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Using the temporal method, monetary accounts, such as cash,

D. are translated at the current spot exchange rate.

Which of the following is true?

Some items that are a source of transaction exposure are also a source of translation exposure. Some items that are a source of transaction exposure are not also a source of translation exposure.

Suppose a foreign subsidiary with positive local (that is, foreign-denominated) net working capital uses the current/noncurrent method. When the foreign currency ______, the firm will show on its balance sheet a translation ______.

appreciates; gain depreciates; loss

The underlying principle of the current/noncurrent method is

assets and liabilities should be translated based on their maturity.

When using the current/noncurrent method, current assets are defined as

assets with a maturity of one year or less.

Under the current/non-current translation method, most income statement items are translated at the ______, but items that are associated with noncurrent assets or liabilities, such as depreciation expense, are translated at the ______.

average exchange rate for the accounting period; historical rate that applies to the applicable balance sheet item

Under the temporal method

monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.

Since fixed assets and inventory are usually carried at historical costs,

the temporal method and the monetary/nonmonetary methods will typically provide the same translation.

A parent firm's foreign-denominated receivable from an affiliate often creates ______ exposure but not ______ exposure.

transaction; translation

The recognized methods for consolidating the financial reports of an MNC are

current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate method.

A derivatives hedge that seeks to eliminate translation exposure

really involves speculation about foreign exchange rate changes.

The currency in which a MNC prepares its consolidated financial statements is its _______ currency.

reporting

The method of foreign currency translation that converts (1) monetary and other accounts carried at their current value at the current exchange rate and (2) accounts carried at historical costs at the rate of exchange on the date the item was placed on the books is referred to as the ______ method.

temporal

Translation exposure measures

the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm.

How many methods of foreign currency translation have been used in recent years? (U.S. GAAP.)

Four

Since January 2005, all companies doing business in the European Union have had to use the accounting standards promulgated by the organization known by its initials

IASB

The authoritative body in the United States that specifies accounting policy for U.S. business firms and certified public accounting firms.

The Financial Accounting Standards Board (FASB).

Which are methods to manage translation exposure?

The balance sheet hedge method The derivatives hedge method

True or false: If managers were not making suboptimal decisions based on accounting rather than economic considerations, the switch from FASB 8 to FASB 52 should not change the value of the firm.

True

The actual translation process prescribed by FASB 52 is

a two-stage process.

With regard to translation exposure versus operating exposure

upper management should be more concerned with operating exposure.

A perfect _____ _______ hedge eliminates the mismatch between the net assets and net liabilities in every currency.

Blank 1: balance Blank 2: sheet

Translation exposure, also frequently called accounting exposure, refers to the effect that an unanticipated change in exchange rates will have on the

Consolidated financial reports of a MNC.

Under the current rate method

all balance sheet accounts are translated at the current exchange rate, except stockholder equity.

A balance sheet hedge seeks to

eliminate any mismatch of net assets and net liabilities denominated in the same currency

Under which method does the gain or loss due to translation adjustment not affect reported cash flows, as it does with the other three translation methods?

Current rate method

Which of the following is a translation method where a "plug" equity account, called cumulative translation adjustment, is used?

Current rate method

The current/noncurrent method of foreign currency translation was generally accepted in the United States from the 1930s until 1975, when

FASB 8 became effective.

Translation exposure is synonymous with ______ exposure.

accounting

Which results were found when the change was made from FASB 8 to FASB 52?

There was a change in reported earnings. Managing translation exposure did not appear to be valued by the market.

