Copyright?2023PearsonEducation,Inc.

MultinationalBusinessFinance,16e(Eiteman/Stonehill/Moffett)

Chapter11TranslationExposure

11.1OverviewofTranslation

1)Translationexposuremayalsobecalled________exposure.

A)transaction

B)operating

C)accounting

D)currency

Answer:C

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

2)________exposureisthepotentialforanincreaseordecreaseintheparentcompany'snetworthandreportednetincomecausedbyachangeinexchangeratessincethelasttransaction.

A)Transaction

B)Operating

C)Currency

D)Translation

Answer:D

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

3)Translationexposuremeasures:

A)changesinthevalueofoutstandingfinancialobligationsincurredpriortoachangeinexchangerates.

B)thepotentialforanincreaseordecreaseintheparentcompany'snetworthandreportednetincomecausedbyachangeinexchangeratessincethelastconsolidationofinternationaloperations.

C)anunexpectedchangeinexchangeratesimpactonshortrunexpectedcashflows.

D)noneoftheabove

Answer:B

Diff:2

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

4)Accordingtoyourauthors,themainpurposeoftranslationis:

A)toprepareconsolidatedfinancialstatements.

B)tohelpmanagementassesstheperformanceofforeignsubsidiaries.

C)toactasaninterpreterformanagerswithoutforeignlanguageskills.

D)noneoftheabove

Answer:A

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

5)Generallyspeaking,translationmethodsbycountrydefinethetranslationprocessasafunctionofwhattwofactors?

A)size;location

B)afirm'sfunctionalcurrency;location

C)location;foreignsubsidiaryindependence

D)foreignsubsidiaryindependence;afirm'sfunctionalcurrency

Answer:D

Diff:2

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

6)Aforeignsubsidiary's________currencyisthecurrencyusedinthefirm'sday-to-dayoperations.

A)local

B)integrated

C)notationaldollar

D)functional

Answer:D

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

7)Itispossibletousedifferentexchangeratesfordifferentlineitemsonafinancialstatement.

Answer:TRUE

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Conceptual

AACSB:Applicationofknowledge

8)Ifthesameexchangeratewereusedtoremeasureeverylineonafinancialstatement,thentherewouldbenoimbalancesfromremeasuring.

Answer:TRUE

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Conceptual

AACSB:Applicationofknowledge

9)Aforeignsubsidiary'sfunctionalcurrencyisthecurrencyoftheprimaryeconomicenvironmentinwhichthesubsidiaryoperatesandinwhichitgeneratescashflows.

Answer:TRUE

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Conceptual

AACSB:Applicationofknowledge

10)ItishighlyunusualforamultinationalfirmtohavebothintegratedforeignentitiesANDself-sustainingforeignentities.

Answer:FALSE

Diff:1

L.O.:11.1OverviewofTranslation

Skill:Recognition

AACSB:Applicationofknowledge

11)Mostcountriesspecifythetranslationmethodtobeusedbyaforeignsubsidiarybasedonitsbusinessoperationsorthefunctionalcurrency.ExplainbothsubsidiarycharacterizationcriteriaandtheoneadoptedintheUnitedStates.

Answer:Aforeignsubsidiary'sbusinesscanbecategorizedaseitheranintegratedforeignentityoraself-sustainingforeignentity.Anintegratedforeignentityisonethatoperatesasanextensionoftheparentcompany,withcashflowsandgeneralbusinesslinesthatarehighlyinterrelatedwiththoseoftheparent.Aself-sustainingforeignentityisonethatoperatesinthelocaleconomicenvironmentindependentoftheparentcompany.Thedifferentiationisimportanttothelogicoftranslation.Aforeignsubsidiaryshouldbevaluedprincipallyintermsofthecurrencythatisthebasisofitseconomicviability.Itisnotunusualforasinglecompanytohavebothtypesofforeignsubsidiaries,integratedandself-sustaining.

Aforeignsubsidiary'sfunctionalcurrencyisthecurrencyoftheprimaryeconomicenvironmentinwhichthesubsidiaryoperatesandinwhichitgeneratescashflows.Inotherwords,itisthedominantcurrencyusedbythatforeignsubsidiaryinitsday-to-dayoperations.Itisimportanttonotethatthegeographiclocationofaforeignsubsidiaryanditsfunctionalcurrencymaybedifferent.

TheUnitedStates,ratherthandistinguishingaforeignsubsidiaryaseitherintegratedorself-sustaining,requiresthatthefunctionalcurrencyofthesubsidiarybedetermined.Managementmustevaluatethenatureandpurposeofeachofitsindividualforeignsubsidiariestodeterminetheappropriatefunctionalcurrencyforeach.IfaforeignsubsidiaryofaU.S.-basedcompanyisdeterminedtohavetheU.S.dollarasitsfunctionalcurrency,itisessentiallyanextensionoftheparentcompany(equivalenttotheintegratedforeignentitydesignationusedbymostcountries).If,however,thefunctionalcurrencyoftheforeignsubsidiaryisdeterminedtobedifferentfromtheU.S.dollar,thesubsidiaryisconsideredaseparateentityfromtheparent(equivalenttotheself-sustainingentitydesignation).

Diff:2

L.O.:11.1OverviewofTranslation

Skill:Conceptual

AACSB:Applicationofknowledge

11.2TranslationMethods

1)Thetwobasicmethodsforthetranslationofforeignsubsidiaryfinancialstatementsarethe________methodandthe________method.

A)currentrate;temporal

B)temporal;propertiming

C)currentrate;futurerate

D)noneoftheabove

Answer:A

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

2)Gainsorlossescausedbytranslationadjustmentswhenusingthecurrentratemethodarereportedseparatelyonthe:

A)consolidatedstatementofcashflow.

B)consolidatedincomestatement.

C)consolidatedbalancesheet.

D)noneoftheabove

Answer:C

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

3)Thebasicadvantageofthe________methodofforeigncurrencytranslationisthatforeignnonmonetaryassetsarecarriedattheiroriginalcostintheparent'sconsolidatedstatementwhilethemostimportantadvantageofthe________methodisthatthegainorlossfromtranslationdoesnotpassthroughtheincomestatement.

A)monetary;currentrate

B)temporal;currentrate

C)temporal;monetary

D)currentrate;temporal

Answer:B

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

4)UndertheU.S.methodoftranslationprocedures,ifthefinancialstatementsoftheforeignsubsidiaryofaU.S.companyaremaintainedinU.S.dollars:

A)translationisaccomplishedthroughthecurrentratemethod.

B)translationisaccomplishedthroughthetemporalmethod.

C)translationisnotrequired.

D)thetranslationmethodtobeusedisnotobvious.

Answer:C

Diff:1

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

5)UndertheU.S.methodoftranslationprocedures,ifthefinancialstatementsoftheforeignsubsidiaryofaU.S.companyaremaintainedinthelocalcurrency,andthelocalcurrencyisthefunctionalcurrency,then:

A)thetranslationmethodtobeusedisnotobvious.

B)translationisaccomplishedthroughthetemporalmethod.

C)translationisnotrequired.

D)translationisaccomplishedthroughthecurrentratemethod.

Answer:D

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

6)UndertheU.S.methodoftranslationprocedures,ifthefinancialstatementsoftheforeignsubsidiaryofaU.S.companyaremaintainedinthelocalcurrency,andtheU.S.dollaristhefunctionalcurrency,then:

A)translationisnotrequired.

B)translationisaccomplishedthroughthecurrentratemethod.

C)translationisaccomplishedthroughthetemporalmethod.

D)noneoftheabove

Answer:C

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

7)UnderU.S.accountingandtranslationpractices,useofthecurrentratemethodistermed________whileuseofthetemporalmethodistermed________.

A)translation;thesame

B)translation;remeasurement

C)remeasurement;thesame

D)remeasurement;translation

Answer:B

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

8)WhichofthefollowingprimaryprinciplesofU.S.translationproceduresisNOTtrue?

A)IfthefinancialstatementsoftheforeignsubsidiaryofaU.S.companyaremaintainedinU.S.dollars,translationisnotrequired.

B)Ifthefinancialstatementsoftheforeignsubsidiaryaremaintainedinthelocalcurrencyandthelocalcurrencyisthefunctionalcurrency,theyaretranslatedbythetemporalmethod.

C)IfthefinancialstatementsoftheforeignsubsidiaryaremaintainedinthelocalcurrencyandtheU.S.dollaristhefunctionalcurrency,theyareremeasuredbythetemporalmethod.

D)Alloftheabovearetrue.

Answer:B

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

9)________occurasaresultofchangesinthevalueofcurrency,whereas________occurasaresultofongoingbusinessactivities.

