2/2/23, 12:18 PM Kaplanlearn - Quiz

Question #1 of 102 Question ID: 1472582

The CAMELS approach to analyzing a bank considers:

A) character, ability to pay, market exposure, efficiency, liabilities, and stability.

capacity, appetite for risk, monetary assets, evidence, legislative factors, and
B)
structure.
C) capital adequacy, asset quality, management, earnings, liquidity, and sensitivity.
C

Question #2 of 102 Question ID: 1472529

Which of the following statements is NOT a characteristic of the current rate method of
accounting for foreign currency translation?

The common stock account is translated at the rate of exchange that applied when
A)
the equity was issued.
B) Nonmonetary liabilities are translated at the historical rate of exchange.
All asset accounts are translated at the current rate of exchange as of the balance
C)
sheet date.

b. Under the current rate method, all liabilities are translated at the current rate of
exchange.

Question #3 of 102 Question ID: 1472551

Which of the following statements regarding the effects of translation on financial statement
items/ratios is most accurate?

Leverage is higher under the current rate method as compared to under the local
A)
currency.
Fixed assets are relatively overstated under the temporal method compared to the
B)
local currency if the local currency has appreciated.
Depreciation in the reporting currency under the current rate method is higher than
C)
under the temporal method if the local currency has appreciated.
C. Fixed assets are relatively understated under the temporal method if the local currency appreciates as they are
translated at the weaker historic rate. The leverage ratio will be unaltered under the current rate method as it is a pure
balance sheet ratio and hence all translated at the current rate.
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Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the
U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is
based in Japan and manufactures a hugely successful line of trading cards, toys, and other
related products. All of Kasamatsu's operations and sales take place in Japan, and the
corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's
books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The
history of the exchange rate between the dollar and the yen over the last two years is
presented in the following table. Figures are presented in Yen/dollars.

Yen/Dollar Exchange Rate

December 31, 2005 150

December 31, 2004 130

2005 Average 140

2004 Average 120

Exchange rate on date that 2005 dividends were

145
declared by Kasmatsu

Exchange rate on date of stock issue and acquisition of

100
fixed assets.

Ashley Jameson is an analyst with Henderson-Wells, an investment banking firm in New

York, and is the chief analyst covering WB. She believes that the enormous success of the
trading cards has contributed greatly to WB's bottom line. However, she believes that this
effect may be misstated in the company's financial statements because of the recent
volatility in exchange rates. Many analysts at other major investment banking firms have
been raising their ratings on WB because of the recent earnings growth. Jameson, however,
wants to be absolutely certain that these results are accurate and fully attributable to
Kasamatsu's hot new product and not a result of an exchange rate fluctuation. The following
are the financial statements of Kasamatsu, stated in thousands of yen.

Financial Statements for Year Ending December 31, 2005

(in thousands of yen)

Statement of Income and Retained Earnings

Sales 700,000

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Expenses

Cost of Goods Sold (COGS) 280,000

Depreciation 126,000

SG&A 77,000

Total Expenses 483,000

Earnings Before Taxes (EBT) 217,000

Income Tax Expense 98,000

Net Income 119,000

Retained Earnings: December 31, 2004 250,000

369,000

Dividends 58,000

Retained Earnings: December 31, 2005* 311,000

* Retained earnings on 12/31/2005 were US $2million

Balance Sheet

Assets

Cash and receivables 60,000

Inventory 180,000

Land 200,000

Fixed assets 346,000

Total assets 786,000

Liabilities and stockholders' equity

Liabilities 300,000

Capital stock 175,000

Retained earnings 311,000

Total liabilities and stockholders' equity 786,000

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Question #4 - 5 of 102 Question ID: 1472535

Before Jameson can perform any financial statement analysis she needs to determine which
method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the
following is the most appropriate method to use?

A) First the temporal method, followed by the current rate method.

B) The temporal method.
C) The current rate method.
C. The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation
(reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation
Currency.
Under US GAAP the current method must be used to translate the yen financial statements into USD, the reporting
currency. Had Kasamatsu been operating in a highly Inflationary environment or had the local and functional currency not
been the same, then WB would be required to use the temporal method.
Question #5 - 5 of 102 Question ID: 1472536

Jameson must also determine how the fluctuation in the yen vs. the dollar has affected
Kasamatsu's earnings in the reporting currency. Which of the following best describes the
effect of changes in the yen/dollar rate has had on earnings in the reporting currency?
Earnings have:

A) increased because the yen is depreciating versus the USD.

B) increased because the yen is appreciating versus the USD.
C) decreased because the yen is depreciating versus the USD.

C. Examination of the history of the exchange rate shows that both the year-end and average exchange rates are lower
in 2005 than in 2004 (lower in that the yen has weakened vs. the USD). Therefore, Kasamatsu has to earn more yen
than it did in the previous year for WB to be able to report the same dollar amount of net income. This means that the
true economic performance of Kasamatsu is understated when viewed as a component of WB's net income.

Question #6 of 102 Question ID: 1472547

Hann Company is a U.S. multinational firm with operations in several foreign countries.
Hann has a 100% stake in a French subsidiary. The foreign subsidiary's local currency has
appreciated against the U.S. dollar over the latest financial statement reporting period. In
addition, the French firm accounts for inventories using the first in, first out (FIFO) inventory
cost-flow assumption. The gross profit margin as computed under the current rate method
would most likely be:

A) lower than the gross profit margin as computed under the temporal method.
B) equal to the gross profit margin as computed under the temporal method.
C) higher than the gross profit margin as computed under the temporal method.
A. The average rate is used to convert sales under both the temporal method and the current rate method. Hence, the
only difference between the two computations is on cost of goods sold (COGS). Since the firm uses FIFO, older materials
are flowing into COGS and an older exchange rate applies. Since in the past the foreign currency bought fewer dollars,
the gross profit under the temporal method will be higher than that of the current rate method. It may help to 'think' that
with the current rate method, you use the average rate for COGS, which makes COGS higher because the currency has
appreciated.
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Question #7 of 102 Question ID: 1472500

Which of the following situations does NOT require the use of the temporal method? The:

A) local currency is the functional currency.

B) foreign subsidiary is operating in a highly inflationary economy.
C) functional currency is some currency other that the local currency or the U.S. dollar.
A. The basis for using the current rate method is when Functional Currency is NOT the same as Parent's
Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency =
Parent's Presentation Currency. The temporal method is not required in the situation when the local currency is the
functional currency.

