MBA 7427 Sample Questions CH 14

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. 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 these.

____ 2. Translation exposure is defined as:

a. the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes.
b. the extent to which the value of the firm would be affected by unanticipated
changes in exchange rate.
c. the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates.
d. ex post and ex ante currency exposures.

____ 3. Which translation method is used in Canada?

a. Current rate method only.
b. Temporal approach only.
c. Both current rate method and temporal approach..
d. None of these.

____ 4. The Canadian methods for consolidating the financial reports of an MNC are:
a. short/long term method and current/future method.
b. current/non-current method and short/long term method.
c. temporal method and current rate method.
d. temporal method and economic/non-economic method.

____ 5. Which of the following is true for the exchange rate used to translate long-term receivables?
a. Current exchange rate under both current rate method and temporal approach.
b. Current exchange rate under current rate method and historical rate under the
translation method.
c. Historical exchange rate under current rate method and current rate under the
translation method.
d. Historical exchange rate under both current rate method and temporal approach.

____ 6. Under the temporal approach, which exchange rate is used to translate most of the income statement
items?
a. Current exchange rate
b. Historical exchange rate
c. Average exchange rate for the period covered by the income statement.
 d. The firm has the right to choose any exchange rate that existed during the period
covered by the income statement
____ 7. Which of the following is a translation method where the gain or loss due to translation adjustment
does not affect reported cash flows?
a. Current/non-current method
b. Current rate method
c. Current/future method
d. Short/long term method

____ 8. The CICA handbook section 1650 contains recommendations on procedure and accounting policy in
regard to foreign operations of Canadian companies:

(i)- measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated
in a foreign currency according to generally accepted accounting principles

(ii)- uses the temporal method of translation

(iii)- provide information that is generally compatible with the expected economic effects of a rate
change on an enterprise's cash flows and equity

(iv)- uses the current rate method

Which of the above statements pertains to integrated foreign operations?

a. (i)
b. (i) and (ii)
c. (iii) and (iv)
d. (i), (ii), and (iii)

____ 9. Which of the above statements pertain to self-sustaining foreign operations?

a. (i)
b. (i) and (ii)
c. (iii) and (iv)
d. (i), (ii), and (iii)

____ 10. A foreign operation which is financially or operationally interdependent with the Canadian parent
company such that the exposure to exchange rate changes is similar to the exposure that would exist
had the transactions of the foreign operation been undertaken directly by the Canadian parent is
called a/an:
a. interdependent foreign operation.
b. integrated foreign operation.
 c. self-sustaining foreign operation
d. Has no special name.

____ 11. A foreign operation which is financially or operationally independent of the Canadian parent
company such that the exposure to exchange rate changes is limited to the Canadian company's net
investment in the foreign operation is called a/an:
a. interdependent foreign operation.
b. integrated foreign operation
c. independent foreign operation.
d. self-sustaining foreign operation.

____ 12. A "self-sustaining foreign operation" refers to:

a. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
b. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
c. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.
d. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.

____ 13. An "integrated foreign operation" refers to:

a. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
b. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation
c. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
d. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.
____ 14. The "functional currency" is:
a. the currency of the primary economic environment in which the entity operates.
b. the currency in which the MNC prepares its consolidated financial statements.
c. a currency that is not the parent firm's home country currency.
d. None of these.
____ 15. The "reporting currency" is:
a. the currency of the primary economic environment in which the entity operates.
b. the currency in which the MNC prepares its consolidated financial statements.
c. a currency that is not the parent firm's home country currency.
d. None of these.

____ 16. change in the ¥/$ exchange rate on the assets and liabilities of the consolidated balance sheet is:

Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a
"balance sheet hedge" of:
a. ¥200,000,000 less liabilities denominated in yen.
b. ¥200,000,000 more assets denominated in yen.
c. ¥200,000,000 of net exposure denominated in yen
d. None of these

____ 17. XYZ Corporation, a Canadian parent firm, has a wholly owned sales affiliate, ABC Ltd., in the
United Kingdom. The affiliate was established to service to the local market.
Assume that:

1. the functional currency of ABC is the pound

2. the reporting currency is the dollar
3. the initial exchange rate $1.00 = £ 0.67

ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that
ABC owes the parent firm £200,000. Assume that, XYZ had made an investment of $300,000 in the
affiliate. Under CICA 1650, the intercompany debt and investment will appear on the consolidated
balance sheet as:
a. £200,000.
b. $201,493.
c. $298,507
d. . None of these.

____ 18. Which of the following statements hold true in general?

a. Eliminating transaction exposure will also eliminate translation exposure
b. Eliminating transaction exposure will increase translation exposure.
c. Eliminating transaction exposure will reduce translation exposure.
d. None of these.

____ 19. Under the current rate method:

a. all balance sheet and all income statement items are translated at the current
exchange rate.
b. all balance sheet and some income statement items are translated at the current
exchange rate.
 c. some balance sheet and none of the income statement items are translated at the
current exchange rate.
d. some balance sheet and some income statement items are translated at the current
exchange rate.
____ 20. Under the temporal method:
a. all balance sheet and all income statement items are translated at the current
exchange rate.
b. all balance sheet and some income statement items are translated at the current
exchange rate.
c. some balance sheet and all income statement items are translated at the current
exchange rate.
d. some balance sheet and some income statement items are translated at the current
exchange rate.
____ 21. A Canadian firm has an integrated foreign operation in the United States. Which of the following
statements is true?
a. If the US dollar appreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be smaller.
b. If the US dollar depreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be larger.
c. If the US dollar depreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be smaller.
d. . Need more information

____ 22. The net effect of an increase in the exchange rate on translation exposure depends on:
a. the translation method used.
b. the translation method used.
c. whether the value of liabilities exceeds the value of assets.
d. All of these.

____ 23. Which of the following items will be translated at historical exchange rate under temporal method?
a. Monetary assets.
b. Nonmonetary assets.
c. All income statement items.
d. Both nonmonetary assets and all income statement items.
MBA 7427 Sample Questions CH 14
Answer Section

MULTIPLE CHOICE

1. ANS: D PTS: 1
2. ANS: C PTS: 1
3. ANS: C PTS: 1
4. ANS: C PTS: 1
5. ANS: A PTS: 1
6. ANS: C PTS: 1
7. ANS: B PTS: 1
8. ANS: B PTS: 1
9. ANS: C PTS: 1
10. ANS: B PTS: 1
11. ANS: D PTS: 1
12. ANS: A PTS: 1
13. ANS: D PTS: 1
14. ANS: A PTS: 1
15. ANS: B PTS: 1
16. ANS: C PTS: 1
17. ANS: D PTS: 1
18. ANS: D PTS: 1
19. ANS: C PTS: 1
20. ANS: D PTS: 1
21. ANS: C PTS: 1
22. ANS: D PTS: 1
23. ANS: B PTS: 1