Chapter 08 – Translation of

Foreign Currency Financial

Statement
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
2.
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
3.
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
4.
When the parent company of a foreign subsidiary believes that all of its
investment in the subsidiary is exposed to foreign exchange risk, what
method of translation should be used in consolidating the financial
statements?
a. current rate method
b. current/noncurrent method
c. monetary/nonmonetary method
d. temporal method
5.
Under the current rate method of translating foreign currency financial
statements, what exchange rate should be used for cost of goods sold?
a. spot rate at the end of the year
b. average rate during the year
c. spot rate mid-year
d. There is no single rate because beginning and ending inventory
must be converted at different exchange rates than purchases.
6.
Which method of translating foreign currency financial statements
must be used according to FASB ASC 830, Foreign Currency Matters?
a. Temporal method for all subsidiaries
b. Current rate method for all subsidiaries
c. U.S. parent companies may choose between the temporal method
and the current rate method.
d. Temporal method for subsidiaries that are closely controlled by the
parent and current rate method for subsidiaries which are not
7.
Under FASB ASC 830, Foreign Currency Matters, what group is
responsible for determining the functional currency of a foreign
subsidiary?
a. Financial Accounting Standards Board
b. International Accounting Standards Board
c. Securities and Exchange Commission
d. Company management
8.
According to FASB ASC 830, Foreign Currency Matters, which of the
following conditions would indicate that a foreign subsidiary's
functional currency is the parent company's currency?
a. active local sales market
b. sales price not affected by changes in exchange rate in the short run
c. high volume of intercompany transactions
d. All of the above are indicators that the functional currency is the
parent company's currency.
9.
Why would the management of a multinational corporation incur real
costs to hedge accounting exposure, which is only on paper?
a. Fluctuations in reported income may affect stock price.
b. Management compensation may be tied to accounting income.
c. Hedging can smooth income.
d. all of the above
10.
Which of the following is a non-derivative hedging instrument?
a. forward contract on foreign currency
b. foreign currency call option
c. foreign currency loan
d. foreign currency put option