Deck 16: Translating Foreign Currency Statements: The Temporal Method and the Functional Currency Concept

Question 1

The translation methods that fit under the U.S. dollar unit of measure are the ________________________________ method, the _________________________________ method, and the _____________________________________ method.

Answer 1

temporal, monetary-nonmonetary, current-noncurrent

Question 2

Under the temporal method of translation, the focus is on the ______________________________________.

Answer 2

net monetary position (essentially)

Question 3

An excess of monetary assets over monetary liabilities is referred to as a(n) ____________________________________.

Answer 3

net monetary asset position

Question 4

An excess of monetary liabilities over monetary assets is referred to as a(n) ____________________________________.

Question 5

After using the temporal method, it is necessary to perform a(n) _______________ _______________________________ in dollars.

Question 6

Under FAS 52, the effect of an exchange rate change arising from using the temporal method is called a(n) ________________________________________.

Question 7

When a foreign subsidiary has the U.S. dollar as its functional currency, the parent would hedge the ____________________________________________ to prevent reporting an adverse impact on stockholders' equity as a result of an adverse exchange rate change.

Question 8

Under FAS 52, it is necessary to first determine a foreign unit's ________________________________________ before determining the appropriate translation method.

Question 9

Under FAS 52, going from the functional currency into the reporting currency (U.S. dollars) requires the use of the __________________________________ process.

Question 10

Under FAS 52, going from a different currency into the functional currency requires the use of the ________________________________________ process.

Question 11

Under FAS 52, the U.S. dollar is deemed the functional currency for foreign units operating in ________________________________________.

Question 12

A U.S. parent's French subsidiary has the British pound as its functional currency. If the French subsidiary keeps its books in francs, it will be necessary to ____________________________ and then __________________________.

Question 13

Under the U.S. dollar unit of measure approach, the monetary-nonmonetary distinction is crucial.

Question 14

Under the U.S. dollar unit of measure approach, the focus is on the net investment (net asset) position.

Question 15

Under the U.S. dollar unit of measure approach, the focus is on the composition of the individual assets and liabilities.

Question 16

Under the U.S. dollar unit of measure approach, the relationships in the foreign currency statements are maintained in translation.

Question 17

Under the U.S. dollar unit of measure approach, a decrease in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Question 18

Under the U.S. dollar unit of measure approach, an increase in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Question 19

Under the U.S. dollar unit of measure approach, monetary accounts are always translated at the current exchange rate.

Question 20

Under the U.S. dollar unit of measure approach, the current rate method is used to translate all assets and liabilities.

Question 21

Under the U.S. dollar unit of measure approach, the current rate method is used to translate all assets, liabilities, and equity accounts.

Question 22

Under the U.S. dollar unit of measure approach, the temporal method is used to translate all assets and liabilities.

Question 23

Under the temporal method, all current assets and current liabilities are translated at the current exchange rate, and all noncurrent assets and noncurrent liabilities are translated at historical exchange rates.

Question 24

The current-noncurrent method fits under the U.S. dollar unit of measure approach.

Question 25

The monetary-nonmonetary method fits under the U.S. dollar unit of measure approach.

Question 26

Under current U.S. GAAP, the temporal method and the monetary-nonmonetary method produce the same results.

Question 27

Under current U.S. GAAP, the temporal method and the current-noncurrent method produce the same results.

Question 28

The current-noncurrent method does not fit under the foreign currency unit of measure approach.

Question 29

Under FAS 52, the effect of an exchange rate change is reported in Other Comprehensive Income when the temporal method is used.

Question 30

Under FAS 52, the effect of an exchange rate change is reported currently in earnings when the temporal method is used.

Question 31

Under FAS 52, the effect of an exchange rate change is reported as a deferred gain or loss in the balance sheet when the temporal method is used.

Question 32

Under FAS 52, the effect of an exchange rate change is reported in a statement of comprehensive income when the temporal method is used.

Question 33

The functional currency concept is based on which currency the foreign unit uses in keeping its books.

