Question 1

Under the current rate method,

Accepted Answer

A) income statement items are to be translated at the exchange rate at the dates the items are recognized. 
B) since a is generally impractical, an appropriately weighted average exchange rate for the period may be used for translation. 
C) all balance sheet accounts are translated at the current exchange rate, except stockholder equity. 
D) all of the above 
A) income statement items are to be translated at the exchange rate at the dates the items are recognized. 
B) since a is generally impractical, an appropriately weighted average exchange rate for the period may be used for translation. 
C) all balance sheet accounts are translated at the current exchange rate, except stockholder equity. 
D) all of the above D

Question 2

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 C

Question 3

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

Question 4

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 5

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 above 
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 above

Question 6

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 7

The underlying principle of the monetary/nonmonetary 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 stockholder 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 stockholder equity.

Question 8

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:   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) both a or b 
D) none of the above 
A) ¥200,000,000 more liabilities denominated in yen. 
B) ¥200,000,000 less assets denominated in yen. 
C) both a or b 
D) none of the above

Question 9

Since fixed assets and inventory are usually carried at historical costs,

Accepted Answer

A) the temporal method and the monetary/nonmonetary methods will typically provide the same translation. 
B) the current rate method and the monetary/nonmonetary methods will typically provide the same translation. 
C) the temporal method and the current/noncurrent methods will typically provide the same translation. 
D) none of the above 
A) the temporal method and the monetary/nonmonetary methods will typically provide the same translation. 
B) the current rate method and the monetary/nonmonetary methods will typically provide the same translation. 
C) the temporal method and the current/noncurrent methods will typically provide the same translation. 
D) none of the above

Question 10

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

A) True 
 B)False

Question 11

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 12

In implementing FASB 52,

Accepted Answer

A) the functional currency of the foreign entity must be translated into the reporting currency in which the consolidated statements are reported. 
B) the local currency of a foreign entity may not always be its functional currency. If it is not, the temporal method of translation is used to remeasure the foreign entity's books into the functional currency. 
C) the current rate method is used to translate from the functional currency to the reporting currency. 
D) in some cases, a foreign entity's functional currency may be the same as the reporting currency, in which case translation is not necessary. 
E) All of the above are true 
A) the functional currency of the foreign entity must be translated into the reporting currency in which the consolidated statements are reported. 
B) the local currency of a foreign entity may not always be its functional currency. If it is not, the temporal method of translation is used to remeasure the foreign entity's books into the functional currency. 
C) the current rate method is used to translate from the functional currency to the reporting currency. 
D) in some cases, a foreign entity's functional currency may be the same as the reporting currency, in which case translation is not necessary. 
E) All of the above are true

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. Non-current 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. Non-current 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 above 
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. Non-current 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. Non-current 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 above

Question 14

When using the current/noncurrent method,

Accepted Answer

A) most income statement items are translated at the average exchange rate for the accounting period. 
B) revenue and expense items that are associated with noncurrent assets or liabilities are translated at the historical rate that applies to the applicable balance sheet items. 
C) depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items. 
D) all of the above 
A) most income statement items are translated at the average exchange rate for the accounting period. 
B) revenue and expense items that are associated with noncurrent assets or liabilities are translated at the historical rate that applies to the applicable balance sheet items. 
C) depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items. 
D) all of the above

Question 15

The extent to which the value of the firm would be affected by 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 16

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 17

The impact of financing in determining the functional currency

Accepted Answer

A) financing does not impact the choice of functional currency due to the integrated nature of capital markets. 
B) if the financing of the foreign entity is primarily denominated in the foreign currency and the debt service obligations are normally handled by the foreign entity, the functional currency is the foreign currency. 
C) if the financing of the foreign entity is primarily from the parent, with debt service obligations are normally handled by the parent, the functional currency is the home currency. 
D) both b and c 
A) financing does not impact the choice of functional currency due to the integrated nature of capital markets. 
B) if the financing of the foreign entity is primarily denominated in the foreign currency and the debt service obligations are normally handled by the foreign entity, the functional currency is the foreign currency. 
C) if the financing of the foreign entity is primarily from the parent, with debt service obligations are normally handled by the parent, the functional currency is the home currency. 
D) both b and c

Question 18

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 stockholder 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 stockholder equity.

Question 19

Under FASB 52, when a net translation exposure exists,

Accepted Answer

A) a derivatives hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
B) a money market hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
C) a cumulative translation adjustment account is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
D) none of the above 
A) a derivatives hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
B) a money market hedge is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
C) a cumulative translation adjustment account is necessary to bring balance to the consolidated balance sheet after an exchange rate change. 
D) none of the above

Question 20

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

Accepted Answer

A) You have undertaken a hedging strategy that gives the asset a constant dollar value. 
B) Multiply the foreign currency value of the asset by the spot exchange rate. 
C) Undertaken accounting changes to eliminate translation exposure. 
D) None of the above 
A) You have undertaken a hedging strategy that gives the asset a constant dollar value. 
B) Multiply the foreign currency value of the asset by the spot exchange rate. 
C) Undertaken accounting changes to eliminate translation exposure. 
D) None of the above

Under the current rate method,

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

The underlying principle of the current rate method is

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

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

The underlying principle of the monetary/nonmonetary method is

Since fixed assets and inventory are usually carried at historical costs,

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.

FASB 8

In implementing FASB 52,

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

When using the current/noncurrent method,

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

The management of translation exposure is best described as

The impact of financing in determining the functional currency

The underlying principle of the current rate method is

Under FASB 52, when a net translation exposure exists,

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

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

Filters

Exam 10: Management of Translation Exposure

Under the current rate method,

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

The underlying principle of the current rate method is

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

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

The underlying principle of the monetary/nonmonetary method is

Since fixed assets and inventory are usually carried at historical costs,

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.

FASB 8

In implementing FASB 52,

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

When using the current/noncurrent method,

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

The management of translation exposure is best described as

The impact of financing in determining the functional currency

The underlying principle of the current rate method is

Under FASB 52, when a net translation exposure exists,

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

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

Filters