International Accounting 3rd Ed By Doupnik – Test Bank

International Accounting 3rd Ed By Doupnik – Test Bank

Chapter 08
Translation of Foreign Currency Financial Statements

Multiple Choice Questions

1. What is meant by the “translation” of foreign currency financial statements?
A) converting financial statements prepared under foreign GAAP into domestic GAAP
B) converting financial statements of a foreign currency into a domestic currency
C) converting the language used in financial statements from foreign to domestic
D) converting historic cost financial statements into current cost financial statements

Answer: B Level: Easy LO: 1

2. Companies must choose 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 international rate

Answer: C Level: Easy LO: 1

3. What is the cause of balance sheet exposure?
A) converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates
B) completing international transactions in currency other than the currency of the home company
C) translating subsidiary account balances to amounts denominated in the parent company’s currency
D) none of the above

Answer: D Level: Medium LO: 2

4. What is another term for “balance sheet exposure?”
A) transaction exposure
B) exchange exposure
C) translation exposure
D) negative exposure

Answer: C Level: Easy LO: 2

5. Which items in the balance sheet are subject 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 Level: Medium LO: 2

6. Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates 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 adjustment necessary unless the difference is realized.

Answer: A Level: Medium LO: 2

7. What is the primary difference between transaction exposure and accounting exposure?
A) Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.
B) Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
C) Transaction exposure must be hedged, but accounting exposure does not need to be hedged.
D) Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

Answer: B Level: Medium LO: 2

8. Which of the following methods for translating foreign currency financial statements is no longer allowed 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 Level: Medium LO: 5

9. Which of the following methods for translating foreign currency financial statements may be used under IAS 21?
A) Current/Noncurrent method
B) Monetary/Nonmonetary method
C) Temporal method
D) All of the above may be used under IAS 21.

Answer: C Level: Medium LO: 5

10. Which of the following methods for translating foreign currency financial statements attempts to produce 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 Level: Medium LO: 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 value) used by the foreign subsidiary?
A) Current rate method
B) Current/Noncurrent method
C) Temporal method
D) Monetary/Nonmonetary method

Answer: C Level: Medium LO: 3

12. Essco Ltd, a foreign 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 Level: Medium LO: 3