Question 1

When using the current/noncurrent method,current assets are defined as

Accepted Answer

A) inventory that is currently salable. 
B) assets with a maturity of one year or less. 
C) assets with a maturity of 90 days or less. 
D) none of the options 
A) inventory that is currently salable. 
B) assets with a maturity of one year or less. 
C) assets with a maturity of 90 days or less. 
D) none of the options

Question 2

The underlying principle of the current rate method is

Accepted Answer

A) assets and liabilities should be translated based on their maturity. 
B) monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes. 
C) monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. 
D) all balance sheet accounts are translated at the current exchange rate,except for stockholders' equity.A "plug" equity account,named cumulative translation adjustment (CT
A) ,is used to make the balance sheet balance,since translation gains or losses do not go through the income statement according to this method. 
A) assets and liabilities should be translated based on their maturity. 
B) monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes. 
C) monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates. 
D) all balance sheet accounts are translated at the current exchange rate,except for stockholders' equity.A "plug" equity account,named cumulative translation adjustment (CT
A) ,is used to make the balance sheet balance,since translation gains or losses do not go through the income statement according to this method.

Question 3

The source of translation exposure

Accepted Answer

A) is a mismatch of net assets and net liabilities denominated in the same currency. 
B) is a mismatch of net assets and net liabilities denominated in the different currencies. 
C) is a mismatch of current assets and current liabilities denominated in different currencies. 
D) none of the options 
A) is a mismatch of net assets and net liabilities denominated in the same currency. 
B) is a mismatch of net assets and net liabilities denominated in the different currencies. 
C) is a mismatch of current assets and current liabilities denominated in different currencies. 
D) none of the options

Question 4

A U.S.parent firm,as result of its business activities in Germany,has a net exposure of €1,000,000.The consolidated reports were prepared at the year-end for the last two successive years.If the exchange rates on these reporting dates changed from $1.00 = €1.10 to $1.00 = €1.00,then the translation exposure report will indicate a "reporting currency imbalance" of

Accepted Answer

A) $90,910. 
B) $0. 
C) -$90,910. 
D) none of the options 
A) $90,910. 
B) $0. 
C) -$90,910. 
D) none of the options

Question 5

Under the current/noncurrent method

Accepted Answer

A) a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency appreciates (depreciates). 
B) a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss (gain)if the local currency appreciates (depreciates). 
C) a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency depreciates (appreciates). 
D) a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss (gain)if the local currency appreciates (depreciates),and a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency depreciates (appreciates). 
A) a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency appreciates (depreciates). 
B) a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss (gain)if the local currency appreciates (depreciates). 
C) a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency depreciates (appreciates). 
D) a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss (gain)if the local currency appreciates (depreciates),and a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss)if the local currency depreciates (appreciates).

Question 6

Which of the following are true statements?

Accepted Answer

A) Since translation exposure does not have an immediate direct effect on operating cash flows,its control is relatively unimportant in comparison to transaction exposure,which involves potential real cash flow losses. 
B) Since it is generally not possible to eliminate both translation exposure and transaction exposure,it is more logical to effectively manage transaction exposure. 
C) Two ways to control translation risk are: a balance sheet hedge and a derivatives hedge. 
D) all of the options 
A) Since translation exposure does not have an immediate direct effect on operating cash flows,its control is relatively unimportant in comparison to transaction exposure,which involves potential real cash flow losses. 
B) Since it is generally not possible to eliminate both translation exposure and transaction exposure,it is more logical to effectively manage transaction exposure. 
C) Two ways to control translation risk are: a balance sheet hedge and a derivatives hedge. 
D) all of the options

Question 7

A highly inflationary economy is defined in FASB 52 as

Accepted Answer

A) one that has cumulative inflation of approximately 100 percent or more over a 3-year period. 
B) one that has current inflation of approximately 40 percent per year. 
C) one that has going-forward expected inflation of approximately 40 percent per year. 
D) none of the options 
A) one that has cumulative inflation of approximately 100 percent or more over a 3-year period. 
B) one that has current inflation of approximately 40 percent per year. 
C) one that has going-forward expected inflation of approximately 40 percent per year. 
D) none of the options

Question 8

A translation exposure report shows,for each account that is included in the consolidated balance sheet,

Accepted Answer

A) the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest. 
B) the amount of foreign exchange exposure that exists on a net basis for the firm. 
C) the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure. 
D) none of the options 
A) the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest. 
B) the amount of foreign exchange exposure that exists on a net basis for the firm. 
C) the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure. 
D) none of the options

Question 9

Consider a U.S.-based MNC 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 $$\begin{array} { l l l } 
\text { Exposed assets } & \text {  ¥ } & 700,000,000 \
\text { Exposed liabilities } & \text {  ¥ } & 500,000,000
\end{array}$$ Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of

Accepted Answer

A) ¥200,000,000 more liabilities denominated in yen. 
B) ¥200,000,000 less assets denominated in yen. 
C) ¥200,000,000 more liabilities denominated in yen or ¥200,000,000 less assets denominated in yen. 
D) none of the options 
A) ¥200,000,000 more liabilities denominated in yen. 
B) ¥200,000,000 less assets denominated in yen. 
C) ¥200,000,000 more liabilities denominated in yen or ¥200,000,000 less assets denominated in yen. 
D) none of the options

Question 10

With regard to translation exposure versus operating exposure

Accepted Answer

A) upper management should be more concerned with translation exposure. 
B) any discussion really involves speculation about foreign exchange rate changes. 
C) upper management should be more concerned with operating exposure. 
D) none of the options 
A) upper management should be more concerned with translation exposure. 
B) any discussion really involves speculation about foreign exchange rate changes. 
C) upper management should be more concerned with operating exposure. 
D) none of the options

Question 11

XYZ Corporation,a U.S.parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service 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 $500,000 in the affiliate.Under FASB 52,the intercompany debt and investment will appear on the consolidated balance sheet as

Accepted Answer

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

Question 12

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

A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the options 
A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the options

Question 13

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

Accepted Answer

A) Current assets and liabilities are converted at the current exchange rate in effect when the cash flow associated with the asset or liability actually occurred.Noncurrent assets and liabilities are translated at the historical exchange rate that prevailed when the asset was recognized. 
B) Current assets and liabilities,which by definition have a maturity of one year or less,are converted at the current exchange rate.Noncurrent assets and liabilities are translated at the historical exchange rate. 
C) All assets and liabilities are converted at the current exchange rate. 
D) none of the options 
A) Current assets and liabilities are converted at the current exchange rate in effect when the cash flow associated with the asset or liability actually occurred.Noncurrent assets and liabilities are translated at the historical exchange rate that prevailed when the asset was recognized. 
B) Current assets and liabilities,which by definition have a maturity of one year or less,are converted at the current exchange rate.Noncurrent assets and liabilities are translated at the historical exchange rate. 
C) All assets and liabilities are converted at the current exchange rate. 
D) none of the options

Question 14

Under which accounting method are most income statement accounts translated at the average exchange rate for the period?

Accepted Answer

A) Current/noncurrent method 
B) Monetary/nonmonetary method 
C) Temporal method 
D) Current rate method 
A) Current/noncurrent method 
B) Monetary/nonmonetary method 
C) Temporal method 
D) Current rate method

Question 15

With regard to research on the stock price reaction to mandated accounting changes,such as FASB 52,

Accepted Answer

A) the results suggest that market participants seem to think that changes in reported earnings do not change the actual cash flows in multinational firms. 
B) the results suggest that market agents react to "cosmetic" earning changes. 
C) the results suggest that market agents do not react to cosmetic earning changes that do not affect value. 
D) none of the options 
A) the results suggest that market participants seem to think that changes in reported earnings do not change the actual cash flows in multinational firms. 
B) the results suggest that market agents react to "cosmetic" earning changes. 
C) the results suggest that market agents do not react to cosmetic earning changes that do not affect value. 
D) none of the options

Question 16

Find the foreign currency gain or loss for this U.S.MNC translating the balance sheet and income statement of a French subsidiary,which keeps its books in euro,then is translated into U.S.dollars using the current/noncurrent method-the reporting currency of the U.S.MNC.
The subsidiary is at the end of its first year of operation.The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $1.50/€.
 \(\begin{array}{lccccc}
&&&\text { Curent/Nor }\
&\text { Local Currency }&&\text { current }\
\text { Balance Sheet }\
\text { Cash } & €  2,100 & & \$ 3,150 \
\text { Inventory (current Value }=€ 1,800) & €  1,50 \mathrm{C} & & \$  2,250 \
\text { Net fixed assets } & €  3,000 & & \$  4,800 \
\text { Total Assets } & €  6,600 & & \$ 10,200 \
\text { Current liabilities } & € 1,200& & \$ 1,800 \
\text { Long-term } & €  1,800& & \$ 32,880 \
\text { Common stock } & € 2,700 & & \$ 3,320 \
\text { Retained earnings } & € 900& &\
\text { Total L\&E } & € 6,600 & &\$ 10,200 \
\text { Income Statement } & & & & \

\text { Sales Revenue } & €  10,000 & & \$ 15,484 \
\text { COGS } & €  7,500 & & \$ 11,613 \
\text { Depreciation } & €  1,000 & & \$  1,600 \
\text { NOI } & €  1,500& & \$ 2,271 \
\text { Tax }(40 \%) & € 600 & & \$ 908 \
\text { Profit after tax } & € 900 & & \$1,363\
\text { Net income } & € 900 \
\text { Dividends } & €0 && \$0\
\text { Addition to Retained Earnings }& € 900 
\end{array}\)

