47) 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 8?
A) (i)
B) (i) and (ii)
C) (iii) and (iv)
D) (i), (ii), and (iii)
48) 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?
A) (i)
B) (i) and (ii)
C) (iii) and (iv)
D) (i), (ii), and (iii)
49) FASB 52 requires
A) the current rate method of translation in some circumstances and the temporal method in others.
B) the current rate method of translation in some circumstances and the noncurrent method in
others.
C) the monetary rate method of translation in some circumstances and the temporal method in
others.
D) the current rate method of translation in some circumstances and the monetary method in
others.
50) The International Accounting Standards Committee
A) is now known as The International Accounting Standards Board.
B) is charged with accounting standards at the International House of Pancakes.
C) includes many convicted felons among its members.
D) all of the options
51) In what year were U.S. MNCs mandated to implement FASB 52?
A) 1952
B) 1962
C) 1972
D) 1982
52) The “functional currency” is defined in FASB 52 as
A) the currency of the primary economic environment in which the entity operates.
B) the currency in which the MNC prepares its consolidated financial statements.
C) a currency that is not the parent firm’s home country currency.
D) the currency in which the MNC prepares its consolidated financial statements, as well as a
currency that is not the parent firm’s home country currency.
53) The “reporting currency” is defined in FASB 52 as
A) the currency of the primary economic environment in which the entity operates.
B) the currency in which the MNC prepares its consolidated financial statements.
C) a currency that is not the parent firm’s home country currency.
D) the currency of the primary economic environment in which the entity operates, as well as a
currency that is not the parent firm’s home country currency.
54) The stated objectives of FASB 52 are
A) to provide information that is generally compatible with the expected economic effects of a rate
change on an enterprise’s cash flows and equity.
B) to 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.
C) to provide information that is generally compatible with the expected economic effects of a rate
change on an enterprise’s cash flows and equity, and to 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.
D) none of the options
55) The currency of the primary economic environment in which the entity operates is defined in
FASB 52 as
A) the “reporting currency.”
B) the “functional currency.”
C) the “current currency.”
D) none of the options
56) The actual translation process prescribed by FASB 52 is
A) a two-stage process.
B) a twelve-step program.
C) a five-step process.
D) none of the options
57) When determining the functional currency,
A) 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.
B) if there is an active local market for the foreign entity’s products the local currency should be the
functional currency.
C) 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.
D) all of the options
58) In implementing FASB 52,
A) the functional currency of the foreign entity must be translated into the reporting currency in
which the consolidated statements are reported.
B) the local currency of a foreign entity may not always be its functional currency. If it is not, the
temporal method of translation is used to remeasure the foreign entity’s books into the functional
currency.
C) the current rate method is used to translate from the functional currency to the reporting
currency.
D) in some cases, a foreign entity’s functional currency may be the same as the reporting currency,
in which case translation is not necessary.
59) A translation exposure report shows, for each account that is included in the consolidated
balance sheet,
A) the amount of foreign exchange exposure that exists for each foreign subsidiary in which the
MNC has a material interest.
B) the amount of foreign exchange exposure that exists on a net basis for the firm.
C) the amount of foreign exchange exposure that exists for each foreign currency in which the
MNC has exposure.
D) none of the options
60) Salient economic factors for determining the functional currency include
A) cash flow indicators.
B) sales price indicators.
C) sales market indicators.
D) all of the options
61) 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
1. the functional currency of ABC is the pound.
2. the reporting currency is the dollar.
3. 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
A) £200,000.
B) $201,493.
C) $298,507.
D) none of the options
62) The impact of financing in determining the functional currency is that
A) financing does not impact the choice of functional currency due to the integrated nature of
capital markets.
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.
D) 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. Additionally, 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.
63) If a foreign entity is only a shell company for carrying accounts that could be carried on the
parent’s books,
A) the functional currency would generally be the parent’s currency.
B) the functional currency would generally be the local currency.
C) there is no reason to hedge transaction exposure.
D) none of the options
64) A highly inflationary economy is defined in FASB 52 as
A) one that has cumulative inflation of approximately 100 percent or more over a 3-year period.
B) one that has current inflation of approximately 40 percent per year.
C) one that has going-forward expected inflation of approximately 40 percent per year.
D) none of the options
65) 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
A) 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.
B) to prevent games playing in the accounting books.
C) to prevent having to restate the books at a later date.
D) none of the options
66) Which of the following is true?
A) Some items that are a source of transaction exposure are also a source of translation exposure.
B) Some items that are a source of transaction exposure are not also a source of translation
exposure.
