International Accounting 3rd edition Ed By Doupnik
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Global Accounting 3rd Edition By Doupnik
ISBN-10:0078110955. ISBN-13:978-0078110955
Chapter 08
Foreign Exchange Translation of Overseas Financial Statements
Multiple Choice Queries
1. What does the “conversion” of international foreign exchange financial statements entail?
A) changing financial statements prepared under global GAAP into local GAAP
B) transforming financial statements of an international currency into a domestic currency
C) modifying the language used in financial statements from global to local
D) converting historical value financial statements into current value financial statements
Answer: B Difficulty Level: Easy Learning Outcome: 1
2. Companies must decide between which exchange rates for consolidating foreign subsidiaries?
A) spot rate and forward rate
B) spot rate and current rate
C) current rate and historical rate
D) domestic rate and foreign rate
Answer: C Difficulty Level: Easy Learning Outcome: 1
3. What is the reason for balance sheet exposure?
A) adjusting subsidiary account balances to amounts denominated in the parent company’s currency at historical exchange rates
B) completing international transactions in currencies other than the currency of the domestic company
C) translating subsidiary account balances to quantities denominated in the parent company’s currency
D) none of the above
Answer: D Difficulty Level: Medium Learning Outcome: 2
4. What is another term for “balance sheet exposure?”
A) transaction exposure
B) trade exposure
C) translation exposure
D) negative exposure
Answer: C Difficulty Level: Easy Learning Outcome: 2
5. Which items in the balance sheet are susceptible to accounting exposure?
A) only assets
B) only liabilities and owners’ equity
C) all accounts translated at historical exchange rates
D) all accounts translated at current exchange rates
Answer: D Difficulty Level: Medium Learning Outcome: 2
6. Homeko, Inc. is based in the U.S., but it has subsidiaries in Germany. When the euro strengthens relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial statements?
A) When there is net asset exposure, the translation adjustment will be positive.
B) When there is net liability exposure, the translation adjustment will be positive.
C) The direction of the adjustment is indeterminate.
D) There will be no significant adjustment until the difference is realized.
Answer: A Difficulty Level: Medium Learning Outcome: 2
7. What is the primary difference between transaction exposure and accounting exposure?
A) Transaction exposure arises from fluctuations in currency exchange rates, while accounting exposure is the result of changes in accounting methodology.
B) Transaction exposure leads to changes in cash flow, while accounting exposure does not necessarily lead to changes in cash flow.
C) Transaction exposure needs to be hedged, but accounting exposure does not need to be hedged.
D) Transaction exposure affects only financial assets and liabilities, while accounting exposure affects all assets and liabilities.
Answer: B Difficulty Level: Medium Learning Outcome: 2
8. Which of the following methods for translating foreign currency financial statements is not permitted under U.S. GAAP?
A) Temporal method
B) Current/Noncurrent method
C) Current rate method
D) None of these methods are allowed under GAAP.
Answer: B Difficulty Level: Medium Learning Outcome: 5
9. Which of the following methods for translating foreign currency financial statements can be used under IAS 21?
A) Current/Noncurrent method
B) Monetary/Nonmonetary method
C) Temporal method
D) All of the above can be used under IAS 21.
Answer: C Difficulty Level: Medium Learning Outcome: 5
10. Which of the following methods for translating foreign currency financial statements attempts to provide consolidated financial statements as if a subsidiary had actually used the parent company’s currency for all its transactions?
A) Current/Noncurrent method
B) Monetary/Nonmonetary method
C) Current rate method
D) Temporal method
Answer: D Difficulty Level: Medium Learning Outcome: 3
11. Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current price) used by the foreign subsidiary?
A) Current rate method
B) Current/Noncurrent method
C) Temporal method
D) Monetary/Nonmonetary method
Answer: C Difficulty Level: Medium Learning Outcome: 3
12. Essco Ltd, an overseas subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule. When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method?
A) historical rate
B) current rate
C) average rate
D) cannot be determined with the information given
Answer: B Difficulty Level: Medium Learning Outcome: 3
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