M5-3

Translating a liability on a foreign subsidiary's balance sheet at the current exchange rate results in

- a negative translation adjustment when the foreign currency has appreciated. - a positive translation adjustment when the foreign currency has depreciated.

The translation adjustment calculated as the balancing amount in a translated balance sheet using the current rate method is the _____ translation adjustment.

cumulative

Comparability of financial statements across companies within an industry is made more difficult by

some companies identifying local currencies as functional currency and other companies identifying the U.S. dollar as functional currency.

Under the temporal method, revenues that are earned evenly throughout the year are translated using

the average-for-the-year exchange rate.

In calculating the translation adjustment when the current rate method is used, the focus is on determining the impact that exchange rate changes have on

the beginning balance and changes in net assets.

Each of the ratios calculated from a foreign entity's foreign currency financial statements will have a different value in parent company currency when the foreign financial statements are translated using

the temporal method.

The Canadian subsidiary of a U.S.-based company has an account receivable in British pounds. To report this account receivable in the U.S.-parent's consolidated balance sheet, the

- British pound receivable should translated into Canadian dollars using the current exchange rate. - the Canadian dollar translated amount for the British pound receivable should be translated into U.S. dollars using the current exchange rate.

Balance sheet accounts translated using the same exchange rate under both the current rate and temporal methods include

- cash and receivables. - additional paid in capital. - long-term debt.

Under the temporal method of translation, balance sheet accounts translated at historical exchange rates include

- common stock and additional paid-in capital. - equipment, buildings, and land.

When the temporal method of translation is used, inventory carried at foreign currency cost on the foreign entity's balance sheet under the lower of cost or net realizable value rule

- could be carried at cost in parent currency on the parent's consolidated balance sheet. - could be carried at net realizable value in parent currency on the parent's consolidated balance sheet

Net cash from operations reported in the translated statement of cash flows will be the same regardless of whether a foreign entity's financial statements have been translated using the current rate method or remeasured using the temporal method.

True

A U.S.-based company must use the current rate method to translate the financial statements of a foreign subsidiary whose functional currency is

a foreign currency.

The use of different functional currencies by companies in the same industry distorts the intra-industry _____ of financial statements.

comparability

The _____ exchange rate is the exchange rate that exists at the balance sheet date.

current

In consolidating a foreign subsidiary, the current translation adjustment on the excess of fair value over book value related to that foreign subsidiary must be

recognized through an adjusting entry on the consolidation worksheet.

Translating an asset on a foreign subsidiary's balance sheet at the current exchange rate results in

- a positive translation adjustment when the foreign currency has appreciated. - a negative translation adjustment when the foreign currency has depreciated.

There is no need to keep record of the acquisition date exchange rates related to

- assets translated at the current exchange rate under the temporal method. - assets translated under the current rate method.

Assuming that all expenses are incurred evenly throughout the year, those expenses translated using a different exchange rate under the current rate method than under the temporal method include

- depreciation expense. - cost of goods sold.

The net asset balance sheet exposure of a foreign entity can be hedged using a

- foreign currency option. - foreign currency note payable. - foreign currency forward contract.

Conceptually, translation adjustments that result from applying either the current rate method or the temporal method could be

- included in consolidated other comprehensive income as a deferred translation gain or loss. - included in consolidated net income as a translation gain or loss.

Current U.S. GAAP recognizes that

- some foreign entities primarily conduct their operations in foreign currency. - some foreign entities primarily conduct their operations in parent company currency

Translation adjustments included in other comprehensive income are

accumulated in a stockholders' equity account on the consolidated balance sheet.

In translating the financial statements of a foreign entity located in a hyperinflationary economy, IFRS requires

the foreign financial statements to be restated for inflation and then all restated balances are translated at the current rate.

The methods used in valuing assets on the foreign currency financial statements of a foreign entity are maintained in the translated parent company currency financial statements when

the temporal method is used to translate the foreign financial statements.

Translating a foreign currency balance sheet account at the current exchange rate gives rise to

balance sheet exposure to foreign exchange risk.

The net asset balance sheet exposure related to a French subsidiary can be hedged with a

euro note payable.

The accounting system must keep track of the acquisition date exchange rates related to those assets that are translated at

historical exchange rates under the temporal method.

Under the temporal method of translation, assets carried on the foreign entity's balance sheet at historical cost are translated using

historical exchange rates.

In determining the remeasurement gain or loss that results when the temporal method of translation is used the beginning net _____ asset or liability position is translated using the beginning-of-the-year exchange rate.

monetary

Under the temporal method of translation, assets carried on the foreign entity's balance sheet at a current or future value are translated using

the current exchange rate.

Some of the ratios calculated from a foreign entity's foreign currency financial statements will have the same value in parent company currency when the foreign financial statements are translated using

the current rate method.

Net cash from operations reported in the translated statement of cash flows

will be the same regardless of whether the current rate method or temporal method is used.

Assets translated using a different exchange rate under the current rate method than under the temporal method include

- property, plant and equipment. - intangible assets.

Translation using the temporal method with remeasurement gains and losses recognized in net income is appropriate for those foreign entities

- that are located in highly inflationary economies. - that have the U.S. dollar as their functional currency.

Locations in the financial statements where companies typically present an analysis of the change in cumulative translation adjustment includes

- the notes to financial statements - the statement of comprehensive income.

The current year's translation adjustment related to a foreign subsidiary is recognized as an adjustment to the Investment in Foreign Subsidiary account on the parent company's books.

True

True or false: Under the temporal method, inventory reported at cost on the foreign currency balance sheet could be reported at either cost or at net realizable value on the parent currency balance sheet.

True

The current rate method of translation assumes that a foreign subsidiary is

a net asset that is exposed to foreign exchange risk.

