International Financial Management, 8e (Eun)
1) Under the monetary/nonmonetary method, revenue and expense items associated with
nonmonetary accounts, such as cost of goods sold and depreciation, are translated at the historical
rate associated with the balance sheet account.
2) Translation exposure refers to
A) accounting exposure.
B) the effect that an unanticipated change in exchange rates will have on the consolidated financial
reports of an MNC.
C) 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.
D) all of the options
3) The recognized methods for consolidating the financial reports of an MNC are
A) short/long term method, current/future method, flexible/inflexible method, and
economic/noneconomic method.
B) current/noncurrent method, monetary/nonmonetary method, short/long term method, and
current/future method.
C) current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate
method.
D) temporal method, current rate method, flexible/inflexible method, and economic/noneconomic
method.
4) How many methods of foreign currency translation have been used in recent years? (U.S.
GAAP.)
A) One
B) Two
C) Three
D) Four
5) Translation exposure, also frequently called accounting exposure, refers to the effect that an
unanticipated change in exchange rates will have on the
A) choice of accounting methodology.
B) consolidated financial reports of a MNC.
C) firms competitive position.
D) cash flows realized from foreign operations.
6) When exchange rates change, the value of a foreign subsidiary’s assets and liabilities that are
denominated in a foreign currency change
A) when they are viewed from the perspective of the subsidiary firm.
B) when they are viewed from the perspective of the parent firm.
C) but this is only of material concern if the parent firm is liquidating the subsidiary in a
bankruptcy and is forced to realize the value of the assets and liabilities at the current exchange
rate.
D) none of the options
7) 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
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
8) The management of translation exposure is best described as
A) selecting a mechanical means for handling the consolidation process for MNCs that logically
deals with exchange rate changes.
B) selecting a mechanical means for handling the consolidation process for MNCs that makes this
quarter’s accounting numbers as attractive as possible.
C) selecting a mechanical means for handling the consolidation process for MNCs that treats
inventory valuation as LIFO on the income statement and FIFO on the balance sheet.
D) selecting a mechanical means for handling the consolidation process for MNCs that treats
inventory valuation as FIFO on the income statement and LIFO on the balance sheet.
9) The sensitivity of the firm’s consolidated financial statements to unexpected changes in the
exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
10) The extent to which the value of the firm would be affected by unexpected changes in the
exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
11) Which of the following is true?
A) The competitive effect is defined as the impact that a currency depreciation may have on the
operating cash flow in the foreign currency by altering the firm’s competitive position in the
marketplace.
B) The conversion effect is defined as a given accounting cash value in a foreign currency will be
converted into a lower dollar amount after currency depreciation.
C) The competitive effect is defined as a given operating cash flow in a foreign currency will be
converted into a lower dollar amount after a currency depreciation.
D) none of the options
12) What does it mean to have redenominated an asset in terms of the dollar?
A) You have undertaken a hedging strategy that gives the asset a constant dollar value.
B) Multiply the foreign currency value of the asset by the spot exchange rate.
C) Undertaken accounting changes to eliminate translation exposure.
D) none of the options
13) The authoritative body in the United States that specifies accounting policy for U.S. business
firms and certified public accounting firms.
A) The Federal Accounting Standards Board (FASB).
B) The International Accounting Standards Board (IASB).
C) The Financial Accounting Standards Board (FASB).
D) The Securities and Exchange Commission (SEC).
14) The difference between accounting exposure and translation exposure is that
A) translation is about going from one language to another, accounting is just about the numbers.
B) accounting exposure and translation exposure are the same thing.
C) hedging one always involves increasing the other.
D) hedging one might involve increasing the other.
15) When exchange rates change
A) the value of a foreign subsidiary’s foreign currency denominated assets and liabilities change to
new numbers still denominated in the foreign currency.
B) the value of a foreign subsidiary’s foreign currency denominated assets and liabilities change
when redenominated into the home currency.
C) hedging should be done after the change.
D) none of the options
16) Translation exposure measures
A) the effect that an anticipated change in exchange rates will have on the consolidated financial
reports of an MNC.
B) economic exposure.
C) 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.
D) all of the options
17) The extent to which the value of the firm would be affected by expected changes in the
exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
18) The current/noncurrent method of foreign currency translation was generally accepted in the
United States from the 1930s until 1975, when
A) FASB 2 became effective.
B) FASB 4 became effective.
C) FASB 6 became effective.
D) FASB 8 became effective.
19) The underlying principle of the current/noncurrent method is that assets and liabilities should
be translated based on their maturity.
A) Current assets and liabilities are converted at the current exchange rate in effect when the cash
flow associated with the asset or liability actually occurred. Noncurrent assets and liabilities are
translated at the historical exchange rate that prevailed when the asset was recognized.
B) Current assets and liabilities, which by definition have a maturity of one year or less, are
converted at the current exchange rate. Noncurrent assets and liabilities are translated at the
historical exchange rate.
C) All assets and liabilities are converted at the current exchange rate.
D) none of the options
20) The generally accepted method for consolidating the financial reports of an MNC from the
1930s to 1975 was the
A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
21) Under the current/noncurrent method
A) a foreign subsidiary with current assets in excess of current liabilities will cause a translation
gain (loss) if the local currency appreciates (depreciates).
B) a foreign subsidiary with current assets in excess of current liabilities will cause a translation
loss (gain) if the local currency appreciates (depreciates).
C) a foreign subsidiary with current assets in excess of current liabilities will cause a translation
gain (loss) if the local currency depreciates (appreciates).
D) a foreign subsidiary with current assets in excess of current liabilities will cause a translation
loss (gain) if the local currency appreciates (depreciates), and a foreign subsidiary with current
assets in excess of current liabilities will cause a translation gain (loss) if the local currency
depreciates (appreciates).
22) When using the current/noncurrent method, current assets are defined as
A) inventory that is currently salable.
B) assets with a maturity of one year or less.
C) assets with a maturity of 90 days or less.
D) none of the options
23) When using the current/noncurrent method,
A) most income statement items are translated at the average exchange rate for the accounting
period.
B) revenue and expense items that are associated with noncurrent assets or liabilities are translated
at the historical rate that applies to the applicable balance sheet items.
C) depreciation expense is translated at the historical rate that applies to the applicable depreciable
asset items.
D) all of the options
24) Which of the following statements is false?
A) Most income statement items under the current/noncurrent method are translated at the average
exchange rate for the accounting period.
B) 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.
C) Under the current/noncurrent method, revenue and expense items that are associated with
noncurrent assets or liabilities, such as depreciation expense, are translated at the historical rate
that applies to the applicable balance sheet item.
D) Depreciation expense is translated at the historical rate that applies to the applicable
depreciable asset items.
25) The underlying principle of the current/noncurrent method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
26) The underlying principle of the current/noncurrent method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except for stockholders’
equity. A “plug” equity account, named cumulative translation adjustment (CTA), is used to make
the balance sheet balance, since translation gains or losses do not go through the income statement
according to this method.
27) The underlying principle of the monetary/nonmonetary method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
28) According to the monetary/nonmonetary method, monetary balance sheet accounts include
A) for example, cash, marketable securities, accounts receivable, notes payable, accounts payable
of a foreign subsidiary.
B) for example, stockholders’ equity and long term debt.
C) for example, inventory paid for in cash, but not working capital.
D) COGs, Sales, Net Income.
29) The underlying philosophy of the monetary/nonmonetary method is that
A) monetary accounts have a similarity because their value represents a sum of money whose
currency equivalent after translation is independent of exchange rate changes.
B) 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.
C) assets and liabilities should be translated based on their maturity.
D) most income statement items are translated at the average exchange rate for the period.
Depreciation and cost of goods sold, however, are translated at historical rates if the associated
balance sheet accounts are carried at historical costs.
30) 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.
C) differs substantially with regard to the treatment of inventory and classifies accounts on the
basis of similarity of attributes rather than the similarity of maturities.
D) none of the options
31) Under which accounting method are most income statement accounts translated at the average
exchange rate for the period?
A) Current/noncurrent method
B) Monetary/nonmonetary method
C) Temporal method
D) Current rate method
32) The underlying principle of the monetary/nonmonetary method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except for stockholders’
equity. A “plug” equity account, named cumulative translation adjustment (CTA), is used to make
the balance sheet balance, since translation gains or losses do not go through the income statement
according to this method.
33) Using the temporal method, monetary accounts, such as cash,
A) are not translated.
B) are translated at the average exchange rate prevailing over the reporting period.
C) are translated at the current forward exchange rate.
D) are translated at the current spot exchange rate.
34) The underlying principle of the temporal method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
35) Since fixed assets and inventory are usually carried at historical costs,
A) the temporal method and the monetary/nonmonetary methods will typically provide the same
translation.
B) the current rate method and the monetary/nonmonetary methods will typically provide the same
translation.
C) the temporal method and the current/noncurrent methods will typically provide the same
translation.
D) none of the options
36) The underlying principle of the temporal method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except for stockholders’
equity. A “plug” equity account, named cumulative translation adjustment (CTA), is used to make
the balance sheet balance, since translation gains or losses do not go through the income statement
according to this method.
37) The underlying principle of the current rate method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except for stockholders’
equity. A “plug” equity account, named cumulative translation adjustment (CTA), is used to make
the balance sheet balance, since translation gains or losses do not go through the income statement
according to this method.
38) Under the current rate method,
A) income statement items are to be translated at the exchange rate at the dates the items are
recognized.
B) an appropriately weighted average exchange rate for the period may be used for translation.
C) all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
D) all of the options
39) Which of the following is a translation method where the gain or loss due to translation
adjustment does not affect reported cash flows?
A) Current/noncurrent method
B) Current rate method
C) Current/future method
D) Short/long term method
40) The underlying principle of the current rate method is
A) assets and liabilities should be translated based on their maturity.
B) 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.
C) 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.
D) all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
41) The simplest of all translation methods to apply is
A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
42) Which of the following is a translation method where a “plug” equity account, called
cumulative translation adjustment, is used?
A) Current/noncurrent method
B) Current rate method
C) Current/future method
D) Short/long term method
43) FASB 8 is essentially the
A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
44) FASB 8
A) required taking foreign exchange gains or losses through the income statement.
B) caused reported earnings to fluctuate substantially from year to year.
C) ran into acceptance problems from the accounting profession and MNCs.
D) all of the options
45) 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
A) ¥200,000,000 more liabilities denominated in yen.
B) ¥200,000,000 less assets denominated in yen.
C) ¥200,000,000 more liabilities denominated in yen or ¥200,000,000 less assets denominated in
yen.
D) none of the options
46) A U.S. parent firm, as result of its business activities in Germany, has a net exposure of
€1,000,000. The consolidated reports were prepared at the year-end for the last two successive
years. If the exchange rates on these reporting dates changed from $1.00 = €1.10 to $1.00 = €1.00,
then the translation exposure report will indicate a “reporting currency imbalance” of
A) $90,910.
B) $0.
C) –$90,910.
D) none of the options