Multinational Business Finance 13th Edition Test Bank Chapter 11

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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 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

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 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

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:
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 firm’s functional currency; location

C) location; foreign subsidiary independence

D) foreign subsidiary independence; a firm’s 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:
Question: 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

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 subsidiary”s 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:
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 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

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 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, 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 firm’s 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 item’s creation.

Answer:
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 company’s consolidated statements. Identify when each technique should be used and the major advantage(s) of each.

Answer:
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:
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 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

Answer:
Question: 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.

Answer:
Question: 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

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:
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 firm”s 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:
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: