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Student name:__________
1) 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
2) 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.
3) How many methods of foreign currency translation have been used in recent years? (U.S.
GAAP.)
A) One
B) Two
C) Three
D) Four
4) Translation exposure, also frequently called accounting exposure, refers to the effect that
an unanticipated change in exchange rates will have on the
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A) choice of accounting methodology.
B) consolidated financial reports of a MNC.
C) firms competitive position.
D) cash flows realized from foreign operations.
5) 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
6) 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
7) The management of translation exposure is best described as
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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.
8) 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
9) 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
10) Which of the following is true?
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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
11) A mismatch between foreign currency denominated net assets and net liabilities
A) can be eliminated by constructing a balance sheet hedge.
B) can be eliminated by multiplying the foreign currency value of the asset by the spot
exchange rate.
C) can be eliminated by undertaking accounting changes to eliminate translation
exposure.
D) none of the options
12) 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).
13) The difference between accounting exposure and translation exposure is that
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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.
14) 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
15) 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
16) The extent to which the value of the firm would be affected by expected changes in the
exchange rate is
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A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
17) 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.
18) 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
19) The generally accepted method for consolidating the financial reports of an MNC from
the 1930s to 1975 was the
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A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
20) 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).
21) 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
22) When using the current/noncurrent method,
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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
23) 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.
24) 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.
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25) 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.
26) Under the monetary/nonmonetary method
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.
27) 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.
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28) 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.
29) 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) Both A & B are correct.
D) none of the options
30) 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) All of the options
31) The underlying principle of the monetary/nonmonetary method is
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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.
32) 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.
33) Under the temporal method
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.
34) Since fixed assets and inventory are usually carried at historical costs,
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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
35) Under the temporal method
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.
36) Under the current rate method
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.
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37) 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
38) 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
39) Under the current rate method
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.
40) The simplest of all translation methods to apply is
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A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
41) 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
42) FASB 8 is essentially the
A) current/noncurrent method.
B) monetary/nonmonetary method.
C) temporal method.
D) current rate method.
43) 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
44) 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
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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) Both A & B are correct.
D) none of the options
45) 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
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46) 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.
1. (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
2. (ii) Is essentially the temporal method of translation (with some subtle differences)
3. (iii) Provide information that is generally compatible with the expected economic effects of
a rate change on an enterprise's cash flows and equity
4. (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)
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.
1. (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
2. (ii) Is essentially the temporal method of translation (with some subtle differences)
3. (iii) Provide information that is generally compatible with the expected economic effects of
a rate change on an enterprise's cash flows and equity
4. (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?
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A) (i)
B) (i) and (ii)
C) (iii) and (iv)
D) (i), (ii), and (iii)
48) 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.
49) 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
50) In what year were U.S. MNCs mandated to implement FASB 52?
A) 1952
B) 1962
C) 1972
D) 1982
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51) 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.
52) 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.
53) 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) Both A & B are correct.
D) none of the options
54) The currency of the primary economic environment in which the entity operates is
defined in FASB 52 as
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A) the "reporting currency."
B) the "functional currency."
C) the "current currency."
D) none of the options
55) 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
56) 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
57) When determining the functional currency, which of the following are salient economic
factors?
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A) cash flow indicators
B) sales price indicators
C) sales market indicators.
D) all of the options
58) When determining the functional currency, the statement, “financing of the foreign entity
is primarily denominated in the foreign currency and the debt service obligations are normally
handled by the foreign entity”, best describes which salient economic factor?
A) financing indicators
B) sales price indicators
C) sales market indicators.
D) expense indicators
59) When determining the functional currency, the statement, “the factor of production costs
of the foreign entity are primarily local costs”, best describes which salient economic factor?
A) financing indicators
B) sales price indicators
C) sales market indicators.
D) expense indicators
60) In implementing FASB 52,
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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.
61) 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
62) 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
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63) 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) $798,507
64) 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) Both B & C are correct.
65) If a foreign entity is only a shell company for carrying accounts that could be carried on
the parent's books,
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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
66) 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
67) 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
68) 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) Both A & B are correct.
D) none of the options
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69) 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
70) 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
71) 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
72) A balance sheet hedge seeks to
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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
73) 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
74) 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
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75) 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
76) 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
77) 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
78) 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?
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A) Current/noncurrent method
B) Monetary/nonmonetary method
C) Temporal method
D) Current rate method
79) 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
80) Under FASB 133, which of the following statements is true?
A) the statement establishes accounting and reporting standards for derivative
instruments and hedging activities
B) to qualify for FASB 133, a company must identify a clear link between exposure and
a derivative instrument
C) the statement clarifies which transactions qualify as an acceptable hedge and how to
treat an unexpected gain or loss if the hedge is not effective.
D) all of the options
81) With regard to foreign currency translation methods used by foreign MNCs,
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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
82) 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
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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
83) 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
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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
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84) 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
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16
Profit after tax
€
900
17
Foreign Exchange
gain (loss)
18
Net income
€
900
19
Dividends
€
0
20
Addition to
Retained
Earnings
€
900
85) 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.
⊚ true
⊚ false
86) When using a derivatives hedge to control translation exposure, speculation about foreign
exchange rate changes is involved.
⊚ true
⊚ false
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Answer Key
Test name: chapter 10
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