Accepted Answer

Correct answer is -$163.$10,20

Question 17

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

Accepted Answer

A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the options 
A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the options

Question 18

When exchange rates change

Accepted Answer

A) the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency. 
B) the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency. 
C) hedging should be done after the change. 
D) none of the options 
A) the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency. 
B) the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency. 
C) hedging should be done after the change. 
D) none of the options

Question 19

Assume that the balance sheet and income statement of a French subsidiary,which keeps its books in euro,is translated into U.S.dollars,the reporting currency of the U.S.MNC. The table presents the balance sheet and income statement in euro.The subsidiary is at the end of its first year of operation.The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $2.00/€.
Fill out the 20 missing entries that translate the balance sheet and income statement for this French subsidiary using the Current/Noncurrent Method,the Monetary/Nonmonetary Method,the Temporal Method,and the Current Rate Method.
                   Local Currency       Current/Non current        Monetary/Non monetary       Temporal      Current Rate               Balance Sheet                                                   Cash       € 2,100                                            Inventory (current Value = €1,800)       € 1,500                                           Net fixed assets       € 3,000       ______       ______       ______       ______               Total Assets       € 6,600                                           Current liabilities       € 1,200                                           Long-term debt       € 1,800                                           Common stock       € 2,700                                           Retained earnings       € 900                                           CTA      ______       ______       ______       ______       ______               Total L&E       € 6,600                                           Income Statement                                                  Sales Revenue       € 10,000                                           COGS       € 7,500                                           Depreciation       € 1,000                                           NOI       € 1,500        ______        ______        ______        ______               Tax(40%)       € 600                                           Profit after tax       € 900        ______        ______        ______        ______               Foreign Exchange gain (loss)                                                  Net income       € 900        ______        ______        ______        ______               Dividends       € 0                                       Addition to Retained Earnings       € 900

Accepted Answer

The answer of Assume that the balance sheet and income...

Question 20

Under which method does the gain or loss due to translation adjustment not affect reported cash flows,as it does with the other three translation methods?

Accepted Answer

A) Current/noncurrent method 
B) Monetary/nonmonetary method 
C) Temporal method 
D) Current rate method 
A) Current/noncurrent method 
B) Monetary/nonmonetary method 
C) Temporal method 
D) Current rate method

When using the current/noncurrent method,current assets are defined as

The underlying principle of the current rate method is

The source of translation exposure

Under the current/noncurrent method

Which of the following are true statements?

A highly inflationary economy is defined in FASB 52 as

A translation exposure report shows,for each account that is included in the consolidated balance sheet,

With regard to translation exposure versus operating exposure

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

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

Under which accounting method are most income statement accounts translated at the average exchange rate for the period?

With regard to research on the stock price reaction to mandated accounting changes,such as FASB 52,

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

When exchange rates change

Under which method does the gain or loss due to translation adjustment not affect reported cash flows,as it does with the other three translation methods?

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

	Local Currency	Current/Non current	Monetary/Non monetary	Temporal	Current Rate
Balance Sheet
Cash	€ 2,100
Inventory (current Value = €1,800)	€ 1,500
Net fixed assets	€ 3,000	______	______	______	______
Total Assets	€ 6,600
Current liabilities	€ 1,200
Long-term debt	€ 1,800
Common stock	€ 2,700
Retained earnings	€ 900
CTA	______	______	______	______	______
Total L&E	€ 6,600
Income Statement
Sales Revenue	€ 10,000
COGS	€ 7,500
Depreciation	€ 1,000
NOI	€ 1,500	______	______	______	______
Tax(40%)	€ 600
Profit after tax	€ 900	______	______	______	______
Foreign Exchange gain (loss)
Net income	€ 900	______	______	______	______
Dividends	€ 0
Addition to Retained Earnings	€ 900

Exam 10: Management of Translation Exposure

When using the current/noncurrent method,current assets are defined as

The underlying principle of the current rate method is

The source of translation exposure

Under the current/noncurrent method

Which of the following are true statements?

A highly inflationary economy is defined in FASB 52 as

A translation exposure report shows,for each account that is included in the consolidated balance sheet,

With regard to translation exposure versus operating exposure

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

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

Under which accounting method are most income statement accounts translated at the average exchange rate for the period?

With regard to research on the stock price reaction to mandated accounting changes,such as FASB 52,

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

When exchange rates change

Under which method does the gain or loss due to translation adjustment not affect reported cash flows,as it does with the other three translation methods?

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters