Multinational Finance Ch. 11; Translation Exposure

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

If management anticipates an appreciationof the foreign currency, it should decreasenet 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

It is highly unusualfor a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

False

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

False

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

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

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

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

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

True

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

a

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

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

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) self-sustaining foreign B) integrated foreign entity C) foreign D) none of the above

b

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

b

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) maximize translation; no transaction B) eliminate translation; transaction C) maximize transaction; no translation D) eliminate transaction; translation

b

Translation exposure measures: A) changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. B) 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. C) an unexpected change in exchange rates impact on short run expected cash flows. D) none of the above

b

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

b

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 thetemporal 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.

b

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

b

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) self-sustaining; domestic C) integrated; self-sustaining D) self-sustaining; integrated

c

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the: A) consolidated statement of cash flow. B) consolidated income statement. C) consolidated balance sheet. D) none of the above

c

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

c

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

c

The ________ determines accounting policy for U.S. firms. A) Securities and Exchange Commission (SEC) B) Federal Reserve System (Fed) C) Financial Accounting Standards Board (FASB) D) General Agreement on Tariffs and Trade (GATT)

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 current rate method. B) translation is accomplished through the temporal method. C) translation is not required. D) the translation method to be used is not obvious.

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 not required. B) translation is accomplished through the current rate method. C) translation is accomplished through the temporal method. 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

) 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) have a 2:1 ratio of liabilities to assets. C) have a 2:1 ratio of liabilities to equity. D) be equal.

d

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

d

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

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

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) monetary; current rate B) temporal; current rate C) temporal; monetary D) current rate; temporal

d

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 accomplished through the temporal method. C) translation is not required. D) translation is accomplished through the current rate method.

d

________ 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. A) Transaction B) Operating C) Currency D) Translation

d

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

Translation exposure may also be called ________ exposure.

Accounting

) 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

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.

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