Question #8 of 102 Question ID: 1472590

Under the Basel III Regulatory Framework, the Net Stable Funding Ratio (NSFR) is most likely
to be calculated as:

A) required stable funding ÷ expected cash outflows.

B) highly liquid assets ÷ available stable funding.
C) available stable funding ÷ required stable funding.
C. The Net Stable Funding Ratio (NSFR) is the percentage of a bank's required stable funding
that must be sourced from available stable funding. The numerator (available stable
funding) is a function of the composition and maturity of a bank's funding sources (i.e.,
capital and deposits and other liabilities), while the denominator (required stable funding)
is a function of the composition and maturity of a bank's asset base.

Question #9 of 102 Question ID: 1472565

Under U.S. GAAP, the temporal method is preferred to the current rate method in
hyperinflationary economies because the temporal method:

A) is easier to perform under hyperinflation.

results in non-monetary asset values that are a better proxy for the economic values
B)
of those assets.
C) provides better conversions of subsidiary revenues.
b. The temporal method results in non-monetary asset values that are a better proxy for the
economic values of those assets than those obtained under the current rate method. Both
methods convert revenues and SG&A at the average rate so there could be no clear
preference when considering these measures.

Question #10 of 102 Question ID: 1472579

Basel III regulation that aims to prevent banks from assuming so much leverage that they
are unable to withstand loan losses is most correctly described as the:

A) minimum capital requirement.

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B) minimum liquidity requirement.

C) stable funding requirement.
A. The minimum capital requirement specifies a ratio of assets to risk-weighted assets to
ensure the balance sheet is robust enough to cope with loan losses. Stable funding
requirements specify the amount of stable funding relative to liquidity needs over a oneyear horizon. The
minimum liquidity requirement specifies a minimum level of liquidity to
cover a partial loss of funding sources or outflow due to off balance sheet commitments.

Question #11 of 102 Question ID: 1472566

Which of the following asset or liability values is likely to be the most understated in a
hyperinflationary economy if translation occurs under the current rate method?

A) Accounts receivable.
B) A plant purchased several years ago.
C) Dividends payable.
B. The accounts receivable and dividends payable will each have book values that are closer
to their market values than a plant purchased many years ago.

Question #12 of 102 Question ID: 1472487

The local currency is:

A) translated into the functional currency under the current rate method.
the preferred functional currency for subsidiaries that are highly integrated with the
B)
parent.
C) the same as the functional currency under the current rate method.
C. The local currency is best described as the currency of the country in which the foreign
subsidiary is located. If a subsidiary is highly integrated with its parent or operating in a
high-inflation environment, the functional currency is the parent's currency. Local
currencies are remeasured under the temporal method.

Question #13 of 102 Question ID: 1472577

Compared to manufacturing or merchandising companies, financial institutions are most

likely to have higher direct exposures to:

A) operational risk, process risk, political risk, and compliance risk.

B) inflationary risk, business risk, exchange rate risk, and legal risk.
C) market risk, credit risk, liquidity risk, and interest rate risk.
C

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Question #14 of 102 Question ID: 1472538

Global International Corp. (GIC) has three subsidiaries: GIC Europe whose local currency is
the euro and whose functional currency is the euro; GIC China whose local currency is the
yuan and whose functional currency is the Hong Kong dollar; and GIC Bahamas whose local
currency is the Bahamian dollar and whose functional currency is the U.S. dollar. GIC's
reporting currency is the U.S. dollar. Which conversion methods should be used by GIC for
each of its subsidiaries?

GIC Europe’s data should be remeasured under the temporal method; GIC China’s
data should be remeasured under the temporal method into Hong Kong dollars,
A)
and then translated under the current rate method into U.S. dollars; and GIC
Bahamas’ data should be translated under the current rate method into U.S. dollars.
The financial data for all three subsidiaries should be remeasured under the
B)
temporal method.
GIC Europe’s data should be translated under the current rate method; GIC China’s
data should be remeasured under the temporal method into Hong Kong dollars,
C)
and then translated under the current rate method into U.S. dollars; and GIC
Bahamas’ data should be remeasured under the temporal method into U.S. dollars.
C. The basis for using the current rate method is when Functional Currency is NOT the same as Parent's
Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's
Presentation Currency. GIC Europe's data should be translated under the current rate method; GIC China's data
should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate
method into U.S. dollars; and GIC Bahamas' data should be remeasured under the temporal method into U.S.
dollars.
Question #15 of 102 Question ID: 1472571

Which translation method should be used under a hyperinflationary economy when using
U.S. GAAP?

Temporal, because all non-monetary accounts are re-measured at the historical

A)
rate.
All-current, because dividends are translated at the rate that applied when they
B)
were issued.
Monetary/non-monetary, because all monetary accounts are translated at the
C)
historical rate.
A

Question #16 of 102 Question ID: 1472501

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Which of the following general statements is most accurate with respect to the temporal
method? Nonmonetary assets are translated at:

A) historical rates at the time of the transaction.

B) the average rate during the year.
C) the current rate.

Question #17 of 102 Question ID: 1472580

It would be least accurate to state that the Basel Committee:

A) develops international regulatory framework for banks.

B) monitors adoption and implementation of standards in member jurisdictions.
has legal authority to enforce compliance with supervision and accountability
C)
standards.
C. The Basel Committee develops international regulatory framework for banks, and
monitors adoption and implementation in member jurisdictions. However, the Basel
Committee does not have legal authority (i.e., jurisdiction) to enforce compliance

Question #18 of 102 Question ID: 1472528

Which of the following statements is least accurate regarding accounting for foreign
currency translations? The:

temporal method uses the historical exchange rate to translate non-monetary

A)
assets and liabilities into the currency of the country of the parent company.
current rate method applies the current exchange rate to all balance sheet
B)
accounts.
current rate method applies the average exchange rate to all income statement
C)
accounts.
B. The current rate method applies the current exchange rate to all balance sheet accounts
except for common stock, which is translated at a historical rate.

Question #19 of 102 Question ID: 1472564

In a hyperinflationary economy, translation under the current rate method will most likely
result in relatively:

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A) high translation gains.

B) low balance sheet values for long term liabilities.
C) high balance sheet values for long term assets.
B. In a hyperinflationary economy, translation under the current rate method will most likely
result in relatively low balance sheet values for assets and liabilities. Translation losses will
also occur

Question #20 of 102 Question ID: 1472586

Important attributes that the CAMELS approach to assessing bank soundness does not
address are most likely to include:

A) earnings, liquidity, and sensitivity to market risk.