A)Operatinggainsorlosses;translationgainsorlosses

B)Swaplosses;translationgainsorlosses

C)Translationgainsorlosses;operatinggainsorlosses

D)alloftheabove

Answer:C

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

10)Historicalexchangeratesmaybeusedfor________,whilecurrentexchangeratesmaybeusedfor________.

A)fixedassetsandcurrentassets;incomeandexpenseitems

B)equityaccountsandfixedassets;currentassetsandliabilities

C)currentassetsandliabilities;equityaccountsandfixedassets

D)equityaccountsandcurrentliabilities;currentassetsandfixedassets

Answer:B

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

11)Ifanimbalanceresultsfromtheaccountingmethodusedfortranslation,theimbalanceistakeneitherto________or________.

A)thebank;thepostoffice

B)depreciation;themarketforforeignexchangeswaps

C)currentincome;equityreserves

D)currentliabilities;equityreserves

Answer:C

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

12)A/An________subsidiaryisoneinwhichthefirmoperatesasanextensionoftheparentcompanywithcashflowshighlyinterrelatedwiththeparent.

A)self-sustainingforeign

B)integratedforeignentity

C)foreign

D)noneoftheabove

Answer:B

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

13)ConsidertwodifferentforeignsubsidiariesofGeorgia-PacificWoodProductsInc.ThefirstsubsidiarymillstreesinCanadaandshipsitsentireproducttotheGeorgia-PacificU.S.ThesecondsubsidiaryisalsoownedbytheparentfirmbutislocatedinJapanandretailstropicalhardwoodfurniturethatitbuysfrommanydifferentsources.Thefirstsubsidiaryislikelya/an________foreignentitywithmostofitscashflowsinU.S.dollars,andthesecondsubsidiaryismoreofa/an________foreignentity.

A)domestic;integrated

B)self-sustaining;domestic

C)integrated;self-sustaining

D)self-sustaining;integrated

Answer:C

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

14)The________determinesaccountingpolicyforU.S.firms.

A)SecuritiesandExchangeCommission(SEC)

B)FederalReserveSystem(Fed)

C)FinancialAccountingStandardsBoard(FASB)

D)GeneralAgreementonTariffsandTrade(GATT)

Answer:C

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

15)Exchangerateimbalancesthatarepassedthroughthebalancesheetaffectafirm'sreportedincome,butimbalancestransferredtotheincomestatementdonot.

Answer:FALSE

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

16)Thecurrentratemethodisthemostprevalentmethodtodayforthetranslationoffinancialstatements.

Answer:TRUE

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

17)Thetemporalratemethodisthemostprevalentmethodtodayforthetranslationoffinancialstatements.

Answer:FALSE

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

18)Thebiggestadvantageofthecurrentratemethodofreportingtranslationadjustmentsisthefactthatthegainorlossgoesdirectlytothereserveaccountontheconsolidatedbalancesheetanddoesnotpassthroughtheconsolidatedincomestatement.

Answer:TRUE

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

19)Underthetemporalratemethod,specificassetsandliabilitiesaretranslatedatexchangeratesconsistentwiththetimingoftheitem'screation.

Answer:TRUE

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

20)Thetemporalmethodofforeigncurrencytranslationgainsorlossesresultingfromremeasurementarecarrieddirectlytocurrentconsolidatedincomeandthusintroducesvolatilitytoconsolidatedearnings.

Answer:TRUE

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

21)Thecurrentratemethodandthetemporalmethodaretwobasicmethodsfortranslationthatareemployedworldwide.

Answer:TRUE

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

22)UnderU.S.accountingandtranslationpractices,useofthecurrentratemethodistermed"translation"whileuseofthetemporalmethodistermed"remeasurement."

Answer:TRUE

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

23)IfthefinancialstatementsoftheforeignsubsidiaryaremaintainedinthelocalcurrencyandtheU.S.dollaristhefunctionalcurrency,theyareremeasuredbythetemporalmethod.

Answer:TRUE

Diff:2

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

24)Translationgainsorlossescanbequitedifferentfromoperatinggainsorlossesnotonlyinmagnitudebutalsoinsign.

Answer:TRUE

Diff:1

L.O.:11.2TranslationMethods

Skill:Recognition

AACSB:Applicationofknowledge

25)Thetwomethodsforthetranslationofforeignsubsidiaryfinancialstatementsarethecurrentrateandtemporalmethods.Briefly,describehoweachofthesemethodstranslatestheforeignsubsidiaryfinancialstatementsintotheparentcompany'sconsolidatedstatements.Identifywheneachtechniqueshouldbeusedandthemajoradvantage(s)ofeach.

Answer:Thecurrentratemethodtranslatesalmostalllineitemsfromtheforeignsubsidiarytotheparentconsolidatedstatementsatthecurrentexchangerate.Thisisthemostcommonlyusedmethodintheworldtoday.Assetsandliabilitiesaretranslatedatcurrentexchangerateanditemsfoundontheincomestatementaretranslatedattheactualexchangerateonthedateoftransaction,orasanaverageoverthestatementperiodwhereappropriate.Equityaccountsaretranslatedathistoricalcosts.

Anygainsorlossescausedbytranslationadjustmentsaretypicallyplacedintoaspecialreserveaccount(suchasaCTA).Thus,gainsorlossesdonotgothroughtheincomestatementanddonotincreasethevolatilityofnetincome.Thisisperhapsthebiggestadvantagetousingthecurrentratemethod.

Bycontrast,thetemporalmethodassumesthatseveralindividualfinancialstatementitemsareperiodicallyrestatedtoreflecttheirmarketvalue.Thetemporalmethodtranslatesindividuallineitemsbasedonmonetary/nonmonetarycriteriawheremonetaryassetssuchascashandmarketablesecuritiesaretranslatedatcurrentexchangerates,butnonmonetaryassetssuchasfixedassetsaretranslatedathistoricalrates.Thegainsorlossesthatresultfromtranslationremeasurementarerecordedontheconsolidatedincomestatementandimpactuponthevolatilityofnetincome.Thetemporalmethodofusinghistoricalcostsmaybemoreconsistentwiththepracticeofcarryingdomesticitemsatcostonthefinancialstatements.

Diff:2

L.O.:11.2TranslationMethods

Skill:Conceptual

AACSB:Applicationofknowledge

11.3GanadoCorporation'sTranslationExposure

1)IftheEuropeansubsidiaryofaU.S.firmhasnetexposedassetsof€750,000,andtheeurodropsinvaluefrom$1.30/euroto$1.20/€,theU.S.firmhasatranslation:

A)gainof$75,000.

B)lossof$75,000.

C)gainof$625,000.

D)lossof€576,923.

Answer:B

Diff:3

L.O.:11.3GanadoCorporation'sTranslationExposure

Skill:Analytical

AACSB:Analyticalthinking

2)IftheEuropeansubsidiaryofaU.S.firmhasnetexposedassetsof€200,000,andtheeuroincreasesinvaluefrom$1.22/€to$1.26/€,theU.S.firmhasatranslation:

A)gainof$8,000.

B)lossof$8,000.

C)gainof$252,000.

D)lossof€252,000.

Answer:A

Diff:3

L.O.:11.3GanadoCorporation'sTranslationExposure

Skill:Analytical

AACSB:Analyticalthinking

3)IftheBritishsubsidiaryofaEuropeanfirmhasnetexposedassetsof￡125,000,andthepoundincreasesinvaluefrom€1.40/￡to€1.44/￡,theEuropeanfirmhasatranslation:

A)lossof€5,000.

B)gainof€5,000.

C)gainof￡5,000.

D)lossof￡5,000.

Answer:B

Diff:3

L.O.:11.3GanadoCorporation'sTranslationExposure

Skill:Analytical

AACSB:Analyticalthinking

4)IftheBritishsubsidiaryofaEuropeanfirmhasnetexposedassetsof￡250,000,andthepounddropsinvaluefrom€1.35/￡to€1.30/￡,theEuropeanfirmhasatranslation:

A)gainof€12,500.

B)lossof€12,500.

C)lossof￡12,500.

D)gainof￡12,500.

Answer:B

Diff:3

L.O.:11.3GanadoCorporation'sTranslationExposure

Skill:Analytical

AACSB:Analyticalthinking

5)Thevaluecontributionofasubsidiaryofamultinationalfirmtothefirmcanbereportedintheincomestatementorbalancesheetoftheconsolidatedfirm.Explainthereportingofthechangesinthevalueofasubsidiaryasaresultofthechangeinanexchangerate—changestotheincomeandtheassetsofthesubsidiary—intheconsolidatedfinancialstatementsoftheparentcompany.

