Multinational Business Finance 13th Edition Test Bank Chapter 11

subject Type Homework Help
subject Pages 9
subject Words 3326
subject Authors Arthur I. Stonehill, David K. Eiteman, Michael H. Moffett

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 11
Translation Exposure 11.1 Overview of Translation Multiple Choice
Question: Translation exposure may also be called ________ exposure. A) transaction B)
operating C) accounting D) currency Answer:
Question: ________ exposure is the potential for an increase or decrease in the parent
companys 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 Answer:
Question: 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 companys 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
Answer:
Question: 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 Answer:
Question: 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 Answer:
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Question: 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 Answer:
Question: Generally speaking, translation methods by country define the translation
process as a function of what two factors? A) size; location B) a firms functional currency;
location C) location; foreign subsidiary independence D) foreign subsidiary independence;
a firms functional currency Answer:
Question: 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 Answer:
Question: 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 Answer:
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Question: A foreign subsidiarys ________ currency is the currency used in the firms
day-to-day operations. A) local B) integrated C) notational dollar D) functional Answer:
Question: 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) Answer:
Question: It is possible to use different exchange rates for different line items on a
financial statement. Answer:
Question: If the same exchange rate were used to remeasure every line on a financial
statement, then there would be no imbalances from remeasuring. Answer:
Question: A foreign subsidiarys functional currency is the currency of the primary
economic environment in which the subsidiary operates and in which it generates cash
flows. Answer:
Question: It is highly unusual for a multinational firm to have both integrated foreign
entities AND self-sustaining foreign entities. Answer:
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Question: 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 Answer:
Question: 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
Answer:
Question: The basic advantage of the ________ method of foreign currency translation is
that foreign nonmonetary assets are carried at their original cost in the parents 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 Answer:
Question: 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. Answer:
Question: 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
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obvious. B) translation is accomplished through the temporal method. C) translation is not
required. D) translation is accomplished through the current rate method. Answer:
Question: 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 Answer:
Question: If the European subsidiary of a U.S. firm has net exposed assets of €750,000,
and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation: A)
gain of $75,000. B) loss of $75,000. C) gain of $625,000. D) loss of €576,923. Answer:
Question: If the European subsidiary of a U.S. firm has net exposed assets of €200,000,
and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation: A)
gain of $8,000. B) loss of $8,000. C) gain of $252,000. D) loss of €252,000. Answer:
Question: If the British subsidiary of a European firm has net exposed assets of £125,000,
and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a
translation: A) gain of €5,000. B) loss of €5,000. C) gain of 5,000. D) loss of 5,000.
Answer:
Question: If the British subsidiary of a European firm has net exposed assets of £250,000,
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and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:
A) gain of €12,500. B) loss of €12,500. C) loss of 12,500. D) gain of 12,500. Answer:
Question: Exchange rate imbalances that are passed through the balance sheet affect a
firms reported income, but imbalances transferred to the income statement do not. Answer:
Question: The current rate method is the most prevalent method today for the translation of
financial statements. Answer:
Question: The temporal rate method is the most prevalent method today for the translation
of financial statements. Answer:
Question: 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.
Answer:
Question: Under the temporal rate method, specific assets and liabilities are translated at
exchange rates consistent with the timing of the items creation. Answer:
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Question: 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. Answer:
Question: : The current rate method and the temporal method are two basic methods for
translation that are employed worldwide Answer:
Question: The two methods for the translation of foreign subsidiary financial statements
are the current rate and temporal methods. Briefly, describe how each of these methods
translates the foreign subsidiary financial statements into the parent companys
consolidated statements. Identify when each technique should be used and the major
advantage(s) of each. Answer:
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Question: 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 Answer:
Question: 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 the temporal 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. Answer:
Question: 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."
Answer:
Question: 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. Answer:
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Question: ________ 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 Answer:
Question: Translation gains or losses can be quite different from operating gains or losses
not only in magnitude but also in sign. Answer:
Question: The main technique to minimize translation exposure is called a/an ________
hedge. A) balance sheet B) income statement C) forward D) translation Answer:
Question: 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. Answer:
Question: If a firms 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
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change in exchange rates will be of equal but opposite direction. C) Both A and B are true.
D) none of the above Answer:
Question: If a firms 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 firms 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. Answer:
Question: If the parent firm and all subsidiaries denominate all exposed assets and
liabilities in the parents 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 Answer:
Question: A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the
parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in
Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays
the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10%
against the U.S. dollar. In this example, the Canadian subsidiary will record a: A) 10%
foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange
gain on the U.S. dollar accounts receivable. C) Since the Canadian firm is a U.S.
subsidiary, neither a gain nor loss will be recorded. D) Any gain or loss will be recorded
only by the parent firm. Answer:
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Question: ________ 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 Answer:
Question: It is possible that efforts to decrease translation exposure may result in an
increase in transaction exposure. Answer:
Question: 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. Answer:
Question: One possible reason for a balance sheet hedge could be because the firm has
debt covenants or bank agreements that state the firms debt/equity ratios will be
maintained within specific limits. Answer:
Question: If management expects a foreign currency to depreciate, it could minimize
translation exposure by increasing net exposed assets. Answer:
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Question: If management anticipates an appreciation of the foreign currency, it should
decrease net exposed assets to benefit from a gain. Answer:
Question: Describe a balance sheet hedge and give at least two examples of when such a
hedge could be justified. Answer:

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