B) management capabilities, asset quality, and capital adequacy.
C) competitive environment, mission, and support by government.
C

Question #21 of 102 Question ID: 1472561

Which example least accurately describes pure balance sheet and income statement ratios?

A) All pure balance sheet ratios are affected by the all-current translation method.
When multiplying both the numerator and denominator by the current exchange
B)
rate, the current rate is cancelled.
C) The current ratio is a pure balance sheet ratio.
A. All pure balance sheet ratios are unaffected by the all-current translation method.
A. The increase in sales due to the appreciating EUR is measured as 7.5% [= (1.1417 / 1.0620) 1]. Sales for the
subsidiary rose 10% [= (1,100,000 / 1,000,000) – 1] in the local currency (EUR). After translation the parent firm
will report sales of USD 1,062,000 (= EUR 1,000,000 × 1.0620) for 2002 and USD 1,255,870 (= EUR 1,100,000 ×
1.1417) for 2003. Growth measured from the parent's perspective suggests sales rose 18.25% [= (1,255,870 /
1,062,000) 1], but this includes the growth rate in sales measured in the local currency and the rate of appreciation
Question
in the foreign currency, #22 ×of1.075)
or (1.10 102 1 = 0.1825. The question only asks for the impactQuestion ID: change
of the 1472496in the
value of the USD.
A U.S. firm owns a foreign subsidiary in France. In 2002, sales were EUR 1,000,000 and the
USD/EUR exchange rate was 1.0620. In 2003, sales were EUR 1,100,000 and the exchange
rate was 1.1417. What is the impact of the change in the value of the USD on the parent
company's translated sales?

A) Sales will increase by 7.5%.

B) Sales will decrease by 7.5%.
C) Sales will increase by 18.25%.

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Question #23 of 102 Question ID: 1472550

The U.S. dollar has been depreciating relative to the local currency over the past year. The
use of the current rate method to translate a foreign subsidiary's financial statements to U.S.
dollars will most likely have which of the following effects on the operating profit margin
(EBIT/S) relative to what the ratio would have been without the effects of translation?

A) The ratio will fall.

B) There will be no effect on the ratio.
C) The ratio will rise.

B. Under the current rate method, the average rate is applied to all income statement
accounts. Hence, since the average rate is applied to both numerator and denominator of
the equation and the ratio will not change.

Question #24 of 102 Question ID: 1472546

Which of the following ratios is affected by translation under the current rate method?

A) Net profit margin.

B) Debt/Assets ratio.
C) Fixed asset turnover ratio.

C. Recall that all pure income statements and balance sheet ratios are unaffected by
translation under the current rate method. The fixed asset turnover ratio is not a pure
ratio; it consists of an income statement measure (sales, translated at the average rate)
and a balance sheet measure (fixed assets, translated at the current rate).

Question #25 of 102 Question ID: 1472572

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Sopgate is a manufacturer of branded fast moving consumer goods having business

operations in 28 countries (in each country, Sopgate has a wholly owned local subsidiary for
production and/or distribution). Following information is available from Sopgate's annual
report:

Growth in pre-tax
Region Revenue Growth (USD)* Tax rate
profits (USD)*

Latin America 5% 4% 25%

North America 3% 3% 35%

Europe 2% −1% 45%

Asia pacific 4% 6% 20%

*Growth rate indicates expected growth rate over the next five years.

Sopgate's effective tax rate is most likely expected to:

A) increase. B. Sopgate's profits are expected to grow at a faster rate for lower tax rate
regions as compared to higher tax regions. Hence the effective tax rate can
B) decrease. be expected to decrease.

C) remain unchanged.

Question #26 of 102 Question ID: 1472555

The U.S. dollar (i.e., the reporting currency) has been depreciating relative to the local
currency over the past year. The use of the current rate method to translate a foreign
subsidiary's financial statements to U.S. dollars will most likely have which of the following
effects on return on equity (ROE) based on ending equity relative to what the ratio would
have been without the effects of translation?

A) ROE will most likely decline.

B) ROE will most likely rise.
C) The impact of the depreciation of the US dollar on ROE is indeterminate.
A. ROE = Net Income / Equity. Under the current rate method, the equity accounts as a whole
are translated at the current rate whereas net income is translated at the average rate.
Since the dollar is depreciating, each foreign currency unit is buying more dollars in the
denominator relative to the numerator of the equation. Hence, the denominator is
increasing and the ratio falls.

Question #27 of 102 Question ID: 1472495

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Sycamore Systems sold $5 million worth of software on December 1, 20X1 to a Japanese

company with payment denominated in Japanese yen to be received in two months.
Sycamore's year end is 31st December. Payment was received on 31 Jan 20X2.

Exchange rates (1 USD)

1 Dec 20X1 95

31 Dec 20X1 90

31 Jan 20X2 35

The amount of transaction gain/loss recorded by Sycamore on its income statement for the
year ending 31 Dec 20X1 is closest to:

A) loss of $300,000. C. Sale amount = $5 million × 95 = 475 million yen. Accounts receivable on sale
date = $5 million.
Accounts receivable at year-end = 475 million yen/90 = $5.28 million
B) gain of $580,000. The appreciation of the yen resulted in a gain of $280,000 on the balance sheet
date and would be recognized in the income statement.
C) gain of $280,000.

Question #28 of 102 Question ID: 1472488

Which of the following statements describing the choice of the functional currency is least
accurate? The functional currency should be the same as the parent's reporting currency if
the subsidiary is:

A) mostly independent from the parent.

highly integrated with the parent where the local currency, prices, and some costs
B)
are not controlled or restricted.
highly integrated with the parent where the local currency, prices, and some costs
C)
are controlled or restricted.
A

Question #29 of 102 Question ID: 1472592

Which of the following statements comparing Property and Casualty insurers to Life and
Health insurers is least likely correct?

The calculation of Property and Casualty insurers minimum capital requirements is

A)
more likely to factor in exposure to interest rate risk
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Property and Casualty insurers typically require a higher equity cushion and hence
B)
can have higher capital requirements
Life and Health insurers typically face more predictable claims than Property and
C)
Casualty insurers
A. Property and Casualty insurers typically face more unpredictable claims and hence have
higher capital requirements.
Life and Health insurers are more likely to sell products with material exposures to
interest rate risk and hence they, not Property and Casualty insurers, are more likely to
factor that risk into capital requirements.