C) Some items that are a source of transaction exposure are also a source of translation exposure,
but some items that are a source of transaction exposure are not also a source of translation
exposure.
D) none of the options
67) Generally speaking,
A) it is not possible to hedge both translation exposure and transaction exposure simultaneously.
B) if a firm can hedge translation exposure then transaction exposure will be simultaneously
hedged.
C) if a firm can hedge transaction exposure then translation exposure will be simultaneously
hedged.
D) none of the options
68) Translation exposure,
A) is not entity specific, rather it is currency specific.
B) is not currency specific, rather it is entity specific.
C) involves restatement from Italian to French.
D) none of the options
69) The source of translation exposure
A) is a mismatch of net assets and net liabilities denominated in the same currency.
B) is a mismatch of net assets and net liabilities denominated in the different currencies.
C) is a mismatch of current assets and current liabilities denominated in different currencies.
D) none of the options
70) A balance sheet hedge seeks to
A) eliminate any mismatch of net assets and net liabilities denominated in the same currency.
B) transfer accounting exposure to transaction exposure.
C) create cumulative translation adjustment.
D) none of the options
71) A derivatives hedge that seeks to eliminate translation exposure
A) eliminates any mismatch of the rate of change in net assets and the rate of change in net
liabilities denominated in the same currency.
B) really involves speculation about foreign exchange rate changes.
C) simultaneously goes long and short in currency futures contracts.
D) none of the options
72) 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
A) short position in ¥200,000,000 currency futures.
B) long position in ¥200,000,000 currency futures.
C) either short position in ¥200,000,000 currency futures or long position in ¥200,000,000
currency futures.
D) none of the options
73) With regard to translation exposure versus operating exposure
A) upper management should be more concerned with translation exposure.
B) any discussion really involves speculation about foreign exchange rate changes.
C) upper management should be more concerned with operating exposure.
D) none of the options
74) With regard to research on the stock price reaction to mandated accounting changes, such as
FASB 52,
A) the results suggest that market participants seem to think that changes in reported earnings do
not change the actual cash flows in multinational firms.
B) the results suggest that market agents react to “cosmetic” earning changes.
C) the results suggest that market agents do not react to cosmetic earning changes that do not affect
value.
D) none of the options
75) Which of the following are true statements?
A) 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.
B) Since it is generally not possible to eliminate both translation exposure and transaction
exposure, it is more logical to effectively manage transaction exposure.
C) Two ways to control translation risk are: a balance sheet hedge and a derivatives hedge.
D) all of the options
76) 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?
A) Current/noncurrent method
B) Monetary/nonmonetary method
C) Temporal method
D) Current rate method
77) Under FASB 52, when a net translation exposure exists,
A) a derivatives hedge is necessary to bring balance to the consolidated balance sheet after an
exchange rate change.
B) a money market hedge is necessary to bring balance to the consolidated balance sheet after an
exchange rate change.
C) a cumulative translation adjustment account is necessary to bring balance to the consolidated
balance sheet after an exchange rate change.
D) none of the options
78) With regard to foreign currency translation methods used by foreign MNCs,
A) foreign currency translation methods are generally only used by U.S. based MNCs since
foreign firms have a built-in hedge by being foreign.
B) are generally the same methods used by U.S.-based firms.
C) are exactly the same methods used by U.S.-based firms since GAAP is GAAP.
D) none of the options
79) Find the foreign currency gain or loss for this U.S. MNC translating the balance sheet and
income statement of a French subsidiary, which keeps its books in euro, then is translated into U.S.
dollars using the current/noncurrent method—the reporting currency of the U.S. MNC.
The subsidiary is at the end of its first year of operation. The historical exchange rate is
$1.60/€1.00 and the most recent exchange rate is $1.50/€.
Local Currency
Current/Non
current
Balance Sheet
Cash
2,100
$
3,150
Inventory (current Value = €1,800)
1,500
$
2,250
Net fixed assets
3,000
$
4,800
Total Assets
6,600
$
10,200
Current liabilities
1,200
$
1,800
Long-term
1,800
$
2,880
Common stock
2,700
$
4,320
Retained earnings
900
CTA
Total L&E
6,600
$
10,200
Income Statement
Sales Revenue
10,000
$
15,484
COGS
7,500
$
11,613
Depreciation
1,000
$
1,600
NOI
1,500
$
2,271
Tax(40%)
600
$
908
Profit after tax
900
$
1,363
Foreign Exchange gain (loss)
Net income
900
Dividends
0
$
0
Addition to Retained Earnings
900
80) Calculate the cumulative translation adjustment for this U.S. MNC translating the balance
sheet and income statement of a French subsidiary, which keeps its books in euro, but that is
translated into U.S. dollars using the current rate method, the reporting currency of the U.S. MNC.
