Question 1

Which of the following is true?

Accepted Answer

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. This statement accurately defines the competitive effect. B) and C) are incorrect as they misdefine the conversion effect and competitive effect respectively.

Question 2

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

Accepted Answer

Realized domestic currency values of contractual cash flows denominated in foreign currency reflect transaction exposure, which refers to the risk of losses resulting from unexpected changes in exchange rates before the underlying transactions are completed. Translation exposure is the risk associated with the conversion of foreign financial statements into the reporting currency, while economic exposure relates to the effect of unexpected changes in exchange rates on the firm's future cash flows and market value.

Question 3

The recognized methods for consolidating the financial reports of an MNC are

Accepted Answer

The recognized methods for consolidating financial reports of an MNC are the current/noncurrent method, monetary/nonmonetary method, temporal method, and the current rate method. These are the most commonly used methods for MNCs and provide consistent and accurate results for financial reporting. The other options listed are not recognized methods for consolidating financial reports.

Question 4

The management of translation exposure is best described as

Accepted Answer

The management of translation exposure involves selecting a mechanical means for handling the consolidation process for MNCs that logically deals with exchange rate changes. The goal is to minimize the impact of currency fluctuations on the financial statements of the company. The focus is not on making accounting numbers more attractive or changing inventory valuation methods. Therefore, option A is the best choice.

Question 5

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.

Accepted Answer

In the monetary/nonmonetary method, revenue and expense items associated with nonmonetary accounts are translated at the historical rate associated with the balance sheet account. This is because nonmonetary accounts have a fixed value, and therefore their historical rate is appropriate for translating associated revenue and expense items.

Question 6

The authoritative body in the United States that specifies accounting policy for U.S.business firms and certified public accounting firms.

Accepted Answer

The Financial Accounting Standards Board (FASB) is the authoritative body in the United States that specifies accounting policy for U.S. business firms and certified public accounting firms. The FASB establishes Generally Accepted Accounting Principles (GAAP) for U.S. companies. The Federal Accounting Standards Board (FASB) is a non-profit organization that sets accounting standards for federal government agencies. The International Accounting Standards Board (IASB) sets international accounting standards, while the Securities and Exchange Commission (SEC) is a government agency that enforces securities laws and has oversight over the financial reporting of publicly traded companies.

Question 7

The current/noncurrent method of foreign currency translation was generally accepted in the United States from the 1930s until 1975,when

Accepted Answer

FASB 8 became effective in 1975, replacing the current/noncurrent method of foreign currency translation with a new approach. This marked a significant change in accounting practices related to foreign currency translation in the United States.

Question 8

Translation exposure measures

Accepted Answer

Translation exposure measures the impact of changes in exchange rates on a company's financial statements. Option A refers to transaction exposure, while option B refers to economic exposure. Option D encompasses all the given options, but C is the most specific and accurate option for translation exposure.

Question 9

When exchange rates change

Accepted Answer

When exchange rates change, the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency. This is because the exchange rate affects the conversion of the foreign currency into the home currency. Therefore, the value of the assets and liabilities may increase or decrease when expressed in the home currency after the exchange rate change. Choice A is incorrect because the values are still denominated in the foreign currency, not the home currency. Choice C is also incorrect because hedging should be done before or during the potential currency fluctuations, not after the change has taken place. Choice D is incorrect as well.

Question 10

The extent to which the value of the firm would be affected by expected changes in the exchange rate is

Accepted Answer

The answer of The extent to which the value of...

Question 11

The generally accepted method for consolidating the financial reports of an MNC from the 1930s to 1975 was

Accepted Answer

The answer of The generally accepted method for consolidating the...

Question 12

What does it mean to have redenominated an asset in terms of the dollar?

Accepted Answer

The answer of What does it mean to have redenominated...

Question 13

The difference between accounting exposure and translation exposure

Accepted Answer

The answer of The difference between accounting exposure and translation...

Question 14

How many methods of foreign currency translation have been used in recent years? (U.S.GAAP.)

Accepted Answer

The answer of How many methods of foreign currency translation...

Question 15

Translation exposure,also frequently called accounting exposure,refers to the effect that an unanticipated change in exchange rates will have on the

Accepted Answer

Translation exposure refers to the impact of exchange rate fluctuations on a company's consolidated financial statements, which can affect the reported earnings and financial position of an MNC. This exposure arises from the need to translate the financial statements of foreign subsidiaries or branches into the reporting currency of the parent company.

Question 16

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

Accepted Answer

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate relates to the translation exposure. Translation exposure refers to the impact of changes in exchange rates on the financial statements of a company that operates internationally, especially when consolidating the financial results of its foreign subsidiaries. The unexpected changes in exchange rates impact the value of the company's foreign assets, liabilities, and equity when translated into the domestic currency, thereby affecting its overall financial position and performance.

Question 17

The underlying principle of the current/noncurrent method is that assets and liabilities should be translated based on their maturity.

Accepted Answer

The current/noncurrent method dictates that current assets and liabilities, which have a maturity of one year or less, should be converted at the current exchange rate, while non-current assets and liabilities should be translated at the historical exchange rate. This principle ensures that assets and liabilities are translated based on their maturity and the associated cash flow timing. Option A is incorrect because it states that non-current assets are translated at the historical rate when they were recognized, which is not always the case. Option C is incorrect because it assumes that all assets and liabilities have the same level of maturity, which is not true.

Question 18

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

Accepted Answer

Economic exposure refers to the impact of unexpected changes in exchange rates on the future cash flows and competitiveness of the firm. It can have a long-term impact on the value of the firm, as it affects the firm's ability to maintain its market position and profitability. Transaction exposure refers to the impact of exchange rate changes on individual transactions, while translation exposure relates to the impact of exchange rate changes on financial statements.

Question 19

When exchange rates change,the value of a foreign subsidiary's assets and liabilities denominated in a foreign currency change

Accepted Answer

The change in exchange rates affects the value of a foreign subsidiary's assets and liabilities when viewed from the perspective of the parent firm because the parent firm consolidates the financial statements of all its subsidiaries. Therefore, any change in the subsidiary's assets and liabilities due to exchange rates will impact the parent firm's financial statements. Option A is incorrect because the change in exchange rates affects the value of a foreign subsidiary's assets and liabilities when viewed from the perspective of the parent firm, not the subsidiary. Option C is incorrect because the change in exchange rates affects the value of a foreign subsidiary's assets and liabilities even if the parent firm is not liquidating the subsidiary. Option D is incorrect because there is a material concern for the parent firm regarding the change in exchange rates, as it impacts the consolidated financial statements.

Question 20

Translation exposure refers to

Accepted Answer

Translation exposure encompasses all three options listed in the question. It refers to the potential impact that changes in exchange rates can have on the financial statements and financial position of a multinational company, both in terms of accounting and in terms of the value of assets and liabilities denominated in foreign currencies.

Quiz 10: Management of Translation Exposure