1 Translation exposure refers to:
a) accounting exposure
b) the effect that an unanticipated change in exchange rates will have on the consolidated
financial reports of an MNC
c) the change in the value of a foreign subsidiaries assets and liabilities denominated in a
foreign currency, as a result of exchange rate change fluctuations, when viewed from the
perspective of the parent firm
d) all of the above
Answer: d)
2 The recognized methods for consolidating the financial reports of an MNC are:
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
Answer: c)
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3 How many method of foreign currency translation have been used in recent years? (U.S.
GAAP.)
a) One
b) Two
c) Three
d) Four
4 The difference between accounting exposure and translation exposure
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
Answer: b)
5 When exchange rates change
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
Answer: B
6 The generally accepted method for consolidating the financial reports of an MNC from the
1930s to 1975 was:
a) Current/noncurrent method
b) Monetary/nonmonetary method
c) Temporal method
d) Current rate method
Answer: a)
7 When using the current/noncurrent method, current assets are defined as
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
8 When using the current/noncurrent method,
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
9 The underlying principle of the current/noncurrent method is
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
10 Under the current/noncurrent method
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)
11 The underlying principle of the monetary/nonmonetary method is
12 In comparison to the current/noncurrent method, the monetary/nonmonetary method
a) Differs substantially with regard to the treatment of inventory.
b) Classifies accounts on the basis of similarity of attributes rather than the similarity of
maturities.
c) a) and b)
13 Using the temporal method, monetary accounts such as cash
a) Are not translated
b) Are translated at the average exchange rate prevailing over the reporting period
c) Are translated at the current forward exchange rate
d) Are translated at the current spot exchange rate
14 The underlying principle of the temporal method is
15 Since fixed assets and inventory are usually carried at historical costs,
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
c) The temporal method and the current/noncurrent methods will typically provide
the same translation.
16 The simplest of all translation methods to apply is:
17 Under the current rate method,
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.
18 Which of the following is a translation method where the gain or loss due to translation
adjustment does not affect reported cash flows?
a) current/noncurrent method
b) current rate method
c) current/future method
d) short/long term method
19 The underlying principle of the current rate method is
20 Which of the following is a translation method where a “plug equity account called cumulative
translation adjustment is used?
21. FASB 8 is essentially the:
22. FASB 8
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
23 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:
Exposed assets ¥700,000,000
Exposed liabilities ¥500,000,000
Ignoring transaction exposure in the yen, the translation exposure will indicate a possible
need for a “balance sheet hedge” of:
a) ¥200,000,000 more liabilities denominated in yen
b) ¥200,000,000 less assets denominated in yen
c) a) or b)
d) none of the above
Financial Accounting Standards Board (FASB) Statements 8 and 52 relate to the translation
methods. The following outlines the objectives and descriptions of the two statements.
(i)- measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting principles
(ii)- is essentially the temporal method of translation (with some subtle differences)
(iii)- provide information that is generally compatible with the expected economic effects
of a rate change on an enterprise’s cash flows and equity
(iv)- reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in
conformity with U.S. generally accepted accounting principles
25 Which of the above statements pertain to FASB 8?
a) (i)
b) (i) and (ii)
c) (iii) and (iv)
d) (i), (ii), and (iii)
26 Which of the above statements pertain to FASB 52?
27 The International Accounting Standards Committee
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
28 In what year were U.S. MNCs mandated to implement FASB 52?
a) 1952
b) 1962
c) 1972
d) 1982
29 The “functional currency” is defined in FASB 52 as:
a) the currency of the primary economic environment in which the entity operates
b) the currency in which the MNC prepares its consolidated financial statements
c) a currency that is not the parent firm’s home country currency
d) b) and c)
30 The “reporting currency” is defined in FASB 52 as:
d) a) and c)
31 The stated objectives of FASB 52 are:
a) To provide information that is generally compatible with the expected economic effects of
a rate change on an enterprise’s cash flows and equity.
b) To reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with U.S. generally accepted accounting principles.
32 The actual translation process prescribed by FASB 52 is
a) A two-stage process
b) A twelve step program
c) A five-step process
d) None of the above.
33 When determining the functional currency
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 function currency should be
the home currency.
34 Salient economic factors for determining the functional currency include:
a) Cash flow indicators
b) Sales price indicators
c) Sales Market indicators
35 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:
a) £200,000
b) $201,493
c) $298,507
36 The impact of financing in determining the functional currency
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.
37 If a foreign entity is only a shell company for carrying accounts that could be carried on the
parent’s books,
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
38 A highly inflationary economy is define in FASB 52 as:
a) One that has cumulative inflation of approximately 100 percent or more over a 3-year
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
39 In highly inflationary economies, FASB 52 requires that the foreign entities financial statement
be remeasured from the local currency “as if the functional currency were the reporting
currency”. The purpose of this requirement is
a) To prevent large important balance sheet accounts, carried at historical values, from
having insignificant values once translated into the reporting currency at the current rate.
b) To prevent games playing in the accounting books.
c) To prevent having to restate the books at a later date.
40 Which of the following are true?
a) Some items that are a source of transaction exposure are also a source of translation
exposure.
b) Some items that are a source of transaction exposure are NOT also a source of translation
exposure
c) Both a) and b) are correct
41 Generally speaking,
a) It is not possible to hedge both translation exposure and transaction exposure
simultaneously.
b) If a firm can hedge translation exposure then transaction exposure will be simultaneously
hedged.
c) If a firm can hedge transaction exposure then translation exposure will be simultaneously
hedged
42 Translation exposure,
a) Is not entity specific, rather it is currency specific.
b) Is not currency specific, rather it is entity specific.
c) Involves restatement from Italian to French
43 The source of translation exposure
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.
44 A balance sheet hedge seeks to
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
45 A derivatives hedge that seeks to eliminate translation exposure
a) Eliminate any mismatch of the rate of change in net assets and the rate of change in net
liabilities denominated in the same currency.
b) Really involves speculation about foreign exchange rate changes.
c) By simultaneously going long and short in currency futures contracts.
46 Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in
Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need
for a “derivatives hedge” of:
a) Short position in ¥200,000,000 currency futures
b) Long position in ¥200,000,000 currency futures
Answer: d).
47 With regard to translation exposure versus operating exposure
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.
Answer: c).
48 With regard to research on the stock price reaction to mandated accounting changes such as
FASB 52
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.
49 Which of the following 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) a) and b) are both true
50 With regard to foreign currency translation methods used by foreign MNCs
a) Foreign currency translation methods are generally only used by U.S. based MNCs since
foreign firms have a built in hedge by being foreign.
b) Are generally the same methods used by U.S.-based firms.
c) Are exactly the same methods used by U.S.-based firms since GAAP is GAAP
d) None of the above are true statements.
Answer d)
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