Question 1

The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's 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.

Accepted Answer

The basic advantage of the current rate method is that it simplifies the translation process by using a single exchange rate for all assets and liabilities, ensuring that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement. The most significant advantage of the temporal method is that it avoids impacting the income statement with translation gains or losses, as these are directly adjusted in the equity section of the balance sheet.

Question 2

The current rate method is the most prevalent method today for the translation of financial statements.

Accepted Answer

The current rate method is widely used for the translation of financial statements, making this statement true.

Question 3

The temporal rate method is the most prevalent method today for the translation of financial statements.

Accepted Answer

The most prevalent method today for the translation of financial statements is the current rate method, not the temporal rate method.

Question 4

The current rate 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.

Accepted Answer

The answer of The current rate method of foreign currency...

Question 5

If a firm's 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?

Accepted Answer

The answer of If a firm's subsidiary is using the...

Question 6

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then

Accepted Answer

The answer of If a firm's balance sheet has an...

Question 7

A balance sheet hedge is the main technique for managing ________.

Accepted Answer

A balance sheet hedge is used to mitigate the risk of changes in foreign exchange rates affecting a company's balance sheet. This is specifically related to the translation of assets and liabilities denominated in foreign currencies. Therefore, the best choice is C - translation. A transaction hedge is used to manage the risk of foreign currency fluctuations affecting a specific transaction, an operating hedge is used to manage risks related to a company's ongoing operations, and a money market hedge is used to manage foreign exchange risk associated with borrowing and lending in different currencies.

Question 8

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

Accepted Answer

The appreciation of the Canadian dollar means that the Canadian subsidiary will receive fewer Canadian dollars when it converts the U.S. dollars received from the parent, resulting in a foreign exchange loss on the U.S. dollar accounts receivable. The profit recorded on the sale of goods remains unchanged.

Question 9

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.

Accepted Answer

This is correct, as the current rate method of reporting translation adjustments results in the gain or loss being recorded directly in the reserve account on the consolidated balance sheet, bypassing the consolidated income statement. This helps avoid potential volatility in reported earnings that might result from fluctuations in exchange rates, which can provide greater stability for investors and analysts analyzing the company's financial reports.

Question 10

The main technique to minimize translation exposure is called a/an ________ hedge.

Accepted Answer

A balance sheet hedge involves matching the exposed assets and liabilities in a foreign currency to minimize the impact of currency fluctuations on the company's financial statements.

Question 11

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro drops in value from $1.40/euro to $1.30/euro the U.S.firm has a translation ________.

Accepted Answer

A drop in the value of the euro means that the U.S. dollar strengthens against the euro. Therefore, when the European subsidiary's net exposed assets are translated back to U.S. dollars, they will be worth less than before. The calculation is as follows: 
$500,000 / 1.40 = €357,142 (original value in USD)
$357,142 x 1.30 = €464,285 (new value in USD)
$464,285 - $500,000 = -$35,715 (loss in USD)
When rounded, this is a loss of $50,000.

Question 12

Under the temporal rate method,specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Accepted Answer

The statement is correct. Under the temporal rate method, assets and liabilities are translated at exchange rates that reflect the timing of their creation or acquisition. This method is used for determining the value of monetary assets and liabilities, while the current rate method is used for non-monetary items.

Question 13

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

Accepted Answer

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities be equal. This means that any changes in exchange rates will have an equal impact on both assets and liabilities, thereby minimizing the financial risk associated with currency fluctuations.

Question 14

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.

Accepted Answer

In the temporal method, gains or losses resulting from remeasurement are carried directly to current consolidated income, which can lead to volatility in earnings. This is in contrast to the current rate method, where such gains and losses are first recorded in other comprehensive income before being transferred to current consolidated income later.

Question 15

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

Accepted Answer

A foreign subsidiary's functional currency is the currency used in the firm's day-to-day operations. This means that the subsidiary's financial statements are prepared using the functional currency. It is typically the currency of the country where the subsidiary operates.

Question 16

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

Accepted Answer

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the consolidated balance sheet under the section "accumulated other comprehensive income." They are not reported on the income statement or the statement of cash flows.

Question 17

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income,but imbalances transferred to the income statement do not.

Accepted Answer

Exchange rate imbalances that are passed through the income statement directly affect a firm's reported income, while those passed through the balance sheet may affect income indirectly through valuation adjustments.

Question 18

Under the current rate method,specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Accepted Answer

Under the current rate method, specific assets and liabilities are translated at the current exchange rate at the end of the reporting period, regardless of when they were created.

Question 19

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

Accepted Answer

The current rate method translates all assets and liabilities at the current exchange rate, while the temporal method translates monetary assets and liabilities at the current rate and non-monetary assets and liabilities at historical rates. These are the two basic methods for translating foreign subsidiary financial statements. The other options provided are not valid methods.

Question 20

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

Accepted Answer

Transaction gains and losses are realized because they are the result of an actual transaction. For example, if a company sells an asset and receives less than the amount it was initially purchased for, it would experience a realized transaction loss. On the other hand, translation gains and losses are only "paper" gains or losses because they are the result of fluctuations in currency exchange rates and do not involve an actual transaction. For example, if a company's foreign subsidiary reports a financial statement in a foreign currency and the exchange rate changes, the reported value of the subsidiary's assets may increase or decrease, resulting in a translation gain or loss.

Quiz 10: Transaction and Translation Exposure