Question 1

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

Accepted Answer

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

Question 2

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

Question 3

FASB 52 requires

Accepted Answer

A) The current rate method of translation in some circumstances and the temporal method in others. 
B) The current rate method of translation in some circumstances and the noncurrent method in others. 
C) The monetary rate method of translation in some circumstances and the temporal method in others. 
D) The current rate method of translation in some circumstances and the monetary method in others. 
A) The current rate method of translation in some circumstances and the temporal method in others. 
B) The current rate method of translation in some circumstances and the noncurrent method in others. 
C) The monetary rate method of translation in some circumstances and the temporal method in others. 
D) The current rate method of translation in some circumstances and the monetary method in others.

Question 4

When determining the functional currency,

Accepted Answer

A) if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency. 
B) if there is an active local market for the foreign entity's products the local currency should be the functional currency. 
C) if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency. 
D) all of the above 
A) if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency. 
B) if there is an active local market for the foreign entity's products the local currency should be the functional currency. 
C) if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency. 
D) all of the above

Question 5

The underlying principle of the current rate method is

Accepted Answer

A) assets and liabilities should be translated based on their maturity. 
B) monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. 
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 stockholders' equity. 
A) assets and liabilities should be translated based on their maturity. 
B) monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded. 
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 stockholders' equity.

Question 6

The management of translation exposure is best described as

Accepted Answer

A) selecting a mechanical means for handling the consolidation process for MNCs that logically deals with exchange rate changes. 
B) selecting a mechanical means for handling the consolidation process for MNCs that makes this quarter's accounting numbers as attractive as possible. 
C) selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as LIFO on the income statement and FIFO on the balance sheet. 
D) selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as FIFO on the income statement and LIFO on the balance sheet. 
A) selecting a mechanical means for handling the consolidation process for MNCs that logically deals with exchange rate changes. 
B) selecting a mechanical means for handling the consolidation process for MNCs that makes this quarter's accounting numbers as attractive as possible. 
C) selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as LIFO on the income statement and FIFO on the balance sheet. 
D) selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as FIFO on the income statement and LIFO on the balance sheet.

Question 7

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 above are true statements 
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 above are true statements

Question 8

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 9

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

Accepted Answer

A) FASB 2 became effective. 
B) FASB 4 became effective. 
C) FASB 6 became effective. 
D) FASB 8 became effective. 
A) FASB 2 became effective. 
B) FASB 4 became effective. 
C) FASB 6 became effective. 
D) FASB 8 became effective.

Question 10

A balance sheet hedge seeks to

Accepted Answer

A) eliminate any mismatch of net assets and net liabilities denominated in the same currency. 
B) transfer accounting exposure to transaction exposure. 
C) create cumulative translation adjustment. 
D) none of the above 
A) eliminate any mismatch of net assets and net liabilities denominated in the same currency. 
B) transfer accounting exposure to transaction exposure. 
C) create cumulative translation adjustment. 
D) none of the above

Question 11

The difference between accounting exposure and translation exposure

Accepted Answer

A) translation is about going from one language to another, accounting is just about the numbers. 
B) accounting exposure and translation exposure are the same thing. 
C) hedging one always involves increasing the other. 
D) hedging one might involve increasing the other. 
A) translation is about going from one language to another, accounting is just about the numbers. 
B) accounting exposure and translation exposure are the same thing. 
C) hedging one always involves increasing the other. 
D) hedging one might involve increasing the other.

Question 12

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 above 
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 above

Question 13

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

Accepted Answer

A) short/long term method, current/future method, flexible/inflexible method, and economic/noneconomic method. 
B) current/noncurrent method, monetary/nonmonetary method, short/long term method, and current/future method. 
C) current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate method. 
D) temporal method, current rate method, flexible/inflexible method, and economic/noneconomic method. 
A) short/long term method, current/future method, flexible/inflexible method, and economic/noneconomic method. 
B) current/noncurrent method, monetary/nonmonetary method, short/long term method, and current/future method. 
C) current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate method. 
D) temporal method, current rate method, flexible/inflexible method, and economic/noneconomic method.

Question 14

The International Accounting Standards Committee

Accepted Answer

A) is now known as The International Accounting Standards Board. 
B) is charged with accounting standards at the International House of Pancakes. 
C) includes many convicted felons among its members. 
D) all of the above 
A) is now known as The International Accounting Standards Board. 
B) is charged with accounting standards at the International House of Pancakes. 
C) includes many convicted felons among its members. 
D) all of the above

Question 15

FASB 8

Accepted Answer

A) required taking foreign exchange gains or losses through the income statement. 
B) caused reported earnings to fluctuate substantially from year to year. 
C) ran into acceptance problems from the accounting profession and MNCs. 
D) all of the above 
A) required taking foreign exchange gains or losses through the income statement. 
B) caused reported earnings to fluctuate substantially from year to year. 
C) ran into acceptance problems from the accounting profession and MNCs. 
D) all of the above

Question 16

Which of the following is a translation method where a "plug" equity account called cumulative translation adjustment is used?

Accepted Answer

A) Current/noncurrent method 
B) Current rate method 
C) Current/future method 
D) Short/long term method 
A) Current/noncurrent method 
B) Current rate method 
C) Current/future method 
D) Short/long term method

Question 17

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 above 
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 above

Question 18

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) both b and c 
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) both b and c

Question 19

If a foreign entity is only a shell company for carrying accounts that could be carried on the parent's books,

Accepted Answer

A) the functional currency would generally be the parent's currency. 
B) the functional currency would generally be the local currency. 
C) there is no reason to hedge transaction exposure. 
D) none of the above 
A) the functional currency would generally be the parent's currency. 
B) the functional currency would generally be the local currency. 
C) there is no reason to hedge transaction exposure. 
D) none of the above

Question 20

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

Accepted Answer

A) The Federal Accounting Standards Board (FAS
B) . 
B) The International Accounting Standards Board (IAS
B) . 
C) The Financial Accounting Standards Board (FAS
B) . 
D) The Securities and Exchange Commission (SE
C)  
A) The Federal Accounting Standards Board (FAS
B) . 
B) The International Accounting Standards Board (IAS
B) . 
C) The Financial Accounting Standards Board (FAS
B) . 
D) The Securities and Exchange Commission (SE
C)

Exam 10: Management of Translation Exposure

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

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

FASB 52 requires

When determining the functional currency,

The underlying principle of the current rate method is

The management of translation exposure is best described as

Which of the following are true statements?

The underlying principle of the current rate method is

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

A balance sheet hedge seeks to

The difference between accounting exposure and translation exposure

When exchange rates change

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

The International Accounting Standards Committee

FASB 8

Which of the following is a translation method where a "plug" equity account called cumulative translation adjustment is used?

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

Under the current/noncurrent method

If a foreign entity is only a shell company for carrying accounts that could be carried on the parent's books,

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

Globalization and the Multinational Firm

International Monetary System

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

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