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

companys net worth and reported net income caused by a change in exchange rates since

the last transaction. A) Transaction B) Operating C) Currency D) Translation Answer:

Question: Translation exposure measures: A) changes in the value of outstanding financial

obligations incurred prior to a change in exchange rates. B) the potential for an increase or

decrease in the parent companys net worth and reported net income caused by a change in

exchange rates since the last consolidation of international operations. C) an unexpected

change in exchange rates impact on short run expected cash flows. D) none of the above

Answer:

Question: According to your authors, the main purpose of translation is: A) to prepare

consolidated financial statements. B) to help management assess the performance of

foreign subsidiaries. C) to act as an interpreter for managers without foreign language

skills. D) none of the above Answer:

Question: Historical exchange rates may be used for ________, while current exchange

rates may be used for ________. A) fixed assets and current assets; income and expense

items B) equity accounts and fixed assets; current assets and liabilities C) current assets

and liabilities; equity accounts and fixed assets D) equity accounts and current liabilities;

current assets and fixed assets Answer:

Question: If an imbalance results from the accounting method used for translation, the

imbalance is taken either to ________ or ________. A) the bank; the post office B)

depreciation; the market for foreign exchange swaps C) current income; equity reserves D)

current liabilities; equity reserves Answer:

Question: Generally speaking, translation methods by country define the translation

process as a function of what two factors? A) size; location B) a firms functional currency;

location C) location; foreign subsidiary independence D) foreign subsidiary independence;

a firms functional currency Answer:

Question: A/An ________ subsidiary is one in which the firm operates as an extension of

the parent company with cash flows highly interrelated with the parent. A) self-sustaining

foreign B) integrated foreign entity C) foreign D) none of the above Answer:

Question: Consider two different foreign subsidiaries of Georgia-Pacific Wood Products

Inc. The first subsidiary mills trees in Canada and ships its entire product to the

Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located

in Japan and retails tropical hardwood furniture that it buys from many different sources.

The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in

U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity. A)

domestic; integrated B) self-sustaining; domestic C) integrated; self-sustaining D)

self-sustaining; integrated Answer:

Question: A foreign subsidiarys ________ currency is the currency used in the firms

day-to-day operations. A) local B) integrated C) notational dollar D) functional Answer:

Question: The ________ determines accounting policy for U.S. firms. A) Securities and

Exchange Commission (SEC) B) Federal Reserve System (Fed) C) Financial Accounting

Standards Board (FASB) D) General Agreement on Tariffs and Trade (GATT) Answer:

Question: It is possible to use different exchange rates for different line items on a

financial statement. Answer:

Question: If the same exchange rate were used to remeasure every line on a financial

statement, then there would be no imbalances from remeasuring. Answer:

Question: A foreign subsidiarys functional currency is the currency of the primary

economic environment in which the subsidiary operates and in which it generates cash

flows. Answer:

Question: It is highly unusual for a multinational firm to have both integrated foreign

entities AND self-sustaining foreign entities. Answer:

Question: The two basic methods for the translation of foreign subsidiary financial

statements are the ________ method and the ________ method. A) current rate; temporal

B) temporal; proper timing C) current rate; future rate D) none of the above Answer:

Question: Gains or losses caused by translation adjustments when using the current rate

method are reported separately on the: A) consolidated statement of cash flow. B)

consolidated income statement. C) consolidated balance sheet. D) none of the above

Answer:

Question: The basic advantage of the ________ method of foreign currency translation is

that foreign nonmonetary assets are carried at their original cost in the parents consolidated

statement while the most important advantage of the ________ method is that the gain or

loss from translation does not pass through the income statement. A) monetary; current

rate B) temporal; current rate C) temporal; monetary D) current rate; temporal Answer:

Question: Under the U.S. method of translation procedures, if the financial statements of

the foreign subsidiary of a U.S. company are maintained in U.S. dollars: A) translation is

accomplished through the current rate method. B) translation is accomplished through the

temporal method. C) translation is not required. D) the translation method to be used is not

obvious. Answer:

Question: Under the U.S. method of translation procedures, if the financial statements of

the foreign subsidiary of a U.S. company are maintained in the local currency, and the

local currency is the functional currency, then: A) the translation method to be used is not

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

firms reported income, but imbalances transferred to the income statement do not. Answer:

Question: The current rate method is the most prevalent method today for the translation of

financial statements. Answer:

Question: The temporal rate method is the most prevalent method today for the translation

of financial statements. Answer:

Question: The biggest advantage of the current rate method of reporting translation

adjustments is the fact that the gain or loss goes directly to the reserve account on the

consolidated balance sheet and does not pass through the consolidated income statement.

Answer:

Question: Under the temporal rate method, specific assets and liabilities are translated at

exchange rates consistent with the timing of the items creation. Answer:

Question: The temporal method of foreign currency translation gains or losses resulting

from remeasurement are carried directly to current consolidated income and thus

introduces volatility to consolidated earnings. Answer:

Question: : The current rate method and the temporal method are two basic methods for

translation that are employed worldwide Answer:

Question: The two methods for the translation of foreign subsidiary financial statements

are the current rate and temporal methods. Briefly, describe how each of these methods

translates the foreign subsidiary financial statements into the parent companys

consolidated statements. Identify when each technique should be used and the major

advantage(s) of each. Answer:

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 firms balance sheet has an equal amount of exposed foreign currency assets

and liabilities and the firm translates by the temporal method, then: A) the net exposed

position is called monetary balance. B) the change is value of liabilities and assets due to a

change in exchange rates will be of equal but opposite direction. C) Both A and B are true.

D) none of the above Answer:

Question: If a firms subsidiary is using the local currency as the functional currency, which

of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative

Translation Adjustment (CTA) would be realized. B) The firm has debt covenants or bank

agreements that state the firms debt/equity ratio will be maintained within specific limits.

C) The foreign subsidiary is operating is a hyperinflationary environment. D) All of the

above are appropriate reasons to use a balance sheet hedge. Answer:

Question: If the parent firm and all subsidiaries denominate all exposed assets and

liabilities in the parents reporting currency this will ________ exposure but each

subsidiary would have ________ exposure. A) maximize translation; no transaction B)

eliminate translation; transaction C) maximize transaction; no translation D) eliminate

transaction; translation Answer:

Question: A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the

parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in

Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays

the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10%

against the U.S. dollar. In this example, the Canadian subsidiary will record a: A) 10%

foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange

gain on the U.S. dollar accounts receivable. C) Since the Canadian firm is a U.S.

subsidiary, neither a gain nor loss will be recorded. D) Any gain or loss will be recorded

only by the parent firm. Answer:

Question: ________ gains and losses are “realized” whereas ________ gains and losses are

only “paper.” A) Translation; transaction B) Transaction; translation C) Translation;

operating D) none of the above Answer:

Question: It is possible that efforts to decrease translation exposure may result in an

increase in transaction exposure. Answer:

Question: One possible reason for a balance sheet hedge could be because the foreign

subsidiary is about to be liquidated, so that value of its Cumulative Translation Adjustment

(CTA)would be realized. Answer:

Question: One possible reason for a balance sheet hedge could be because the firm has

debt covenants or bank agreements that state the firms debt/equity ratios will be

maintained within specific limits. Answer:

Question: If management expects a foreign currency to depreciate, it could minimize

translation exposure by increasing net exposed assets. Answer:

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: