Exam 13: Translation Exposure

Historical exchange rates may be used for ________, while current exchange rates may be used for ________.

Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity.

________ occur as a result of changes in the value of currency whereas ________ occur as a result of ongoing business activities.

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

If the European subsidiary of a U.S. firm has net exposed assets of €500,000, and the euro drops in value from $1.40/euro to $1.30/€ the U.S. firm has a translation ________.

Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

If the European subsidiary of a U.S. firm has net exposed assets of €500,000, and the euro increases in value from $1.30/€ to $1.35/€ the U.S. firm has a translation ________.

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

The main technique to minimize translation exposure is called a/an ________ hedge.

The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s)of each.

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

According to your authors, the main purpose of translation is

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

The ________ determines accounting policy for U.S. firms.

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not.

Translation exposure measures

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

________ 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.

Generally speaking, translation methods by country define the translation process as a function of what two factors?