Exam 11: Translation Exposure

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:

One possible reason for a balance sheet hedge could be because the firm has debt covenants or bank agreements that state the firm's debt/equity ratios will be maintained within specific limits.

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

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

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:

The current rate method and the temporal method are two basic methods for translation that are employed worldwide.

The value contribution of a subsidiary of a multinational firm to the firm can be reported in the income statement or balance sheet of the consolidated firm. Explain the reporting of the changes in the value of a subsidiary as a result of the change in an exchange rate - changes to the income and the assets of the subsidiary - in the consolidated financial statements of the parent company.

________ 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.

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

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.

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.

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

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

It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure.