Test bank International Finance MCQ (word)Chap 1.doc

Fundamentals of Multinational Finance, 3e (Moffett) 13Chapter 11 Translation Exposure11.1 Multiple Choice and True/False Questions1) Translation exposure may also be called _ exposure. A) transaction B) operating C) accounting D) currency Answer: C Topic: Translation Exposure Skill: Recognition2) _ exposure is the potential for an increase or decrease in the parent companys net worth and reported net income caused by a change in exchange rates since the last transaction. A) Transaction B) Operating C) Currency D) Translation Answer: D Topic: Translation Exposure Skill: Recognition3) Translation exposure measures A) changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. B) the potential for an increase or decrease in the parent companys net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. C) an unexpected change in exchange rates impact on short run expected cash flows. D) none of the above. Answer: B Topic: Translation Exposure Skill: Recognition4) According to your authors, the main purpose of translation is A) to prepare consolidated financial statements. B) to help management assess the performance of foreign subsidiaries. C) to act as an interpreter for managers without foreign language skills. D) none of the above. Answer: A Topic: Translation Exposure Skill: Recognition5) It is possible to use different exchange rates for different line items on a financial statement. Answer: TRUE Topic: Exchange Rate Accounting Skill: Conceptual 6) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring. Answer: TRUE Topic: Translation Exposure Skill: Conceptual7) Historical exchange rates may be used for _, while current exchange rates may be used for _. A) fixed asses and current assets; income and expense items B) equity accounts and fixed assets; current assets and liabilities C) current assets and liabilities; equity accounts and fixed assets D) equity accounts and current liabilities; current assets and fixed assets Answer: B Topic: Translation Exposure Skill: Conceptual8) If an imbalance results from the accounting method used for translation, the imbalance is taken either to _ or _. A) the bank; the post office B) depreciation; the market for foreign exchange swaps C) current income; equity reserves D) current liabilities; equity reserves Answer: C Topic: Accounting for Translation Error Skill: Conceptual9) Generally speaking, translation methods by country define the translation process as a function of what two factors? A) size; location B) a firms functional currency; location C) location; foreign subsidiary independence D) foreign subsidiary independence; a firms functional currency Answer: D Topic: Factors of Translation Method Skill: Recognition10) A/an _ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent. A) self-sustaining foreign B) integrated foreign entity C) foreign D) none of the above Answer: B Topic: Integrated Foreign Entity Skill: Recognition 11) Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an _ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an _ foreign entity. A) domestic; integrated B) self-sustaining; domestic C) integrated; self-sustaining D) self-sustaining; integrated Answer: C Topic: Integrated or Self-sustaining Foreign Entities Skill: Conceptual12) A foreign subsidiarys _ currency is the currency used in the firms day-to-day operations. A) local B) integrated C) notational dollar D) functional Answer: D Topic: Functional Currency Skill: Recognition13) The _ determines accounting policy for U.S. firms. A) Securities and Exchange Commission (SEC) B) Federal Reserve System (Fed) C) Financial Accounting Standards Board (FASB) D) General Agreement on Tariffs and Trade (GATT) Answer: C Topic: FASB Skill: Recognition14) The two basic methods for the translation of foreign subsidiary financial statements are the _ method and the _ method. A) current rate; temporal B) temporal; proper timing C) current rate; future rate D) none of the above Answer: A Topic: Current Rate and Temporal Methods Skill: Recognition15) Exchange rate imbalances that are passed through the balance sheet affect a firms reported income, but imbalances transferred to the income statement do not. Answer: FALSE Topic: Temporal vs. Current Rate Method Skill: Recognition 16) Which of the following is NOT an economic indicator used by FASB for determining a subsidiarys functional currency? A) cash flow indicators B) sales price indicators C) expense indicators D) These are all economic indicators used by FASB. Answer: D Topic: FASB Skill: Recognition17) The current rate method is the most prevalent method today for the translation of financial statements. Answer: TRUE Topic: Current Rate Skill: Recognition18) The temporal rate method is the most prevalent method today for the translation of financial statements. Answer: FALSE Topic: Temporal Method Skill: Recognition19) Gains or losses caused by translation adjustments when using the current rate method are reported separately on the _. A) consolidated statement of cash flow B) consolidated income statement C) consolidated balance sheet D) none of the above Answer: C Topic: Current Rate Method Skill: Recognition20) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement. Answer: TRUE Topic: Current Rate Method Skill: Recognition21) Under the current rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the items creation. Answer: FALSE Topic: Temporal Method Skill: Recognition22) Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the items creation. Answer: TRUE Topic: Temporal Method Skill: Recognition 23) The basic advantage of the _ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parents consolidated statement while the most important advantage of the _ method is that the gain or loss from translation does not pass through the income statement. A) monetary; current rate B) temporal; current rate C) temporal; monetary D) current rate; temporal Answer: D Topic: Temporal and Current Rate Methods Skill: Conceptual24) The current rate method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings. Answer: FALSE Topic: Temporal Method Skill: Recognition25) The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings. Answer: TRUE Topic: Temporal Method Skill: Recognition26) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, A) translation is accomplished through the current rate method. B) translation is accomplished