Foreign Financial Statements

The financial statements expressed in a foreign currency that need to be converted to a domestic currency could be the financial statements of a/an: Equity Investee Subsidiary to be Consolidated Yes Yes Yes No No Yes No No

Yes Yes

Operating transactions denominated in a foreign currency are converted to the functional currency using the: A. Historic exchange rate. B. Current exchange rate. C. Average exchange rate. D. Forward exchange rate.

B. Current exchange rate.

Which one of the following best describes the currency in which the final consolidated financial statements are presented? A. The local currency. B. The reporting currency. C. The functional currency. D. The temporal currency.

B. The reporting currency.

In which one of the following independent circumstances would the local foreign currency of a country least likely be the functional currency for a manufacturing subsidiary of a U.S. company located in that country? A. The subsidiary's operations are relatively self-contained and integrated in the foreign country, which is not experiencing hyperinflation. B. The economy of the foreign country in which the subsidiary is located has experienced an inflationary rate of between 15% and 20% each of the last 5 years. C. The subsidiary generates most of its cash flows from sales and other activities in the foreign country in which it is located. D. The subsidiary makes all of its product for sale to and for use by its U.S. parent.

D. The subsidiary makes all of its product for sale to and for use by its U.S. parent.

Which of the following could be the functional currency of a foreign subsidiary? I. The recording currency of the foreign subsidiary. II. The reporting currency of the subsidiary's parent. III. A currency other than either the recording currency of the foreign subsidiary or the reporting currency of the subsidiary's parent. A. I only. B. II only. C. I and II, only. D. I, II, and III.

D. I, II, and III.

Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity? A. 20% inflation for each of the past 5 years. B. 30% inflation for each of the past 3 years. C. 35% inflation for each of the past 3 years. D. 20%, 35%, and 40% inflation, respectively, for each of the past 3 years.

C. 35% inflation for each of the past 3 years.

Determining a foreign subsidiary's functional currency will take into account which of the following? I. The extent to which the subsidiary operates, and generates and expends cash in the local foreign economy in which it is located. II. The cumulative inflation rate in the local foreign economy in which it is located. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II.

Which of the following statements concerning the objectives of foreign currency translation is/are correct? I. To reflect financial statements in conformity with U.S. GAAP. II. To provide information that generally is compatible with expected effects of exchange rate changes on an entity's cash flows and equity. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II.

Which of the following statements concerning the determination of a functional currency is/are correct? I. The functional currency can be selected at management's discretion. II. The functional currency could be the recording currency of the foreign entity. III. The functional currency could be the reporting currency of a parent. A. I only. B. I and II, only. C. II and III, only. D. I, II, and III.

C. II and III, only.

Which one of the following would best describe the functional currency of a foreign subsidiary of a U.S. parent? A. The currency in which the subsidiary maintains its books. B. The dollar - the functional currency of the parent. C. The currency of the primary economic environment in which the subsidiary operates and generates most of its net cash flow. D. The currency of the country in which the foreign subsidiary is located.

C. The currency of the primary economic environment in which the subsidiary operates and generates most of its net cash flow.

The specific method to be used to convert financial statements of a subsidiary expressed in a foreign currency into the domestic currency of the parent depends primarily on: A. The reporting currency of the subsidiary. B. The reporting currency of the parent. C. The functional currency of the subsidiary. D. The functional currency of the parent.

C. The functional currency of the subsidiary.

In which one of the following independent circumstances would the local foreign currency of a country likely be the functional currency for a subsidiary of a U.S. entity located in that country? A. The economy of the foreign country in which the subsidiary is located has experienced 40% inflation for each of the last three years. B. The subsidiary's operation is financed principally with dollars provided by the parent. C. The subsidiary's operation is self-contained, and generates and expends cash primarily in the local foreign currency. D. The subsidiary's operation is a direct extension of the parent's operation.

C. The subsidiary's operation is self-contained, and generates and expends cash primarily in the local foreign currency.