Eun8e chapter 10 tb answerkey PDF

Preview

Summary

test bank...

Description

International Financial Management, 8e (Eun) Chapter 10 Management of Translation Exposure 1) 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. Answer: TRUE Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 2) 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 options Answer: D Topic: Translation Methods Accessibility: Keyboard Navigation 3) 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 economic/noneconomic method. Answer: C Topic: Translation Methods Accessibility: Keyboard Navigation

1 Copyright © 2018 McGraw-Hill

4) How many methods of foreign currency translation have been used in recent years? (U.S. GAAP.) A) One B) Two C) Three D) Four Answer: D Topic: Translation Methods Accessibility: Keyboard Navigation 5) Translation exposure, also frequently called accounting exposure, refers to the effect that an unanticipated change in exchange rates will have on the A) choice of accounting methodology. B) consolidated financial reports of a MNC. C) firms competitive position. D) cash flows realized from foreign operations. Answer: B Topic: Translation Methods Accessibility: Keyboard Navigation 6) When exchange rates change, the value of a foreign subsidiary's assets and liabilities that are denominated in a foreign currency change A) when they are viewed from the perspective of the subsidiary firm. B) when they are viewed from the perspective of the parent firm. C) but this is only of material concern if the parent firm is liquidating the subsidiary in a bankruptcy and is forced to realize the value of the assets and liabilities at the current exchange rate. D) none of the options Answer: B Topic: Translation Methods Accessibility: Keyboard Navigation 7) The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options Answer: A Topic: Translation Methods Accessibility: Keyboard Navigation

2 Copyright © 2018 McGraw-Hill

8) The management of translation exposure is best described as 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. Answer: A Topic: Translation Methods Accessibility: Keyboard Navigation 9) The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options Answer: B Topic: Translation Methods Accessibility: Keyboard Navigation 10) The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options Answer: C Topic: Translation Methods Accessibility: Keyboard Navigation

3 Copyright © 2018 McGraw-Hill

11) Which of the following is true? A) The competitive effect is defined as the impact that a currency depreciation may have on the operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace. B) The conversion effect is defined as a given accounting cash value in a foreign currency will be converted into a lower dollar amount after currency depreciation. C) The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. D) none of the options Answer: A Topic: Translation Methods Accessibility: Keyboard Navigation 12) What does it mean to have redenominated an asset in terms of the dollar? 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 options Answer: A Topic: Translation Methods Accessibility: Keyboard Navigation 13) The authoritative body in the United States that specifies accounting policy for U.S. business firms and certified public accounting firms. A) The Federal Accounting Standards Board (FASB). B) The International Accounting Standards Board (IASB). C) The Financial Accounting Standards Board (FASB). D) The Securities and Exchange Commission (SEC). Answer: C Topic: Translation Methods Accessibility: Keyboard Navigation 14) The difference between accounting exposure and translation exposure is that 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 Topic: Translation Methods Accessibility: Keyboard Navigation

4 Copyright © 2018 McGraw-Hill

15) 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 options Answer: B Topic: Translation Methods Accessibility: Keyboard Navigation 16) Translation exposure measures A) the effect that an anticipated change in exchange rates will have on the consolidated financial reports of an MNC. B) economic exposure. 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 options Answer: C Topic: Translation Methods Accessibility: Keyboard Navigation 17) The extent to which the value of the firm would be affected by expected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options Answer: D Topic: Translation Methods Accessibility: Keyboard Navigation 18) The current/noncurrent method of foreign currency translation was generally accepted in the United States from the 1930s until 1975, when A) FASB 2 became effective. B) FASB 4 became effective. C) FASB 6 became effective. D) FASB 8 became effective. Answer: D Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 19) The underlying principle of the current/noncurrent method is that assets and liabilities should 5 Copyright © 2018 McGraw-Hill

be translated based on their maturity. 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. Noncurrent 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. Noncurrent 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 options Answer: B Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 20) The generally accepted method for consolidating the financial reports of an MNC from the 1930s to 1975 was the A) current/noncurrent method. B) monetary/nonmonetary method. C) temporal method. D) current rate method. Answer: A Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 21) 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) a foreign subsidiary with current assets in excess of current liabilities will cause a translation loss (gain) if the local currency appreciates (depreciates), and a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss) if the local currency depreciates (appreciates). Answer: A Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation

6 Copyright © 2018 McGraw-Hill

22) 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. D) none of the options Answer: B Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 23) 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 options Answer: D Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 24) Which of the following statements is false? A) Most income statement items under the current/noncurrent method are translated at the average exchange rate for the accounting period. B) Under the current/noncurrent method, revenue and expense items that are associated with current assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item. C) Under the current/noncurrent method, revenue and expense items that are associated with noncurrent assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item. D) Depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items. Answer: B Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation

7 Copyright © 2018 McGraw-Hill

25) 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. Answer: A Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 26) The underlying principle of the current/noncurrent method is 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 (CTA), is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method. Answer: A Topic: Current/Noncurrent Method Accessibility: Keyboard Navigation 27) The underlying principle of the monetary/nonmonetary 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. Answer: B Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation

8 Copyright © 2018 McGraw-Hill

28) According to the monetary/nonmonetary method, monetary balance sheet accounts include A) for example, cash, marketable securities, accounts receivable, notes payable, accounts payable of a foreign subsidiary. B) for example, stockholders' equity and long term debt. C) for example, inventory paid for in cash, but not working capital. D) COGs, Sales, Net Income. Answer: A Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 29) The underlying philosophy of the monetary/nonmonetary method is that A) monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation is independent of exchange rate changes. 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) assets and liabilities should be translated based on their maturity. D) most income statement items are translated at the average exchange rate for the period. Depreciation and cost of goods sold, however, are translated at historical rates if the associated balance sheet accounts are carried at historical costs. Answer: B Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 30) 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) differs substantially with regard to the treatment of inventory and classifies accounts on the basis of similarity of attributes rather than the similarity of maturities. D) none of the options Answer: C Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 31) Under which accounting method are most income statement accounts translated at the average exchange rate for the period? A) Current/noncurrent method B) Monetary/nonmonetary method C) Temporal method D) Current rate method Answer: B Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 9 Copyright © 2018 McGraw-Hill

32) The underlying principle of the monetary/nonmonetary method is 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 (CTA), is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method. Answer: B Topic: Monetary/Nonmonetary Method Accessibility: Keyboard Navigation 33) 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. Answer: D Topic: Temporal Method Accessibility: Keyboard Navigation 34) The underlying principle of the temporal 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. Answer: C Topic: Temporal Method Accessibility: Keyboard Navigation

10 Copyright © 2018 McGraw-Hill

35) 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 provide the same translation. C) the temporal method and the current/noncurrent methods will typically provide the same translation. D) none of the options Answer: A Topic: Temporal Method Accessibility: Keyboard Navigation 36) The underlying principle of the temporal method is 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 (CTA), is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method. Answer: C Topic: Temporal Method Accessibility: Keyboard Navigation 37) The underlying principle of the current rate method is 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 ...