through the temporal method. C) translation is not required. D) the translation method to be used is not obvious. Answer: C Topic: Translation Procedures Skill: Conceptual27) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the local currency is the functional currency, then A) the translation method to be used is not obvious. B) translation is accomplished through the temporal method. C) translation is not required. D) translation is accomplished through the current rate method. Answer: D Topic: Current Rate Method Skill: Conceptual 28) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the U.S. dollar is the functional currency, then A) translation is not required. B) translation is accomplished through the current rate method. C) translation is accomplished through the temporal method. D) none of the above. Answer: C Topic: Temporal Method Skill: Conceptual29) A major problem for international foreign currency transaction is that FASB and the International Accounting Standards Committee (IASC) do NOT use the same basic translation procedure. Answer: FALSE Topic: FASB vs IASC Skill: Recognition30) The main technique to minimize translation exposure is called a/an _ hedge. A) balance sheet B) income statement C) forward D) translation Answer: A Topic: Balance Sheet Hedge Skill: Recognition31) A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities A) have a 2:1 ratio of assets to liabilities. B) have a 2:1 ratio of liabilities to assets. C) have a 2:1 ratio of liabilities to equity. D) be equal. Answer: D Topic: Balance Sheet Hedge Skill: Conceptual32) If a firms balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then A) the net exposed position is called monetary balance. B) the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) both B and C are true. D) none of the above. Answer: C Topic: Balance Sheet Hedge Skill: Conceptual 33) If a firms subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge? A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized. B) The firm has debt covenants or bank agreements that state the firms debt/equity ratio will be maintained within specific limits. C) The foreign subsidiary is operating is a hyperinflationary environment. D) All of the above are appropriate reasons to use a balance sheet hedge. Answer: D Topic: Balance Sheet Hedge Skill: Conceptual34) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parents reporting currency this will _ exposure but each subsidiary would have _ exposure. A) maximize translation; no transaction B) eliminate translation; transaction C) maximize transaction; no translation D) eliminate transaction; translation Answer: B Topic: Translation and Transaction Exposure Skill: Conceptual35) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a A) 10% foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange gain on the U.S. dollar accounts receivable. C) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded. D) any gain or loss will be recoded only by the parent firm. Answer: A Topic: Translation Loss Skill: Conceptual36) It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure. Answer: TRUE Topic: Translation vs. Transaction Exposure Skill: Conceptual37) _ gains and losses are realized whereas _ gains and losses are only paper. A) Translation; transaction B) Transaction; translation C) Translation; operating D) None of the above Answer: B Topic: Translation vs. Transaction Exposure Skill: Recognition 38) The dominant currency used by a subsidiary in its day-to-day operations is known as its _ currency. A) operational B) transactional C) functional D) foreign Answer: C Topic: Functional Currency Skill: Recognition39) Translation gains and losses can be quite different from operating gains and losses A) in magnitude only. B) in sign only. C) in neither magnitude nor sign. D) in both magnitude and sign. Answer: D Topic: Translation vs. Operational Gains and Losses Skill: Recognition40) A balance sheet hedge is the main technique for managing _. A) transaction B) operating C) translation D) money market Answer: C Topic: Balance Sheet Hedge Skill: Recognition41) Management can easily offset both translation and transaction exposure through A) a passive hedging strategy. B) an active hedging strategy. C) either an active or passive hedging strategy. D) It is almost impossible to offset both translation and transaction exposure simultaneously. Answer: D Topic: Hedging Skill: Recognition42) U.S. multinational firms must use _ as their functional currency. A) the currency of the primary economic environment where they operate B) the U.S. dollar C) the local currency D) the euro Answer: A Topic: Functional Currency Skill: Recognition 43) If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro the U.S. firm has a translation _. A) gain of $50,000 B) loss of $50,000 C) gain of $450,000 D) loss of euro 450,000 Answer: B Topic: Translation Loss Skill: Analytical44) If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro the U.S. firm has a translation _. A) gain of $25,000 B) loss of $25,000 C) gain of $525,000 D) loss of euro 525,000 Answer: A Topic: Translation Gain Skill: Analytical45) Under the current rate method, translation gains of losses are reported in an equity reserve account called _. A) reserve for accounting losses B) accounting reserve adjustment account C) cumulative translation adjustment account D) none of the above; translation gains and losses flow through into the income statement Answer: C Topic: Cumulative Translation Adjustment Account Skill: Recognition46) Under the current rate method, when management anticipates appreciation of a foreign currency it A) may move funds from cash to savings. B) may move funds from cash into plant and equipment. C) may try to decrease net exposed assets in that country. D) may try to increase net exposed assets in that country. Answer: D Topic: Current Rate Method Skill: Conceptual47) If the British subsidiary of a European firm has net exposed assets of 250,000, and the pound increases in value from euro 1.40/ to euro 1.45/, the European firm has a translation _. A) gain of euro 25,000 B) loss of euro 25,000 C) gain of 25,000 D) loss of 25,000 Answer: B Topic: Translation Loss Skill: Analytical 48) If the British subsidiary of a European firm has net exposed assets of 250,000, and the pound drops in value from euro 1.40/ to euro 1.30/, the European firm has a translation _. A) gain of euro 12,500 B)