In consolidating a foreign subsidiary, the excess of fair value over book value must be translated into the parent's currency and

a translation adjustment related to the excess must be recognized in the consolidation worksheet.

A U.S.-based company has a foreign subsidiary that has the Mexican peso as its functional currency. The Mexican subsidiary recognizes in its Mexican peso income statement a foreign exchange gain on a Colombian peso account receivable. In preparing its consolidated income statement, the U.S. parent company should translate the Mexican subsidiary's foreign exchange gain into U.S. dollars using the

average-for-the-year exchange rate between the Mexican peso and U.S. dollar.

In determining remeasurement gains and losses under the temporal method, the focus is on determining the impact that exchange rate changes have on the

beginning balance and changes in net monetary assets and liabilities.

In determining the remeasurement gain or loss that results when the temporal method is used, the beginning-of-the-year net monetary asset or liability position of the foreign entity is translated using the

beginning-of-the-year exchange rate.

In determining the translation adjustment when the current rate method is used, the foreign entity's net asset balance at the beginning of the year is translated using the

beginning-of-the-year exchange rate.

The functional currency of a foreign entity

can be either a foreign currency or the currency of the country in which the parent is located.

The gain on the sale of an asset is translated under the temporal method by first translating the _____ received from the sale using the exchange rate on the date of sale.

cash

Consistent with the underlying assumption of the current rate method that the net investment in a foreign operation is exposed to foreign exchange risk, all assets and liabilities of the foreign operation are translated into parent company currency using the _____ exchange rate.

current

The accounts of a foreign subsidiary are translated into the parent's currency using a combination of

current and historical exchange rates.

Under the temporal method, cost of goods sold (COGS) in foreign currency (FC) is translated into parent company currency by

decomposing COGS in FC into components and then multiplying each of these components by its appropriate historical exchange rate.

The functional currency of a foreign entity located in a highly inflationary country

does not need to be identified because the entity's foreign currency financial statements must be translated using the temporal method.

To determine whether a country has a hyperinflationary economy, IFRS

does not provide a specific threshold but instead provides a list of indicators indicative of hyperinflation.

When an asset carried at historical cost on a foreign currency balance sheet is translated into parent company currency using the current rate method the resulting parent currency amount for that asset

does not represent either the historical cost nor the fair value of that asset in parent currency.

In determining the translation adjustment when the current rate method is used, dividends declared by the foreign entity in the current year are translated using the

exchange rate on the date the dividends are declared.

Foreign currency balance sheet accounts that are translated at the current exchange rate are _____ to translation adjustment.

exposed

A U.S.-based company has a foreign subsidiary. The functional currency of the foreign subsidiary can be either the U.S. dollar or a _____ currency.

foreign

The primary currency of a foreign entity's operating environment is its _____ currency.

functional

The _____ exchange rate is the exchange rate that existed when a transaction occurred sometime in the past.

historical

Under the temporal method, cost of goods sold (COGS) in foreign currency is decomposed into beginning inventory, purchases, and ending inventory and then each component is translated into U.S. dollars using the appropriate _____ exchange rate.

historical

Under the temporal method, depreciation expense and accumulated depreciation are translated using the _____ exchange rate when the related property, plant, and equipment was acquired.

historical

Under the temporal method, expenses related to assets that are translated at historical exchange rates (such as depreciation expense) are translated using

historical exchange rates.

The functional currency of a foreign entity is the currency of the country in which the entity is located. A gain on forward contract designated as a hedge of the net investment in this foreign entity is reported

in accumulated other comprehensive income on the consolidated balance sheet.

In applying the equity method, the current year's negative translation adjustment calculated by reference to changes in net assets and a depreciation in the foreign currency

is recognized as a credit to the Investment in Foreign Subsidiary account.

The foreign currency financial statements of a foreign entity located in a highly inflationary economy

must be translated using the temporal method.

Balance sheet exposure under the current rate method of translation is equal to a foreign operation's

net asset position.

An analysis of the change in cumulative translation adjustment may be presented in the

notes to financial statements.

Translating a foreign currency asset at the current exchange rate when the foreign currency has appreciated gives rise to a _____ translation adjustment.

positive

When the gain on the financial instrument used to hedge a net investment in foreign operation exceeds the translation adjustment being hedged, the difference is

recognized as a gain in net income.

When the temporal method of translation is appropriate, the resulting translation adjustment must be

recognized as a gain or loss in net income.

Similar to U.S. GAAP, IFRS requires the gain or loss on a financial instrument used to hedge a net investment in foreign operation to be

reported in accumulated other comprehensive income along with the translation adjustment being hedged

When an asset carried at historical cost on a foreign currency balance sheet is remeasured into parent company currency using the temporal method the resulting parent currency balance for that asset

represents the historical cost of the asset in parent currency.

Under the temporal method, a gain on the sale of land in foreign currency (FC) is translated into parent company currency by multiplying the cash proceeds from the sale in FC by the exchange rate in effect on the date of sale and

subtracting the product of multiplying the cost of the land in FC by the exchange rate in effect when the land was acquired.

Under the temporal method, expenses are translated using

the average-for-the-year and historical exchange rates.

In translating foreign currency financial statements into parent company currency using the current rate method, a translation adjustment can be calculated as a balancing amount. This balancing amount is

the cumulative translation adjustment.

Exposure to translation adjustment exists for those foreign currency balances that are translated at

the current exchange rate.

Under the temporal method, depreciation expense and accumulated depreciation on property, plant, and equipment are translated

using the historical exchange rate when the property, plant, and equipment was acquired.

Under both IFRS and U.S. GAAP, the cumulative translation adjustment related to a foreign subsidiary and the cumulative gain or loss on the net investment hedge of that subsidiary are transferred from accumulated other comprehensive income to net income

when the foreign subsidiary is sold.