Question 1

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.
A) local
B) integrated
C) notational dollar
D) functional

Accepted Answer

The functional currency is the currency used in a foreign subsidiary's day-to-day operations, including sales, purchases, and other transactions. It is the currency that most closely reflects the economic environment in which the subsidiary operates.

Question 2

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 company's 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

Accepted Answer

Translation exposure, also known as accounting exposure, refers to the impact that a change in exchange rates can have on a company's consolidated financial statements, particularly affecting the parent company's net worth and reported net income. This exposure arises because the financial statements of foreign subsidiaries must be converted ("translated") into the parent company's reporting currency.

Question 3

Translation exposure may also be called ________ exposure.
A) transaction
B) operating
C) accounting
D) currency

Accepted Answer

Translation exposure is also known as accounting exposure because it deals with the impact of currency exchange rate changes on reported financial statements of a company.

Question 4

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

Accepted Answer

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the consolidated balance sheet. This adjustment is made to the equity section of the balance sheet, and it represents the difference between the current rate and the historical rate of the foreign subsidiaries. The consolidated balance sheet reflects the assets, liabilities, and equity of all the subsidiaries as if they were one company, and therefore, it is the appropriate place to report these gains or losses. The consolidated income statement only reflects the revenues, expenses, and net income of the parent company and its subsidiaries, and the consolidated statement of cash flow shows the cash inflows and outflows of the company, but it does not reflect translation adjustments.

Question 5

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

Accepted Answer

The answer of According to your authors, the main purpose...

Question 6

A foreign subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows.

Accepted Answer

The functional currency of a foreign subsidiary is determined based on the primary economic environment in which the subsidiary operates and generates cash flows. This is in accordance with the guidelines set forth by the International Accounting Standards.

Question 7

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.

Accepted Answer

When the financial statements of a foreign subsidiary are already maintained in U.S. dollars, translation is not required because the financial information is already in the reporting currency of the U.S. company.

Question 8

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

Accepted Answer

An integrated foreign entity is the type of subsidiary in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent. A self-sustaining foreign subsidiary operates as an independent entity with minimal interdependence with the parent company. A foreign subsidiary is a broad term that can apply to any type of subsidiary located in a foreign country. None of the above is not a suitable answer as it does not provide a correct option.

Question 9

It is possible to use different exchange rates for different line items on a financial statement.

Accepted Answer

Depending on the nature of the transaction, it may be appropriate to use different exchange rates for different line items on a financial statement. For example, if a company has operations in multiple countries with varying exchange rates, they may use different rates for sales and expenses in each country. This is typically disclosed in the footnotes or accounting policies of the financial statements.

Question 10

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

Accepted Answer

The two basic methods for the translation of foreign subsidiary financial statements are the current rate method and the temporal method. The current rate method uses the current exchange rate to translate all of the foreign subsidiary's balance sheet and income statement items. The temporal method uses different exchange rates depending on whether the balance sheet or income statement item is monetary (cash, accounts payable, etc.) or non-monetary (inventory, property, etc.). The proper timing method and future rate method are not commonly used for the translation of foreign subsidiary financial statements.

Question 11

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)

Accepted Answer

The Financial Accounting Standards Board (FASB) is the organization responsible for determining accounting policy for U.S. firms. The Securities and Exchange Commission (SEC) oversees the FASB, but it does not determine accounting policy. The Federal Reserve System (Fed) is responsible for regulating the U.S. monetary policy. The General Agreement on Tariffs and Trade (GATT) is an international agreement that regulates trade between nations.

Question 12

If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

Accepted Answer

If the same exchange rate is used to remeasure every line on a financial statement, then there would be no imbalances because all the values would be adjusted proportionately.

Question 13

Generally speaking, translation methods by country define the translation process as a function of what two factors?
A) size; location
B) a firm's functional currency; location
C) location; foreign subsidiary independence
D) foreign subsidiary independence; a firm's functional currency

Accepted Answer

Translation methods by country define the translation process as a function of foreign subsidiary independence (which determines the level of control the parent company has over the translation process) and the firm's functional currency (which determines the currency in which the financial statements are reported).

Question 14

It is highly unusual for a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

Accepted Answer

While it is uncommon, it is not impossible for a multinational firm to have both integrated foreign entities (i.e. subsidiaries that are fully integrated into the parent company's operations) and self-sustaining foreign entities (i.e. subsidiaries that operate independently and generate their own profits). Depending on the industry and specific circumstances, a company may choose to have a mix of these types of subsidiaries to optimize performance and efficiencies.

Question 15

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.
A) monetary; current rate
B) temporal; current rate
C) temporal; monetary
D) current rate; temporal

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 16

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

Accepted Answer

The first subsidiary, which mills trees in Canada and ships its entire product to the Georgia-Pacific U.S., is an integrated foreign entity since it is closely tied to the parent company's operations and has most of its cash flows in U.S. dollars.

The second subsidiary, which retails tropical hardwood furniture that it buys from many different sources in Japan, is a self-sustaining foreign entity since it operates independently and sources its products from various suppliers.

Question 17

________ exposure is the potential for an increase or decrease in the parent company's 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

Accepted Answer

Translation exposure, also known as accounting or bookkeeping exposure, refers to the impact of changes in exchange rates on the valuation of assets and liabilities denominated in foreign currencies, as well as on the translation of foreign subsidiaries' financial statements into the parent company's reporting currency. This exposure affects the reported net income and equity of the parent company but does not involve any actual cash flows.

Question 18

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

Accepted Answer

Historical exchange rates are typically used for equity accounts and fixed assets to reflect the value at the time of acquisition, while current exchange rates are used for current assets and liabilities to reflect their current market value.

Question 19

Most countries specify the translation method to be used by a foreign subsidiary based on its business operations or the functional currency. Explain both subsidiary characterization criteria and the one adopted in the United States.

Accepted Answer

The answer of Most countries specify the translation method to...

Question 20

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

Accepted Answer

If there is an imbalance resulting from the accounting method used for translation, the imbalance is taken either to current income or equity reserves. Current liabilities are not typically affected by translation adjustments, and depreciation and the market for foreign exchange swaps are unrelated to this accounting issue. The bank and post office are also not involved in this type of adjustment.

Quiz 11: Translation Exposure

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

Translation exposure measures:

Translation exposure may also be called ________ exposure.

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

According to your authors, the main purpose of translation is:

A foreign subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows.

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/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

It is possible to use different exchange rates for different line items on a financial statement.

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

The ________ determines accounting policy for U.S. firms.

If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

Generally speaking, translation methods by country define the translation process as a function of what two factors?

It is highly unusual for a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

Historical exchange rates may be used for , while current exchange rates may be used for .

Most countries specify the translation method to be used by a foreign subsidiary based on its business operations or the functional currency. Explain both subsidiary characterization criteria and the one adopted in the United States.

If an imbalance results from the accounting method used for translation, the imbalance is taken either to or .