Question #30 of 102 Question ID: 1472503

Which of the following statements is least accurate regarding the use of the temporal
method for foreign exchange accounting?

All nonmonetary assets and liabilities are translated at the historical rate of
A)
exchange.
Under the temporal method, the foreign exchange gain or loss is placed on the
B) IC
balance sheet in the equity section.
C) All monetary assets are translated at the current rate of exchange.

B. Under the temporal method, the foreign exchange gain or loss is placed on the income
statement.

Question #31 of 102 Question ID: 1472562

Which of the following measures is unaffected by the choice between translation under the
current rate method and remeasurement under the temporal method?

A) Tax expense. A. Taxes are converted at the same rate (average rate)
under both methods. Equity under the
B) Cost of goods sold. temporal method is a mixed rate whereas under the current
rate method it is at the
C) Equity. current rate. COGS under the temporal method is at the
historical rate and under the
current rate method it is at the average rate.

Question #32 of 102 Question ID: 1472498

A Canadian firm owns a foreign subsidiary in the U.S. In 2002, sales were USD1,000,000 and
the USD/CAD exchange rate was 0.6329. In 2003, sales were also USD1,000,000 but the
exchange rate was 0.7484. What is the impact of the change in the value of the CAD on the
parent company's translated sales? Sales will:
USD/CAD means how many usd per 1 cad
A) decline by 15%.

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B) decrease by 18%.
C) increase by 18%.
A. While sales were flat at USD 1,000,000 in local currency terms, after translation the parent firm would report sales of
CAD 1,336,184 for 2003 (= USD 1,000,000 / 0.7484) versus sales of CAD 1,580,028 for 2002 (= USD 1,000,000 /
0.6329). The 15% sales decline reported by the Canadian firm (CAD 1,336,184 versus CAD 1,580,028) is a flow effect.
Even though there was no sales growth in the subsidiary, the parent firm still shows a 15% decrease in revenues from
the subsidiary due solely to exchange rate effects. Note that because the subsidiary sales are constant the total
exchange rate effect can be measured as (0.6329 / 0.7484) 1 = 0.15.

Question #33 of 102 Question ID: 1472508

Dave Iverson, CFA, is analyzing the recently released financial statement of Global Corp., a
large multinational manufacturing company with production facilities across Europe and
Southeast Asia. The company's choice of functional currency is not disclosed, but Iverson
does notice that Global Corp. does not have any cumulative translation adjustments (CTA)
on its balance sheet. Which of the following statements is most accurate based upon
Iverson's observation?

A) The temporal method of foreign currency translation is used exclusively.

The temporal method of foreign currency translation is used for at least some of its
B)
subsidiaries.
C) The current rate method of foreign currency translation is used exclusively.

A. The choice of functional currency is the determining factor as to which method of foreign
currency translation is utilized. If no CTA appears on the balance sheet, then the parent
currency must be the functional currency for all of the company's subsidiaries and only
the temporal method is used

Question #34 of 102 Question ID: 1472545

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The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The
Swiss franc (SF) has been determined to be the functional currency. All the common stock of
the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO
inventory cost-flow assumption. In addition, the value of the SF is as follows:

Beginning of year $0.5902

Average throughout the year $0.6002

End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as
follows:

Accounts receivable = 3,000

Inventory = 4,000

Fixed assets = 12,000

Accounts payable = 2,000

Long-term debt = 5,000

Common stock = 10,000

Retained earnings = 2,000

Net income = 2,000

The translated value of accounts receivable and inventory respectively are:

A) $1,845 and $2,401.

B) $1,801 and $2,401.
C) $1,845 and $2,460.
C. The basis for using the current rate method is when Functional Currency is NOT the same
as Parent's Presentation (reporting) Currency. The basis for using the temporal method is
when Functional Currency = Parent's Presentation Currency.
Since the SF is the functional currency, then the current rate method is employed to
translate the SF amounts into USD. Hence, A/R = 0.615 × 3,000 = $1,845 and 0.615 × 4,000
= $2,460.
Question #35 of 102 Question ID: 1472576

Systemic risk in financial services is least likely to:

A) concern the co-movement of an institution’s asset values with the overall market.
B) be caused by interdependencies in the financial system.
C) have consequences for the economy as a whole.
A
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Question #36 of 102 Question ID: 1472509

Each of the following items is considered a monetary asset or liability account under the
temporal method for foreign currency translation EXCEPT:

A) accounts payable.
B) inventory.
C) long-term debt. B

Question #37 of 102 Question ID: 1472532

Which of the following statements regarding foreign currency translation are least accurate?
Under the:

current rate method, the foreign currency translation gain or loss appears on the
A)
parent firm's income statement. Balance statement
B) temporal method, sales are remeasured using the average rate.
C) temporal method, COGS and depreciation are remeasured using the historical rate.

Question #38 of 102 Question ID: 1472587

When analyzing a bank, important attributes that the CAMELS approach to assessing bank
soundness does not address are most likely to include:

A) sensitivity to market risk, liquidity, and earnings.

B) corporate culture, exposure to currencies, and segment information.
C) capital adequacy, asset quality, management capabilities.
b

Question #39 of 102 Question ID: 1472583

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When using the fair value hierarchy as defined by IFRS and US GAAP, a financial asset
valuation performed by discounting future cash-flows at a discount rate would most likely be
classified as a:

A) level 1 valuation
B) level 2 valuation
C) level 3 valuation
c. Neither the future cash flows or the discount rate in a PV calculation are directly
observable, hence the valuation is level 3. Level 1 valuations are based on observed
quoted prices for identical assets. Level 2 valuations are observable but are not quoted
prices for identical assets, they may be prices for similar asset

Question #40 of 102 Question ID: 1472584

Which of the following factors is least likely to be considered during a CAMELS analysis of a
financial institution?

A) Accuracy of accounting estimates

B) Levels of government support
C) Estimation methods used for the fair value of assets

Question #41 of 102 Question ID: 1472593

When analyzing insurance companies, the combined ratio is most likely to:

A) equal net premiums earned divided by total insurance expenses.

B) indicate an underwriting loss when it is higher than 100%.
C) suggest a soft market when it is low.
b. An underwriting loss is indicated by a combined ratio higher than 100% for a single
insurance company. Low prices for premiums leads to a high combined ratio, indicating a
soft market. The combined ratio equals the total insurance expenses divided by the net
premiums earned.