Suppose a foreign entity's books are kept in the parent's currency. If the functional currency is also the parent's currency, then remeasurement is ______ and translation is ______.

not required; not required

XYZ Corporation, a U.S. parent firm, has a wholly owned sales affiliate, ABC Ltd., in the United Kingdom. The affiliate was established to service the local market. Assume that the functional currency of ABC is the pound. the reporting currency is the dollar. the initial exchange rate $1.00 = £0.67. ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000. Assume that, XYZ had made an investment of $500,000 in the affiliate. Under FASB 52, the intercompany debt and investment will appear on the consolidated balance sheet as

$798,507

Financial Accounting Standards Board (FASB) Statements 8 and 52 relate to the translation methods. The following outlines the objectives and descriptions of the two statements. (i) Measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated in a foreign currency according to generally accepted accounting principles (ii) Is essentially the temporal method of translation (with some subtle differences) (iii) Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity (iv) Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles Which of the above statements pertain to FASB 52?

(iii) and (iv)

In comparison to the current/noncurrent method, the monetary/nonmonetary method

A. differs substantially with regard to the treatment of inventory. B. classifies accounts on the basis of similarity of attributes rather than the similarity of maturities.

The impact of financing in determining the functional currency is that

B. if the financing of the foreign entity is primarily denominated in the foreign currency and the debt service obligations are normally handled by the foreign entity, the functional currency is the foreign currency. C. if the financing of the foreign entity is primarily from the parent, with debt service obligations are normally handled by the parent, the functional currency is the home currency.

FASB 8 is essentially the

C. temporal method.

Which of the following are true of FASB 8?

Following it results in foreign exchange gains or losses on the income statement. It is most similar to the temporal method of translation.

Which statements concerning translation and transaction exposure are true?

Transaction exposure is generally considered more important to manage than translation exposure. In some cases, elimination of one creates the other.

Which of the following statements is false?

Under the current/noncurrent method, revenue and expense items that are associated with current assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item.

FASB 8 ran into acceptance problems from the accounting profession and MNCs. all of the options required taking foreign exchange gains or losses through the income statement. caused reported earnings to fluctuate substantially from year to year.

all of the options

When determining the functional currency, if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency. all of the options if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the function currency should be the home currency. if there is an active local market for the foreign entity's products the local currency should be the functional currency.

all of the options

When determining the functional currency, which of the following are salient economic factors? cash flow indicators all of the options sales price indicators sales market indicators.

all of the options

Which of the following are true statements? Multiple Choice Since translation exposure does not have an immediate direct effect on operating cash flows, its control is relatively unimportant in comparison to transaction exposure, which involves potential real cash flow losses. Since it is generally not possible to eliminate both translation exposure and transaction exposure, it is more logical to effectively manage transaction exposure. Two ways to control translation risk are: a balance sheet hedge and a derivatives hedge. all of the options

all of the options

Which of the following are true statements? Since translation exposure does not have an immediate direct effect on operating cash flows, its control is relatively unimportant in comparison to transaction exposure, which involves potential real cash flow losses. Since it is generally not possible to eliminate both translation exposure and transaction exposure, it is more logical to effectively manage transaction exposure. Two ways to control translation risk are: a balance sheet hedge and a derivatives hedge.

all of the options

Under the temporal translation method, most income statement accounts are translated at the ______, but depreciation and costs of goods sold are translated at the ______.

average exchange rate for the accounting period; historical rate that applies to the applicable balance sheet item

Four methods of foreign currency translation have been used in recent years including the _______ rate method.

current

Under the monetary/nonmonetary translation method, most income statement accounts are translated at the ______, but revenue and expense items associated with nonmonetary accounts are translated at the ______.

current exchange rate; historical rate that applies to the applicable balance sheet item

The ______ method of translation uses a cumulative translation adjustment to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method.

current rate

The method of foreign currency translation that converts all balance sheet accounts except for stockholders' equity at the current exchange rate is referred to as the ______ method.

current rate

The simplest of all translation methods to apply is

current rate method.

The method of foreign currency translation that converts assets and liabilities with a maturity of one year or less at the current exchange rate and those with a greater maturity at the exchange rate in effect when the asset was purchased is referred to as the ______ method.

current/noncurrent

The generally accepted method for consolidating the financial reports of an MNC from the 1930s to 1975 was the

current/noncurrent method.

