Question 1

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

Accepted Answer

A)  Securities and Exchange Commission (SE
C)  
B)  Federal Reserve System (Fed) 
C)  Financial Accounting Standards Board (FAS
B)  
D)  General Agreement on Tariffs and Trade (GATT) 
A)  Securities and Exchange Commission (SE
C)  
B)  Federal Reserve System (Fed) 
C)  Financial Accounting Standards Board (FAS
B)  
D)  General Agreement on Tariffs and Trade (GATT) C

Question 2

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.

Accepted Answer

A)  domestic; integrated 
B)  self-sustaining; domestic 
C)  integrated; self-sustaining 
D)  self-sustaining; integrated 
A)  domestic; integrated 
B)  self-sustaining; domestic 
C)  integrated; self-sustaining 
D)  self-sustaining; integrated C

Question 3

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.

Accepted Answer

The earnings of the subsidiary,once remeasured into the home currency of the parent company,contributes directly to the consolidated income of the firm.An exchange rate change results in fluctuations in the value of the subsidiary's income to the global corporation.If the individual subsidiary in question constitutes a relatively significant or material component of consolidated income,the multinational firm's reported income (and earnings per share,EPS)may be seen to change purely as a result of translation.
Changes in the reporting currency value of the net assets of the subsidiary are passed into consolidated income or equity.If the foreign subsidiary was designated as "dollar functional," remeasurement results in a transaction exposure,which is passed through current consolidated income.If the foreign subsidiary was designated as "local currency functional," translation results in a translation adjustment and is reported in consolidated equity as a translation adjustment.It does not alter reported consolidated net income.

Question 4

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

If the British subsidiary of a European firm has net exposed assets of £125,000,and the pound increases in value from €1.40/£ to €1.44/£,the European firm has a translation:

Accepted Answer

A)  gain of €5,000. 
B)  loss of €5,000. 
C)  gain of £5,000. 
D)  loss of £5,000. 
A)  gain of €5,000. 
B)  loss of €5,000. 
C)  gain of £5,000. 
D)  loss of £5,000.

Question 7

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

Accepted Answer

A balance sheet hedge attempts to equali

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

Accepted Answer

A) True 
 B)False

Question 10

If the European subsidiary of a U.S.firm has net exposed assets of €200,000,and the euro increases in value from $1.22/€ to $1.26/€ the U.S.firm has a translation:

Accepted Answer

A)  gain of $8,000. 
B)  loss of $8,000. 
C)  gain of $252,000. 
D)  loss of €252,000. 
A)  gain of $8,000. 
B)  loss of $8,000. 
C)  gain of $252,000. 
D)  loss of €252,000.

Question 11

One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be liquidated,so that value of its Cumulative Translation Adjustment (CTA)would be realized.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A)  maximize translation; no transaction 
B)  eliminate translation; transaction 
C)  maximize transaction; no translation 
D)  eliminate transaction; translation 
A)  maximize translation; no transaction 
B)  eliminate translation; transaction 
C)  maximize transaction; no translation 
D)  eliminate transaction; translation

Question 13

A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

Accepted Answer

A)  self-sustaining foreign 
B)  integrated foreign entity 
C)  foreign 
D)  none of the above 
A)  self-sustaining foreign 
B)  integrated foreign entity 
C)  foreign 
D)  none of the above

Question 14

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

Accepted Answer

A)  local 
B)  integrated 
C)  notational dollar 
D)  functional 
A)  local 
B)  integrated 
C)  notational dollar 
D)  functional

Question 15

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:

Accepted Answer

A)  10% foreign exchange loss on the U.S. dollar accounts receivable. 
B)  10% foreign exchange gain on the U.S. dollar accounts receivable. 
C)  Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded. 
D)  Any gain or loss will be recorded only by the parent firm. 
A)  10% foreign exchange loss on the U.S. dollar accounts receivable. 
B)  10% foreign exchange gain on the U.S. dollar accounts receivable. 
C)  Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded. 
D)  Any gain or loss will be recorded only by the parent firm.

Question 16

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then:

Accepted Answer

A)  the net exposed position is called monetary balance. 
B)  the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. 
C)  Both A and B are true. 
D)  none of the above 
A)  the net exposed position is called monetary balance. 
B)  the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. 
C)  Both A and B are true. 
D)  none of the above

Question 17

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

Accepted Answer

A)  fixed assets and current assets; income and expense items 
B)  equity accounts and fixed assets; current assets and liabilities 
C)  current assets and liabilities; equity accounts and fixed assets 
D)  equity accounts and current liabilities; current assets and fixed assets 
A)  fixed assets and current assets; income and expense items 
B)  equity accounts and fixed assets; current assets and liabilities 
C)  current assets and liabilities; equity accounts and fixed assets 
D)  equity accounts and current liabilities; current assets and fixed assets

Question 18

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

Accepted Answer

A)  Translation; transaction 
B)  Transaction; translation 
C)  Translation; operating 
D)  none of the above 
A)  Translation; transaction 
B)  Transaction; translation 
C)  Translation; operating 
D)  none of the above

Question 19

Under U.S.accounting and translation practices,use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."

Accepted Answer

A) True 
 B)False

Question 20

The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.

Accepted Answer

A)  monetary; current rate 
B)  temporal; current rate 
C)  temporal; monetary 
D)  current rate; temporal 
A)  monetary; current rate 
B)  temporal; current rate 
C)  temporal; monetary 
D)  current rate; temporal

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

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

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.

If the British subsidiary of a European firm has net exposed assets of £125,000,and the pound increases in value from €1.40/£ to €1.44/£,the European firm has a translation:

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

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

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

If the European subsidiary of a U.S.firm has net exposed assets of €200,000,and the euro increases in value from $1.22/€ to $1.26/€ the U.S.firm has a translation:

One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be liquidated,so that value of its Cumulative Translation Adjustment (CTA)would be realized.

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/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

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

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then:

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

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

Under U.S.accounting and translation practices,use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 11: Translation Exposure

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

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

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.

If the British subsidiary of a European firm has net exposed assets of £125,000,and the pound increases in value from €1.40/£ to €1.44/£,the European firm has a translation:

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

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

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

If the European subsidiary of a U.S.firm has net exposed assets of €200,000,and the euro increases in value from $1.22/€ to $1.26/€ the U.S.firm has a translation:

One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be liquidated,so that value of its Cumulative Translation Adjustment (CTA)would be realized.

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/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

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

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then:

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

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

Under U.S.accounting and translation practices,use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

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.

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

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