Question 1

A foreign operation which is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation is called

A)Interdependent foreign operation
B)Integrated foreign operation
C)Independent foreign operation
D)Self-sustaining foreign operation

D

Accepted Answer

A self-sustaining foreign operation is one that operates independently of the parent company, with its own functional currency, limiting the parent company's exposure to exchange rate changes to its net investment in the foreign operation.

Question 2

Which of the following items will be translated at historical exchange rate under temporal method:&#10;A)Monetary assets&#10;B)Nonmonetary assets&#10;C)Income statement items&#10;D)Both b and c

Accepted Answer

Under the temporal method, nonmonetary assets (such as inventory or property, plant and equipment) are translated at historical exchange rates. Monetary assets (such as cash or accounts receivable) are translated at the current exchange rate. Income statement items, including revenues and expenses, are translated at the exchange rate in effect at the time the transaction occurs.

Question 3

Which of the following is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows?&#10;A)current/non-current method&#10;B)current rate method&#10;C)current/future method&#10;D)short/long term method

Accepted Answer

The current rate method is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows. This method uses the exchange rate at the balance sheet date to translate all the monetary assets and liabilities. Non-monetary items are translated at historical rates. The difference between the translated value and the original value is recognized in other comprehensive income, which does not affect cash flows.

Question 4

Under the temporal method&#10;A)All balance sheet and all income statement items are translated at the current exchange rate&#10;B)All balance sheet and some income statement items are translated at the current exchange rate&#10;C)Some balance sheet and all income statement items are translated at the current exchange rate&#10;D)Some balance sheet and some income statement items are translated at the current exchange rate

Accepted Answer

Under the temporal method, some balance sheet and some income statement items are translated at the current exchange rate while some other items are translated at historical exchange rates. Specifically, monetary assets and liabilities are translated at the current exchange rate, while non-monetary items are translated at historical exchange rates. Meanwhile, income statement items are translated based on the exchange rate at the time a transaction occurs. Therefore, the most appropriate choice is D.

Question 5

An &#34;integrated foreign operation&#34; refers to:&#10;A)A foreign operation which is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation&#10;B)A foreign operation which is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent&#10;C)A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation&#10;D)A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent

Accepted Answer

An "integrated foreign operation" is one that is financially or operationally interdependent with the parent company, meaning that exchange rate changes affect the parent company as if the foreign operation's transactions were directly undertaken by the parent.

Question 6

Consider an MNC based in Canada with manufacturing activities in Japan.The result of a change in the ¥/$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of:

A)¥200,000,000 more liabilities denominated in yen
B)¥200,000,000 less assets denominated in yen
C)a or b
D)none of these

Accepted Answer

A balance sheet hedge involves taking actions to mitigate the impact of changes in exchange rates on an MNC's consolidated balance sheet. Ignoring transaction exposure, a change in exchange rates would result in either a decrease in the value of yen-denominated assets or an increase in the value of yen-denominated liabilities. Thus, the best choice would be either to reduce yen-denominated assets by ¥200,000,000 or increase yen-denominated liabilities by ¥200,000,000 to offset the potential negative impact of a weaker yen. Therefore, the correct answer is choice C.

Question 7

The &#34;functional currency&#34; is:&#10;A)the currency of the primary economic environment in which the entity operates&#10;B)the currency in which the MNC prepares its consolidated financial statements&#10;C)a currency that is not the parent firm's home country currency&#10;D)b and c

Accepted Answer

The functional currency is the currency of the primary economic environment in which the entity operates. It is the currency that best reflects the economic environment in which the entity operates and generates cash flows. It is used for measuring and reporting the financial results of the entity's operations.

Options B and C are not correct. While the parent firm's home country currency may not be the functional currency, the functional currency is not necessarily the currency in which the MNC prepares its consolidated financial statements.

Question 8

A &#34;self-sustaining foreign operation&#34; refers to:&#10;A)A foreign operation which is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation&#10;B)A foreign operation which is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent&#10;C)A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation&#10;D)A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent

Accepted Answer

A self-sustaining foreign operation is financially or operationally independent of the Canadian parent company such that the exposure to exchange rate changes is limited to the Canadian company's net investment in the foreign operation.

Question 9

Which of the following statements hold true in general:&#10;A)Eliminating transaction exposure will also eliminate translation exposure&#10;B)Eliminating transaction exposure will increase translation exposure&#10;C)Eliminating transaction exposure will reduce translation exposure&#10;D)None of these

Accepted Answer

Transaction exposure and translation exposure are distinct types of foreign exchange exposures. Eliminating one does not necessarily eliminate or directly affect the other in a predictable way. Transaction exposure deals with actual cash flows from transactions, while translation exposure relates to the accounting representation of those and other values in financial statements.

Question 10

Which of the above statements pertain to self-sustaining foreign operations?&#10;A)(i)&#10;B)(i) and (ii)&#10;C)(iii) and (iv)&#10;D)(i), (ii), and (iii)

Accepted Answer

Statement (iii) mentions "able to fund themselves without relying on constant aid or assistance." This indicates self-sustainability, which is a characteristic of self-sustaining foreign operations. Statement (iv) mentions "continue to operate even if there is a reduction in support from outside donors." This also indicates self-sustainability. Statements (i) and (ii) do not specifically mention self-sustainability, so they are not relevant to this question.

Question 11

A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent is called a

A)Interdependent foreign operation
B)Integrated foreign operation
C)Self-sustaining foreign operation
D)Has no special name

Accepted Answer

The answer of A foreign operation which is financially or...

Question 12

Which of the above statements pertains to integrated foreign operations?&#10;A)(i)&#10;B)(i) and (ii)&#10;C)(iii) and (iv)&#10;D)(i), (ii), and (iii)

Accepted Answer

The answer of Which of the above statements pertains to...

Question 13

XYZ Corporation,a Canadian parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service to the local market. Assume that:
1)the functional currency of ABC is the pound
2)the reporting currency is the dollar
3)the initial exchange rate $1.00 = £ 0.67
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $300,000 in the affiliate.Under CICA 1650,the intercompany debt and investment will appear on the consolidated balance sheet as:

A)£200,000
B)$201,493
C)$298,507
D)none of these

Accepted Answer

The answer of XYZ Corporation,a Canadian parent firm,has a wholly...

Question 14

The Canadian methods for consolidating the financial reports of an MNC are:&#10;A)short/long term method and current/future method&#10;B)current/non-current method and short/long term method&#10;C)temporal method and current rate method&#10;D)temporal method and economic/non-economic method

Accepted Answer

The answer of The Canadian methods for consolidating the financial...

Question 15

Under the current rate method&#10;A)All balance sheet and all income statement items are translated at the current exchange rate&#10;B)All balance sheet and some income statement items are translated at the current exchange rate&#10;C)Some balance sheet and all income statement items are translated at the current exchange rate&#10;D)Some balance sheet and some income statement items are translated at the current exchange rate

Accepted Answer

The answer of Under the current rate method&#10;A)All balance sheet...

Question 16

The &#34;reporting currency&#34; is:&#10;A)the currency of the primary economic environment in which the entity operates&#10;B)the currency in which the MNC prepares its consolidated financial statements&#10;C)a currency that is not the parent firm's home country currency&#10;D)a and c

Accepted Answer

The answer of The &#34;reporting currency&#34; is:&#10;A)the currency of the...

Question 17

Translation exposure refers to:&#10;A)accounting exposure&#10;B)the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC&#10;C)the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm&#10;D)all of these

Accepted Answer

The answer of Translation exposure refers to:&#10;A)accounting exposure&#10;B)the effect that...

Question 18

Translation exposure is defined as:&#10;A)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes&#10;B)the extent to which the value of the firm would be affected by unanticipated changes in exchange rate&#10;C)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates&#10;D)ex post and ex ante currency exposures

Accepted Answer

The answer of Translation exposure is defined as:&#10;A)the sensitivity of...

Question 19

The net effect of an increase in the exchange rate on translation exposure depends on&#10;A)The translation method used&#10;B)Whether the value of assets exceeds the value of liabilities&#10;C)Whether the value of liabilities exceeds the value of assets&#10;D)All of these

Accepted Answer

The answer of The net effect of an increase in...

Question 20

A Canadian firm has an integrated foreign operation in the United States.Which of the following statements is false?&#10;A)If the US dollar appreciates, the Canadian dollar value reported in the balance sheet of the assets in the United States will be larger.&#10;B)If the US dollar depreciates, the Canadian dollar value reported in the balance sheet of the assets in the United States will be smaller.&#10;C)a and b&#10;D)Need more information

Accepted Answer

The answer of A Canadian firm has an integrated foreign...

Question 21

Explain the differences between an integrated foreign operation and a self-sustaining foreign operation.

Accepted Answer

The answer of Explain the differences between an integrated foreign...

Question 22

Assume that translation or transaction exposure cannot be hedged at the same time and you have to decide on the firm's hedging policy.What should you do?

Accepted Answer

The answer of Assume that translation or transaction exposure cannot...

Question 23

The French subsidiary of a Canadian parent has the following balance sheet (in euros):   The euro increases in value from EUR 1.6/C$ to EUR 1.3/C$.Using the current rate method,what happened to the total value of assets?

Accepted Answer

The answer of The French subsidiary of a Canadian parent...

Question 24

The French subsidiary of a Canadian parent has the following balance sheet (in euros):   The euro increases in value from EUR 1.6/C$ to EUR 1.3/C$.Using the temporal method,what happened to the total value of assets?

Accepted Answer

The answer of The French subsidiary of a Canadian parent...

Question 25

Explain the major differences between translating financial statements for self-sustaining foreign operations and for integrated foreign operations.

Accepted Answer

The answer of Explain the major differences between translating financial...

Deck 14: Interest Rate and Currency Swaps