Question 34

The functional currency concept is based on whether decision making at the foreign unit has been decentralized.

Question 35

The functional currency concept is based on which currency the foreign unit uses to pay dividends to its parent company.

Question 36

A factor to be considered in determining a foreign unit's functional currency is whether earnings are reinvested or distributed to the parent/home office.

Question 37

A factor to be considered in determining a foreign unit's functional currency is whether inventory is purchased from the parent company versus unrelated vendors located in the United States.

Question 38

A factor to be considered in determining a foreign unit's functional currency is whether sales are to the parent company versus unrelated customers located in the United States.

Question 39

A factor pointing toward the use of the U.S. dollar as the functional currency is a significant level of intercompany inventory transfers.

Question 40

A factor pointing toward the use of the foreign currency as the functional currency is a significant level of intercompany inventory transfers.

Question 41

A factor pointing toward the use of the foreign currency as the functional currency is the foreign unit selling its products locally rather than in the United States.

Question 42

A factor pointing toward the use of the U.S. dollar as the functional currency is the foreign unit purchasing its inventory from vendors in the United States.

Question 43

Under FAS 52, a highly inflationary economy is defined as one that has inflation of more than 100% annually.

Question 44

Under FAS 52, a foreign unit in a highly inflationary economy must use the U.S. dollar as its functional currency.

Question 45

Under FAS 52, "translation" is the process of going from a different currency into the reporting currency.

Question 46

Under FAS 52, "translation" is the process of going from the functional currency into the reporting currency.

Question 47

Under FAS 52, either "translation" or "remeasurement" can occur, but not both for a given foreign unit.

Question 48

Under FAS 52, only the current rate method can be used in the "translation" process.

Question 49

Under FAS 52, the effect of an exchange rate change is referred to as a translation adjustment only if the foreign currency is the functional currency.

Question 50

Under FAS 52, the effect of an exchange rate change is called a foreign currency transaction gain or loss only if the foreign currency is the functional currency.

Question 51

Under FAS 52, the effect of an exchange rate change is always reported in Other Comprehensive Income if the foreign currency is the functional currency.

Question 52

Under FAS 52, the effect of an exchange rate change is always reported currently in earnings if the foreign currency is the functional currency.

Question 53

Under FAS 52, "remeasurement" is going from the functional currency to the reporting currency.

Question 54

Under FAS 52, "remeasurement" is going from the reporting currency to the functional currency.

Question 55

Under FAS 52, "remeasurement" is going from a nonfunctional currency into the functional currency.

Question 56

Under FAS 52, it may be necessary in some cases to use the remeasurement process and then the translation process for a specific foreign unit.

Question 57

Under FAS 52, it may be necessary in some cases to use the translation process and then the remeasurement process for a specific foreign unit.

Question 58

Under FAS 52, a lower-of-cost-or-market test in U.S. dollars may be necessary under the remeasurement process but is never necessary under the translation process.

Question 59

When the temporal method is used, any exchange rate change adjustment to a parent's long-term intercompany receivable from (or payable to) its foreign subsidiary is reported currently in earnings-regardless of whether the amount is expected to be paid in the foreseeable future.

Question 60

When the temporal method is used, any exchange rate change adjustment to a parent's long-term intercompany receivable from (or payable to) its foreign subsidiary is reported in Other Comprehensive Income (bypassing earnings)-regardless of whether the amount is expected to be paid in the foreseeable future.

Question 61

When the temporal method is used, any exchange rate change adjustment to a parent's long-term intercompany receivable from (or payable to) its foreign subsidiary is reported currently in earnings-only if the amount is not expected to be paid in the foreseeable future.

Question 62

When the temporal method is used, any exchange rate change adjustment to a parent's long-term intercompany receivable from (or payable to) its foreign subsidiary is reported as an adjustment to Other Comprehensive Income account (bypassing earnings)-if the amount is not expected to be paid in the foreseeable future.

Question 63

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported currently in earnings.

Question 64

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported as an adjustment to Other Comprehensive Income (bypassing earnings).