Question #42 of 102 Question ID: 1472594

Compared to a life and health (L&H) insurance company, it is most likely that a property and
casualty (P&C) insurer's:

A) policies will be longer term. c

B) claims will be more predictable.

C) policies’ final cost will typically be known within a year of an insured event.
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Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the
U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is
based in Japan. Kasamatsu manufactures a hugely successful line of trading cards, toys, and
related products. All of Kasamatsu's operations and sales take place in Japan, and the
corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's
books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The
history of the exchange rate between the dollar and the yen over the last two years is
presented in the following table. Figures are presented in yen/$.

Yen/Dollar Exchange Rate

December 31, 2013 150

December 31, 2012 130

2013 Average 140

2012 Average 120

Exchange rate on date that 2013 dividends were

145
declared by Kasamatsu

Exchange rate on date of stock issue and acquisition of

100
fixed assets.

Shelly Jameson is an analyst with Henderson-Wells, an investment banking firm in New York,
and is the chief analyst covering WB. She believes that the enormous success of the trading
cards has contributed greatly to WB's bottom line. However, Jameson believes that this
effect may be misstated in the company's financial statements because of the recent
volatility in exchange rates. Many analysts at other investment banking firms have been
raising their ratings on WB because of the recent earnings growth. Jameson, however, wants
to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's
hot new product and not a result of an exchange rate fluctuation. The following are the
financial statements of Kasamatsu, stated in thousands of yen.

Financial Statements for Year Ending December 31, 2013

(in thousands of yen)

Statement of Income and Retained Earnings

Sales 700,000

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Expenses

Cost of Goods Sold (COGS) 280,000

Depreciation 126,000

SG&A 77,000

Total Expenses 483,000

Earnings Before Taxes (EBT) 217,000

Income Tax Expense 98,000

Net Income 119,000

Retained Earnings: December 31, 2012 250,000

369,000

Dividends 58,000

Retained Earnings: December 31, 2013 * 311,000

* Retained earnings on 12/31/2013 were US $2 million

Balance Sheet

Assets

Cash and receivables 60,000

Inventory 180,000

Land 200,000

Fixed assets 346,000

Total assets 786,000

Liabilities and stockholders' equity

Liabilities 300,000

Capital stock 175,000

Retained earnings 311,000

Total liabilities and

786,000
stockholders' equity

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Question #43 - 46 of 102 Question ID: 1472522

Jameson would like to examine WB's group accounts. What is the most appropriate
exchange rate (yen/$) to use in translating Kasamatsu's reported dividends into U.S. dollars?

A) 150.
B) 140. c. Dividends are translated at the exchange rate that existed on the dividend declaration
date
C) 145.

Question #44 - 46 of 102 Question ID: 1472523

If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen
to dollars, she should most appropriately use which of the following exchange rates (yen/$)?

A) 140.
B) 145. a

C) 150.

Question #45 - 46 of 102 Question ID: 1472524

Jameson has finally completed translating all the necessary figures into dollars and now
wants to compute by how much WB's reported sales in dollars will change due to
Kasamatsu's sales. Which of the following is closest to the amount of sales that WB will
report as a result of Kasamatsu's operations (in thousands of dollars)?

A) $4,828.
b
B) $5,000.
C) $4,667.

Question #46 - 46 of 102 Question ID: 1472525

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Before Jameson can perform any financial statement analysis, she wants to determine which
method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the
following is the most accurate translation method and reasoning? WB should translate
Kasamatsu's earnings using the:

A) current rate method because the local currency is the USD.

B) temporal method because the local currency differs from the functional currency.
C) current rate method because the functional currency is the yen.
c

South Seas Inc, a subsidiary of Seven Seas Inc., reported its most recent performance in its
local currency (LC) which is the functional currency. The reporting currency of Seven Seas is
the U.S. dollar (USD). South Seas also paid a dividend of 16,000LC at year end, at which time
the exchange rate was 2 LC/USD. Last year, Seven Seas reported balance sheet retained
earnings of 90,000 USD for its South Seas subsidiary.

Rates LC/US$

Current rate 2.00

Average rate 2.20

Historical rate for common stock 2.50

Historical rate for COGS 2.30

Historical rate for depreciation 2.10

Historical rate for ending inventory 2.30

Historical rate for fixed assets 2.10

LC

Revenues 520,000

Cost of Goods Sold (COGS) 225,000

SG&A 100,000

Depreciation 80,000

Income Taxes 46,000

Net Income 69,000

The balance sheet for South Seas is given below.

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LC

Cash 25,000

Accounts Receivable 30,000

Inventory 35,000

Net Fixed Assets 500,000

Total Assets 590,000

Accounts Payable 20,000

Long term debt 100,000

Common Stock 250,000

Retained Earnings 220,000

Total Liabilities & Equity 590,000

Question #47 - 50 of 102 Question ID: 1472517

What is the amount of income Seven Seas should report from its South Seas subsidiary?

A) 34,500 USD.
B) 31,400 USD. b

C) 27,600 USD.

Question #48 - 50 of 102 Question ID: 1472518

The currency translation adjustment that results from the translation of South Sea's data is
closest to?

Zero because there is no currency translation adjustment under the current rate
A)
method.
B) −3,300 USD.
c
C) 21,600 USD.

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Question #49 - 50 of 102 Question ID: 1472519

If the temporal method is used, the retaining earnings is closest to:

A) 21,600 USD.
B) 120,800 USD.
b
C) 90,000 USD.

Question #50 - 50 of 102 Question ID: 1489316

If the functional currency is the USD, then the net income before a translation gain/loss is
closest to:

A) 8,000 USD.
B) 4,700 USD.
C) 34,100 USD.

Question #51 of 102 Question ID: 1472573

Organic growth in sales is most accurately defined as growth in sales excluding the effects
of:

A) currency value fluctuations.

B) acquisitions/divestitures only.
C) acquisitions/divestitures and currency value fluctuations.
c

Question #52 of 102 Question ID: 1472581

When assessing capital adequacy using risk-weighted assets, cash will most likely:

A) not be included in risk-weighted assets.

B) be weighted over 100%.

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C) be weighted at 100%.

A. Cash has zero risk and hence is not included in risk-weighted assets (i.e. is weighted at
zero).

Question #53 of 102 Question ID: 1472557

Which of the following subsidiary ratios will be affected by the translation adjustment under
the current rate method? PURE BALANCE SHEET N INCOME STATEMENT RATIO WONT CHANGE,
ONLY MIX
A) Gross margin.
B) Net profit margin.
C
C) Return on equity.