The subsidiary is at the end of its first year of operation.The historical exchange rate is $1.60/€1.00
and the most recent exchange rate is $1.50/€.
Local Currency
Current Rate
Balance Sheet
Cash
2,100
$
3,150
Inventory (Current Value = €1,800)
1,500
$
2,250
Net fixed assets
3,000
$
4,500
Total Assets
6,600
$
9,900
Current liabilities
1,200
$
1,800
Long-term debt
1,800
$
2,700
Common stock
2,700
$
4,320
Retained earnings
900
$
1,394
CTA
Total L&E
6,600
$
9,900
Income Statement
Sales Revenue
10,000
$
15,484
COGS
7,500
$
11,613
Depreciation
1,000
$
1,548
NOI
1,500
$
2,323
Tax(40%)
600
$
929
Profit after tax
900
$
1,394
Foreign Exchange gain (loss)
Net income
900
$
1,394
Dividends
0
$
0
Addition to Retained Earnings
900
$
1,394
27
81) Assume that the balance sheet and income statement of a French subsidiary, which keeps its
books in euro, is translated into U.S. dollars, the reporting currency of the U.S. MNC.
The table presents the balance sheet and income statement in euro.The subsidiary is at the end of
its first year of operation.The historical exchange rate is $1.60/€1.00 and the most recent exchange
rate is $2.00/€.
Fill out the 20 missing entries that translate the balance sheet and income statement for this French
subsidiary using the Current/Noncurrent Method, the Monetary/Nonmonetary Method, the
Temporal Method, and the Current Rate Method.
Local
Currency
Current/Non
current
Monetary/Non
monetary
Temporal
Current
Rate
Balance Sheet
1
Cash
€
2,100
2
Inventory (current Value
= €1,800)
€
1,500
3
Net fixed assets
€
3,000
4
Total Assets
€
6,600
5
Current liabilities
€
1,200
6
Long-term debt
€
1,800
7
Common stock
€
2,700
8
Retained earnings
€
900
9
CTA
10
Total L&E
€
6,600
Income Statement
11
Sales Revenue
€
10,000
12
COGS
€
7,500
13
Depreciation
€
1,000
14
NOI
€
1,500
15
Tax(40%)
€
600
16
Profit after tax
€
900
17
Foreign Exchange gain
(loss)
18
Net income
€
900
19
Dividends
€
0
20
Addition to Retained
Earnings
€
900
28
Copyright © 2018 McGraw-Hill
Answer:
Local
Currency
Current/Non
current
Monetary/Non
monetary
Temporal
Current
Rate
Balance Sheet
1
Cash
€
2,100
$
4,200
$
4,200
$
4,200
$
4,200
2
Inventory (current Value
= €1,800)
€
1,500
$
3,000
$
2,400
$
3,600
$
3,000
3
Net fixed assets
€
3,000
$
4,800
$
4,800
$
4,800
$
6,000
4
Total Assets
€
6,600
$
12,000
$
11,400
$
12,600
$
13,200
5
Current liabilities
€
1,200
$
2,400
$
2,400
$
2,400
$
2,400
6
Long-term debt
€
1,800
$
2,880
$
3,600
$
3,600
$
3,600
7
Common stock
€
2,700
$
4,320
$
4,320
$
4,320
$
4,320
8
Retained earnings
€
900
$
2,400
$
1,080
$
2,280
$
1,600
9
CTA
1,280
10
Total L&E
€
6,600
$
12,000
$
11,400
$
12,600
$
13,200
Income Statement
11
Sales Revenue
€
10,000
$
17,778
$
17,778
$
17,778
$
17,778
12
COGS
€
7,500
$
13,333
$
12,000
$
13,333
$
13,333
13
Depreciation
€
1,000
$
1,600
$
1,600
$
1,600
$
1,778
14
NOI
€
1,500
$
2,844
$
4,178
$
2,844
$
2,667
15
Tax(40%)
€
600
$
1,138
$
1,671
$
1,138
$
1,067
16
Profit after tax
€
900
$
1,707
$
2,507
$
1,707
$
1,600
17
Foreign Exchange gain
(loss)
$
693
–$
1,427
$
573
18
Net income
€
900
$
2,400
$
1,080
$
2,280
$
1,600
19
Dividends
€
0
$
0
$
0
$
0
$
0
20
Addition to Retained
Earnings
€
900
$
2,400
$
1,080
$
2,280
$
1,600
Topic: Summary