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

economic exposure

Because "exchange rate changes have an indirect effect on the net investment that may be realized upon sale or liquidation, but... prior to sale or liquidation, that effect is so uncertain and remote as to require that translation adjustments arising currently should not be reported as part of operating results," FASB 52 handles the effect of exchange rate changes as an adjustment to ______ rather than as an adjustment to ______.

equity; net income

When determining the functional currency, the statement, "the factor of production costs of the foreign entity are primarily local costs", best describes which salient economic factor?

expense indicators

"The currency of the primary economic environment in which the entity operates" is defined in FASB 52 as the ______ currency.

functional

The source of translation exposure

is a mismatch of net assets and net liabilities denominated in the same currency.

The International Accounting Standards Committee

is now known as The International Accounting Standards Board.

Generally speaking,

it is not possible to hedge both translation exposure and transaction exposure simultaneously.

The underlying philosophy of the monetary/nonmonetary method is that

monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.

Under the monetary/nonmonetary method

monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded.

The underlying philosophy of the _____ method is that monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.

monetary/nonmonetary

Though in the future European standards are expected to be similar to U.S. standards, they currently differ in that they most closely follow the ______ method of translation.

monetary/nonmonetary

A change in any foreign currency relative to a firm's reporting currency will have an effect on the firm's consolidated balance sheet if there exists a ______ exposure for that currency.

net translation

The extent to which the value of the firm would be affected by expected changes in the exchange rate is transaction exposure. translation exposure. economic exposure.

none of the above

Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Exposed assets¥700,000,000 Exposed liabilities¥500,000,000 Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a "derivatives hedge" of

none of the options

A highly inflationary economy is defined in FASB 52 as

one with a cumulative inflation rate of approximately 100 percent or more over a three-year period.

The process that is intended to produce the same result as if the entity's books had been maintained in the functional currency is referred to as ______.

remeasurement

The formula NetexposurecurrencyiSnew[i/reporting]NetexposurecurrencyiSnew[i/reporting] - NetexposurecurrencyiSold[i/reporting]NetexposurecurrencyiSold[i/reporting] defines the ______.

reporting currency imbalance

The "functional currency" is defined in FASB 52 as

the currency of the primary economic environment in which the entity operates.

FASB 52 requires

the current rate method of translation in some circumstances and the temporal method in others.

If a foreign entity is only a shell company for carrying accounts that could be carried on the parent's books,

the functional currency would generally be the parent's currency.

With regard to research on the stock price reaction to mandated accounting changes, such as FASB 52,

the results suggest that market agents do not react to cosmetic earning changes that do not affect value.

Under FASB 133, which of the following statements is true?

the statement clarifies which transactions qualify as an acceptable hedge and how to treat an unexpected gain or loss if the hedge is not effective.

When exchange rates change,

the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency.

In highly inflationary economies, FASB 52 requires that the foreign entities financial statement be remeasured from the local currency "as if the functional currency were the reporting currency." The purpose of this requirement is

to prevent large important balance sheet accounts, carried at historical values, from having insignificant values once translated into the reporting currency at the current rate.

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

transaction exposure

FASB 8 deals with ______ exposure.

translation

The amount of foreign exchange exposure that exists for each foreign currency in which a MNC has exposure on its consolidated balance sheet is presented in the _________ exposure report.

translation

The effect that a change in exchange rates will have on the consolidated financial reports of a firm is referred to as _________ exposure (or accounting exposure).

translation

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

translation exposure

When exchange rates change, the value of a foreign subsidiary's assets and liabilities that are denominated in a foreign currency change

when they are viewed from the perspective of the parent firm.

Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is Exposed assets¥700,000,000 Exposed liabilities¥500,000,000 Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a "balance sheet hedge" of

¥200,000,000 more liabilities denominated in yen. ¥200,000,000 less assets denominated in yen.