Question #54 of 102 Question ID: 1472568

In reality, what best describes the real value of non-monetary assets and liabilities in a
hyperinflationary environment?

Typically not affected because their local currency-denominated values increase to

A)
offset the impact of inflation.
B) All non-monetary accounts are re-measured at the current rate.
Typically not affected because their local currency-denominated values decrease to
C)
offset the impact of inflation.

A. Typically not affected because their local currency-denominated values increase to offset
the impact of inflation (i.e., real estate values typically rise with inflation).

Question #55 of 102 Question ID: 1472548

Where does the currency translation gain or loss appear in the financial statements under
the temporal method and the current rate method?

Temporal Current rate

method method

Income
A) Balance sheet
statement

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Income
B) Balance sheet
statement
A
C) Balance sheet Balance sheet

Question #56 of 102 Question ID: 1472504

Under the temporal method, the inventory and cost of goods sold (COGS) accounts are both
nonmonetary accounts. Which of the following statements is least accurate regarding these
accounts?

If the firm accounts for inventory using first in, first out (FIFO), then a more recent
A)
rate will be applied to the inventory account.
The Inventory account is remeasured using the historical rate under both LIFO and
B)
FIFO.
If the firm accounts for inventory using last in, first out (LIFO), then the beginning-of-
C)
period rate is used to remeasure COGS.
A. Under LIFO, the last goods purchased are the first goods out to COGS. Hence, although
technically the historical rate is used to remeasure COGS, a more recent rate is typically
more appropriate for COGS under LIFO
Della Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airline
located in Sydney. The Australian dollar has been chosen by Della as the functional currency
for APJ. The balance sheet of APJ is given below as of Dec. 31, 2011 in U.S. dollars.

Assets Liabilities and Equity

Cash $100 Accounts Payable (A/P) $90

Accounts Receivable (A/R) 120 Common Stock 360

Maintenance Supplies 90

Fixed Assets 140

Total Assets $450 Total Liabilities & Equity $450

APJ's income statement for the year ending Dec. 31, 2012 is expressed in Australian dollars
as:

Sales 3,500

Total Costs 2,900

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Net Income 600

The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2011, the
exchange rate was A$/US$ 2.50, the average rate during the year was A$/US$ 2.75 and
A$/US$ 3.0 on Dec. 31, 2012.

The Dec. 31, 2012 Balance Sheet for APJ is given in Australian dollars as follows:

Assets Liabilities and Equity

Cash 441 A/P 210

A/R 330 Common Stock 720

Supplies 291 Retained Earnings 600

Fixed Assets 468

Total Assets 1,530 Total Liabilities & Equity 1,530

Question #57 - 60 of 102 Question ID: 1472512

On APJ's 2012 income statement, the level of sales in U.S. dollars would be closest to:

A) $1,985.
B) $1,272.
b
C) $1,377.

Question #58 - 60 of 102 Question ID: 1472513

On APJ's 2012 balance sheet, the level of accounts receivable is U.S. dollars would be closest
to:

A) $110. a

B) $132.
C) $330.

Question #59 - 60 of 102

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Question ID: 1472514

For APJ, the conversion to US$ is most likely to result in:

A) remeasurement gain.
B) cumulative translation adjustment loss.
C) cumulative translation adjustment gain.
b. Because the functional currency is the local currency, the current rate method is used.
When we have a net asset balance sheet exposure, a weakening foreign currency will
result in a negative translation adjustment. AJP's net asset position will result in a
cumulative transaction adjustment loss as the foreign currency, the A$, is depreciating.

Question #60 - 60 of 102 Question ID: 1472515

If the functional currency is the reporting currency, the exposure and the foreign currency
movements are most likely to result in a:

A) remeasurement loss.
B) cumulative translation adjustment loss.
C) remeasurement gain.

A.

Question #61 of 102 Question ID: 1472526

Which of the following statements regarding the foreign currency translation under US GAAP
is least accurate? The functional currency is the:

A) subsidiary's local currency for self-contained, independent foreign subsidiaries.

B) parent firm's home currency for self-contained independent foreign subsidiaries.
parent firm's home currency if the foreign subsidiary operates in a country with high
C)
inflation.
B

Question #62 of 102 Question ID: 1472560

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The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The
Swiss franc (SF) has been determined to be the functional currency. All the common stock of
the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO
inventory cost-flow assumption. In addition, the value of the SF is as follows:

Beginning of year $0.5902

Average throughout the year $0.6002

End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as
follows:

Accounts receivable = 3,000

Inventory = 4,000

Fixed assets = 12,000

Accounts payable = 2,000

Long-term debt = 5,000

Common stock = 10,000

Retained earnings = 2,000

Net income = 2,000

The translated value of common stock and long-term debt respectively are:

A) $6,150 and $3,075.

B) $5,902 and $3,001.
C) $5,902 and $3,075.
C. the basis for using the current rate method is when Functional Currency is NOT the same
as Parent's Presentation (reporting) Currency. The basis for using the temporal method is
when Functional Currency = Parent's Presentation Currency.
Since the SF is the functional currency, use the current rate method. Common stock is
translated at the historical rate which is the rate that applied when the transaction was
made or $0.5902 and long-term debt is translated at the current rate of $0.615. 10,000 ×
0.5902 = $5,902 for common stock and 5000 × 0.6150 = $3,075 for long term debt.
Question #63 of 102 Question ID: 1472589

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The following extract shows data prepared by OWB, a financial institution conducting a
review of its BASEL III compliance from 2016 to 2018. All data has been prepared in
accordance with BASEL III requirements.

2016 2017 2018

$m $m $m

Net Outflows (30 days of stress level cash flows) 70,363 79,454 111,547

Available Stable Funding 337,964 347,945 298,045

Required Stable Funding 327,043 287,953 247,876

High Quality Liquid Assets 82,334 87,677 109,654

Using the data extracted from OWB, which of the following statements is most likely correct?

The liquidity coverage ratio meets the standard BASEL III requirements in each of
A)
the three years
The number of days of stress level cash flows that OWB can withstand has steadily
B)
increased over the period
C) The net stable funding ratio was highest in 2017 C. Available / required funding

Question #64 of 102 Question ID: 1472563

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The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die
Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance
sheet and income statement of Acer Tool & Die Company for the year-ended December 31,
20X2, is shown below. The balance sheet has been restated using the U.S. dollar as the
functional currency.

