Advanced Accounting - Chapter 10

Two major theoretical issues are related to the translation process...

(1) which translation method should be used (the current rate method or the temporal method) (2) where the resulting translation adjustment should be reported in the consolidated financial statements (as a translation gain/loss in net income or as a component of accumulated other comprehensive income in equity).

calculation of cost of goods sold

--p.481

issues related to the translation of foreign currency financial statements are...

1. selecting the appropriate method 2. deciding where to report the resulting translation adjustment in the consolidated financial statements

Cash + Marketable securities + Receivables > Liabilities → Net asset exposure Cash + Marketable securities + Receivables < Liabilities → Net liability exposure

The temporal method generates either a net asset or a net liability balance sheet exposure

The basic assumption underlying the current rate method...

a company's net investment in a foreign operation is exposed to foreign exchange risk

if the foreign currency decreases in value against the U.S. dollar..

a decrease in the U.S. dollar value of the foreign currency net asset -negative (debit) balance

The major issue is whether the translation adjustment should be treated as...

a translation gain or loss reported in net income (and then closed to retained earnings) or whether the translation adjustment should be treated as a direct adjustment to owners' equity (in accumulated other comprehensive income) without affecting net income

If the foreign currency increases in value...

an increase in the U.S. dollar value of the net asset -positive (credit) balance

transaction exposure

arises when a company has foreign currency receivables and payables

translation adjustments arising from ___________________ do not directly result in cash inflows or outflows

balance sheet exposure

Exposure to translation adjustment is referred to as.....

balance sheet, translation, or accounting exposure

the _______________ translates the gain of sale land

current rate method

Transaction exposure gives rise to..

foreign exchange gains and losses that are ultimately realized in cash

Balance sheet items translated at _____________________ do not change in dollar value from one balance sheet to the next.

historical change rates -those items are not exposed to translation adjustment

Assets and liabilities carried on the foreign operation's balance sheet at historical cost are translated at...

historical exchange rates to yield an equivalent historical cost in U.S. dollars.

high inflation economy

its cumulative three-year inflation exceeds 100 percent

a ______________ generally exists when the temporal method is used.

net liability exposure

The lower of the dollar cost and dollar net realizable value is reported..

on the consolidated balance sheet

Balance sheet items (assets and liabilities) translated at..

the current exchange rate -the items are exposed to translation adjustment

assets and liabilities carried at a current or future value are translated at...

the current exchange rate to yield an equivalent current value in U.S. dollars

historical exchange rate

the exchange rate that existed when a transaction occurred

current exchange rate

the exchange rate that exists at the balance sheet date

Liabilities translated at the current exchange rate when...

the foreign currency has appreciated generate a negative (debit) translation adjustment

Assets translated at the current exchange rate when....

the foreign currency has appreciated generate a positive (credit) translation adjustment

The balance sheet exposure under the current rate method is equal to...

the foreign operation's net asset (total assets minus total liabilities) position

negative translation adjustment

the increase in liabilities (L) must be offset by a decrease in owners' equity (OE) -debit balance

positive translation adjustment

the increase in owners' equity -credit balance

Application of the temporal method requires...

the inventory's foreign currency cost to be translated into U.S. dollars at the historical exchange rate and foreign currency net realizable value to be translated into U.S. dollars at the current exchange rate

temporal method

to produce a set of U.S. dollar-translated financial statements as if the foreign subsidiary had actually used U.S. dollars in conducting its operations

The temporal method requires... (PPE)

translating property, plant, and equipment acquired at different times at different (historical) exchange rates

net liability balance sheet exposure

when liabilities translated at the current exchange rate are higher than assets translated at the current exchange rate

The U.S. dollar translation adjustment in this case is realized only if..

(1) the parent sends U.S. dollars to the Japanese subsidiary to pay all of its yen liabilities (2) the subsidiary converts its yen receivables and marketable securities into yen cash and then sends this amount plus the amount in its yen cash account to the U.S. parent, which converts it into U.S. dollars

net asset balance sheet exposure

assets translated at the current exchange rate are higher in amount than liabilities translated at the current exchange rate

The net translation adjustment needed to keep the consolidated balance sheet in balance is based solely on..

the net asset or net liability exposure