Question 65

When the temporal method is used, the calculation of any unrealized intercompany profit on inventory transfers is made using the current exchange rate.

Question 66

The risk of investing in foreign countries can be virtually eliminated by having the foreign units invest their assets in nonmonetary assets.

Question 67

The risk of investing in foreign countries can be greatly minimized by making intercompany loans that are to be repaid in U.S. dollars as opposed to making investments in common stocks of the foreign unit.

Question 68

The accounting for the gain or loss on the hedging of a net investment position depends on whether the foreign currency or the U.S. dollar is the foreign unit's functional currency.

Question 69

When the temporal method is used and a net monetary liability position is hedged, there may not be an offsetting effect to the FX transaction gain or loss resulting from the remeasurement process.

Question 70

_____ Which of the following statements does not hold true for the U.S. dollar unit of measure approach?

A) The relationships of items in the foreign currency financial statements are maintained in expressing the accounts in U.S. dollars.
B) It completely disregards how changes in the exchange rate affect the nonmonetary accounts.
C) A distinction is made between monetary and nonmonetary items.
D) For fixed assets, the amounts expressed in U.S. dollars are the U.S. dollar equivalents of the transactions at the time the transactions occurred.
E) None of the above.

Question 71

_____ When using the U.S. dollar unit of measure approach, the focus is on the

A) Net asset (net investment) position.
B) Net monetary position.
C) Net monetary asset position.
D) Net monetary liability position.
E) It depends on which of the three translation methods is used.

Question 72

_____ Under the temporal method, what is the effect of a decrease in the direct exchange rate under each of the following situations?

Question 73

_____ Under the temporal method, what is the effect of an increase in the direct exchange rate under each of the following situations?

Question 74

_____ Under the temporal method, what is the effect of a decrease in the direct exchange rate under each of the following situations?

Question 75

_____ Under the temporal method, what is the effect of an increase in the direct exchange rate under each of the following situations?

Question 76

_____ Which of the following statements is correct?

A) The effect of a decrease in the direct exchange rate is always unfavorable under the foreign currency unit of measure approach.
B) The effect of a decrease in the direct exchange rate is always unfavorable under the U.S. dollar unit of measure approach.
C) The effect of an increase in the direct exchange rate is always unfavorable on the assets and favorable on the liabilities.
D) The effect of an increase in the direct exchange rate is always favorable under the current rate method of translation.
E) None of the above.

Question 77

_____ Under the temporal method of translation, which translation procedures are followed?

A) All balance sheet accounts are translated at the current exchange rate.
B) All income statement accounts are translated at the current exchange rate.
C) A combination of current and historical exchange rates are used in both financial statements.
D) Both a and b.
E) None of the above.

Question 78

_____ Under the temporal method of translation, which translation procedures are followed?

A) All balance sheet accounts are expressed in U.S. dollars using exchange rates that produce the U.S. dollar equivalent at the time the transaction giving rise to the balance was entered into.
B) All assets and liabilities are expressed in U.S. dollars using exchange rates that produce the U.S. dollar equivalent at the time the transaction giving rise to the balance was entered into.
C) All income statement accounts are expressed in U.S. dollars using exchange rates that produce the U.S. dollar equivalent at the time the transaction with the outside, unrelated party giving rise to the balance occurred.
D) All income statement accounts-excluding cost of sales, depreciation expense, amortization expense, and similar accounts-are expressed in U.S. dollars using exchange rates that produce the U.S. dollar equivalent at the time the transaction with the outside, unrelated party giving rise to the balance was entered into.
E) None of the above.

Question 79

_____ Under the temporal method of translation, which of the following occurs?

A) All income statement accounts are expressed in dollars by using exchange rates in effect when the items were recognized in the income statement.
B) The effects of exchange rate changes are reported currently in the income statement.
C) The "translation" process must be used.
D) The current rate method must be used.
E) None of the above.

Question 80

_____ Which exchange rates are used to express the following accounts in dollars under the temporal method of translation?