Acer Tool & Die Company Balance Sheet As of December 31, 20X2

Chad Exchange Rate U.S. $

(millions) (Chad/US$) (millions)

Cash 20 0.25 $80

Accounts receivable 30 0.25 120

Inventory 100 0.3125 320

Fixed assets (net) 500 0.3333 1,500

Total assets 650 $2,020

Accounts payable 50 0.25 $200

Capital stock 380 0.3333 1,140

Retained earnings 220 -- 680

Total liabilities and equity 650 $2,020

Acer Tool & Die Company Income Statement

For year ending December 31, 20X2

(Amounts in millions of Chad)

Revenues 1,000

Cost of sales 700

Depreciation expense 50

Selling expense 30

Translation gain (or loss)

Net income 220

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The exchange rate at the beginning of 20X2 was 0.3333 Chad/US$. The exchange rate at the
end of 20X2 was 0.25 Chad/US$. The average rate for 20X2 is 0.3125 Chad/US$. Beginning
inventory is 90 Chad, which was translated to $270 on the 20X1 balance sheet. Acer Tool &
Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line
method.

Purchases occurred evenly throughout the year. Assume that retained earnings at year-end
20X1 were zero, the historical exchange rate for depreciation is 0.333, and no dividends
were paid during 20X2.

Using the current rate method for the Acer Tool & Die Company, what is the value of total
assets after translation?

A) $1,950.
b. With the current rate method, all balance sheet items except for common stock are
B) $2,600. translated at the current rate.
Total assets = 650 / 0.25 = $2,600
C) $2,020.

Question #65 of 102 Question ID: 1472556

Which of the following statements is most accurate concerning foreign currency translation?

In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the
A) local currency depreciates the cost of good sold under the temporal method is less
than the cost of goods sold using the current rate method.
In the case of an appreciating currency, the fixed asset turnover will be lower under
B)
the temporal method, as compared to the current rate method.
receivable is current monetary, so translate at current rate regarding which method.
The receivables turnover ratio is identical under both the temporal method and the
C)
current rate method. NI/Avg receivables
C. The receivables turnover (sales / receivables) is unaffected because both methods translate sales at the average rate and
accounts receivable at the current rate. When using FIFO and the temporal method we assume that the appropriate rates to
use for cost of goods sold (COGS) are the older historical rates. The average rate is used for COGS under the current rate
method. If the local currency depreciates, COGS would be higher under the temporal method. With an appreciating currency
the fixed asset turnover ratio (sales / fixed assets) will be higher using the temporal method because the temporal method
uses the historical rate for fixed assets whereas the current rate method uses the current rate. They both use the
same average rate for sales
Question #66 of 102 Question ID: 1472533

An important distinction between the temporal method and the current rate method is that:

monetary assets and liabilities are remeasured (temporal method) at historical rates
A)
but translated (current rate method) at current rates.

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depreciation and cost of goods sold (COGS) are a function of the current rate under
B) translation (current rate method), but a function of the average rate under
remeasurement (temporal method).
the current rate method results in an adjustment to the equity account on the
C) balance sheet. The temporal method results in a gain or loss appearing on the
income statement.
c

Question #67 of 102 Question ID: 1472588

Gert Fonn, CFA, extracted the following information on the regulatory capital and total
assets for JJK Inc., a U.S. commercial bank he is considering as an investment. Fonn weights
cash at 0%, performing loans at 100% and non-performing loans at 150% when calculating
risk-weighted assets, and only considers investing in institutions with a tier 1 capital ratio
over 15%. However, he is concerned that JJK has classified $85m of non-performing loans as
performing loans.

2018 2018

Regulatory Capital $('000) $('000)

Common Equity Tier 1 Capital 80,438 Cash 165,754

Additional Tier 1 Capital 14,294 Performing loans 235,631

Tier 2 Capital 22,395 Non-performing loans 158,654

Using the information in the table, which of the following conclusions is Fonn most likely to
make?

A) JJK’s current tier 1 capital ratio does not meet Fonn’s criteria
JJK’s current tier 1 capital ratio meets Fonn’s criteria even if the $85m of non-
B)
performing loans were reclassified
JJK’s current tier 1 capital ratio meets Fonn’s criteria, but would not if the $85m of
C)
non-performing loans were reclassified
b

Question #68 of 102 Question ID: 1472542

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The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss
subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. All the
common stock of the subsidiary was issued at the beginning of the year and the subsidiary
uses the weighted-average inventory cost-flow assumption. In addition, the value of the SF is
as follows:

Beginning of year $0.5902

Average throughout the year $0.6002

End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as
follows:

Accounts receivable = 3,000

Inventory = 4,000

Fixed assets = 12,000

Accounts payable = 2,000

Long-term debt = 5,000

Common stock = 10,000

Retained earnings = 2,000

Net income = 2,000

The remeasured value of accounts receivable and inventory respectively are closest to:

A) $1,771 and $2,361.

B) $1,845 and $2,361.
C) $1,845 and $2,401.
C. The basis for using the current rate method is when Functional Currency is NOT the same
as Parent's Presentation (reporting) Currency. The basis for using the temporal method is
when Functional Currency = Parent's Presentation Currency.
Since the USD is the functional currency, use the temporal method. Under the temporal
method, inventory is remeasured using the historical rate. However, our best guess of the
historical rate under the weighted average inventory cost-flow assumption is the average
rate through the period. Hence, A/R = $0.615 × 3,000 = $1,845 and Inventory = $0.6002 ×
4,000 = $2,401. Question #69 of 102 Question ID: 1472585

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John Gittens is reviewing his firm's guidance for the application of the CAMELS framework
and notices the following two statements:

"The mission of a banking entity will affect the way its assets and liabilities
Statement 1: are managed, and hence this qualitative impact is usually addressed
within the management capabilities section of the CAMELS approach."

"The corporate culture may lead to excessive risk taking, or even a high
Statement 2: level of risk aversion, and this aspect is not covered in a typical CAMELS
analysis."

Regarding the two statements made by Gittens, statement 1 is most likely:

A) correct and statement 2 is most likely correct

B) incorrect and statement 2 is most likely incorrect
C) incorrect, and statement 2 is most likely correct
C. Neither the mission nor the corporate culture are addressed in a typical CAMELS analysis,
hence statement 1 is incorrect (stating that the mission is included) but statement 2 is
correct (in stating that the corporate culture is not included).