Answer:Theearningsofthesubsidiary,onceremeasuredintothehomecurrencyoftheparentcompany,contributesdirectlytotheconsolidatedincomeofthefirm.Anexchangeratechangeresultsinfluctuationsinthevalueofthesubsidiary'sincometotheglobalcorporation.Iftheindividualsubsidiaryinquestionconstitutesarelativelysignificantormaterialcomponentofconsolidatedincome,themultinationalfirm'sreportedincome(andearningspershare,EPS)maybeseentochangepurelyasaresultoftranslation.

Changesinthereportingcurrencyvalueofthenetassetsofthesubsidiaryarepassedintoconsolidatedincomeorequity.Iftheforeignsubsidiarywasdesignatedas"dollarfunctional,"remeasurementresultsinatransactionexposure,whichispassedthroughcurrentconsolidatedincome.Iftheforeignsubsidiarywasdesignatedas"localcurrencyfunctional,"translationresultsinatranslationadjustmentandisreportedinconsolidatedequityasatranslationadjustment.Itdoesnotalterreportedconsolidatednetincome.

Diff:2

L.O.:11.3GanadoCorporation'sTranslationExposure

Skill:Conceptual

AACSB:Applicationofknowledge

11.4ManagingTranslationExposure

1)Themaintechniquetominimizetranslationexposureiscalleda/an________hedge.

A)balancesheet

B)incomestatement

C)forward

D)translation

Answer:A

Diff:1

L.O.:11.4ManagingTranslationExposure

Skill:Recognition

AACSB:Applicationofknowledge

2)Abalancesheethedgerequiresthattheamountofexposedforeigncurrencyassetsandliabilities:

A)havea2:1ratioofassetstoliabilities.

B)havea2:1ratioofliabilitiestoassets.

C)havea2:1ratioofliabilitiestoequity.

D)beequal.

Answer:D

Diff:1

L.O.:11.4ManagingTranslationExposure

Skill:Conceptual

AACSB:Applicationofknowledge

3)Ifafirm'sbalancesheethasanequalamountofexposedforeigncurrencyassetsandliabilitiesandthefirmtranslatesbythetemporalmethod,then:

A)thenetexposedpositioniscalledmonetarybalance.

B)thechangeisvalueofliabilitiesandassetsduetoachangeinexchangerateswillbeofequalbutoppositedirection.

C)BothAandBaretrue.

D)noneoftheabove

Answer:C

Diff:2

L.O.:11.4ManagingTranslationExposure

Skill:Conceptual

AACSB:Applicationofknowledge

4)Ifafirm'ssubsidiaryisusingthelocalcurrencyasthefunctionalcurrency,whichofthefollowingisNOTacircumstancethatcouldjustifytheuseofabalancesheethedge?

A)Theforeignsubsidiaryisabouttobeliquidated,sothatthevalueofitsCumulativeTranslationAdjustment(CTA)wouldberealized.

B)Thefirmhasdebtcovenantsorbankagreementsthatstatethefirm'sdebt/equityratiowillbemaintainedwithinspecificlimits.

C)Theforeignsubsidiaryisoperatingisahyperinflationaryenvironment.

D)Alloftheaboveareappropriatereasonstouseabalancesheethedge.

Answer:D

Diff:2

L.O.:11.4ManagingTranslationExposure

Skill:Conceptual

AACSB:Applicationofknowledge

5)Iftheparentfirmandallsubsidiariesdenominateallexposedassetsandliabilitiesintheparent'sreportingcurrency,thiswill________exposurebuteachsubsidiarywouldhave________exposure.

A)maximizetranslation;notransaction

B)eliminatetranslation;transaction

C)maximizetransaction;notranslation

D)eliminatetransaction;translation

Answer:B

Diff:2

L.O.:11.4ManagingTranslationExposure

Skill:Conceptual

AACSB:Applicationofknowledge

6)ACanadiansubsidiaryofaU.S.parentfirmisinstructedtobillanexporttotheparentinU.S.dollars.TheCanadiansubsidiaryrecordstheaccountsreceivableinCanadiandollarsandnotesaprofitonthesaleofgoods.Later,whentheU.S.parentpaysthesubsidiarythecontractedU.S.dollaramount,theCanadiandollarhasappreciated10%againsttheU.S.dollar.Inthisexample,theCanadiansubsidiarywillrecorda:

A)10%foreignexchangelossontheU.S.dollaraccountsreceivable.

B)10%foreignexchangegainontheU.S.dollaraccountsreceivable.

C)SincetheCanadianfirmisaU.S.subsidiary,neitheragainnorlossw