Question #70 of 102 Question ID: 1472578

Which of the following is least likely a reason for the establishment of global and regional
regulatory bodies?

A) To minimize systemic risk.

B) To increase global opportunities for regulatory arbitrage.
C) To increase harmonization or regulatory rules.
B

Question #71 of 102 Question ID: 1472558

Which of the following statements concerning the translation of a subsidiary's financial

statement and the subsidiary's ratios is least accurate?

The subsidiary's ratios in the local currency will differ from ratios calculated after
A)
translation.
Ratios calculated under the current rate method will not differ from those calculated
B)
under the temporal method.
B
C) The statement of cash flows is not affected by the choice of translation.

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Question #72 of 102 Question ID: 1472591

Which of the following statements regarding Property and Casualty insurance institutions is
most likely correct?

The suitability of assets held can be analyzed by observing the status of the assets in
A) the fair value hierarchy. A majority of level 3 reported values indicates an
appropriate asset base
Due to the uncertainty of payout timings and levels, the institution will usually invest
B)
in high-risk, longer term assets
C) The priority in the selection of assets should be liquidity
C. Due to the uncertain nature of required payouts, liquidity is the key concern. High-risk,
long term assets are therefore not appropriate. Level 1 valuations would suggest liquid
assets, as they are priced using identical trading (and hence liquid) assets.

Question #73 of 102 Question ID: 1472575

Which of the following statements is least likely correct? Financial institutions differ from
other companies:

A) due to their assets being predominantly tangible.

B) due to their activities giving rise to systemic risk.
C) due to their balance sheet containing assets that are often measured at fair value.

A. Lots of companies have predominantly tangible assets. Financial institutions differ in that
their assets are predominantly financial assets. These are often measured at fair value,
and financial institutions do give rise to systemic risk.

Question #74 of 102 Question ID: 1472570

(Assume U.S. GAAP for this question.) For a subsidiary in a hyperinflationary economy, the
functional currency should be the:

A) Subsidiary's operating currency. B

B) Parent's currency.
C) Local currency.

Question #75 of 102 Question ID: 1482619

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The Schuldes Company had the following reported assets in euros at historical cost for the
period ending December 31, 2005.

Cash 134

Accounts receivable 270

Inventory 404

Net fixed assets 1347

Total assets 2155

The exchange rate per euro was $0.8734 on January 1, 2005 and $0.9896 on December 31,
2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes
using the current rate method are:

A) $2,178.
B) $2,133. B

C) $1,923.

Question #76 of 102 Question ID: 1472544

Portinta Inc, a U.S. based pharmaceutical company, has a UK based subsidiary, Medaze plc.
The U.S. dollar has been appreciating relative to GBP over the past year. Using the current-
rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most
likely have which of the following effects on the long-term debt to equity ratio relative to
what the ratio would have been without the effects of translation?

A) The ratio will be lower.

B) The ratio will be higher.
C) The ratio will be the same.
C. Under the current rate method, both LTD and equity are translated at the current rate of
exchange. Hence, since the same rate is applied in both the numerator and denominator,
the ratio will not change.
Note: When equity is broken out into separate accounts, common stock is taken at the
historical rate. When taken as a whole, equity should be translated at the current rate. In
this case we are not given any information on the common stock amount, so we translate
equity at the current rate.
Question #77 of 102 Question ID: 1472506

Under the current rate method, common stock is translated by using the:

A) rate that existed when the equity was issued.

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B) exchange rate as of the balance sheet date.

C) present value of weighted average rate.
A

Question #78 of 102 Question ID: 1472505

Which of the following general statements is CORRECT with respect to the temporal method?
Revenues and operating expenses (excluding COGS) are translated at the:

A) current rate.
B) average rate.
C) historical rate.
B

Question #79 of 102 Question ID: 1472502

Which of the following statements regarding the translation of a foreign subsidiary into the
reporting currency is most accurate?

If the functional currency is equal to the local currency, exchange gains and losses
A)
on translation will be recognized in the income statement.
If the reporting currency is the functional currency, the temporal method is applied
B)
and exposure is equal to net monetary assets.
A multinational firm with small liability balances generally has minimal foreign
C)
currency exposure on its balance sheet.
B

Question #80 of 102 Question ID: 1472497

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A German company (reporting currency = Euro) owns a foreign subsidiary in the U.S. If the
results below are reported in local currency (USD), after translation what is the effect of the
change in the exchange rate on revenues? Round to the nearest dollar and/or percent.

$ per 1 Euro avg.

Year Sales
Exchange Rate

2001 $10,000 0.9

2002 $10,000 0.8

A) There is no change is revenue growth between 2001 and 2002.

B) The company shows a 12.5% growth in revenues in 2002.
C) The company shows a 0.1% decline in revenues in 2002.
B. While sales were flat in terms of local currency, after translation the reported revenue
increased 12.5%. 10,000/0.9 = 11,111; 10,000/0.8 = 12,500; 12,500/11,111 = 12.5% increase
due to exchange rate effects.

Question #81 of 102 Question ID: 1472489

Which of the following statements regarding the functional currency is least accurate? The
functional currency:

A) is remeasured into the reporting currency under the temporal method.

B) is determined by management.
is the currency of the primary economic environment in which the foreign subsidiary
C)
generates and expends cash.

Question #82 of 102 Question ID: 1477070

Which of the following ratios is unaffected by the choice between the current rate method
and the temporal method?

A) Quick ratio. A. All of the components of the quick ratio (cash and cash equivalents,
accounts receivable, and accounts payable) are converted at the same rate
B) Inventory turnover. under both methods so the ratio is unaffected by the method. The current ratio
is the same as the quick ratio except it also contains inventory which is
C) Current ratio. translated at the historical rate with the temporal method and at the current rate
with the current rate method. Inventory turnover ratio and current ratio both
A would be similarly affected as they rely on the value of inventory

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Question #83 of 102 Question ID: 1472540

Gortal Inc., a U.S. company has a wholly owned subsidiary, Fortina GmBh, based in
Germany. The U.S. dollar has been appreciating relative to the Euro over the past year. The
use of the temporal method to translate a foreign subsidiary's financial statements to U.S.
dollars will most likely have which of the following effects on the fixed-asset turnover ratio
(S/FA) relative to what the ratio would have been without the effects of translation assuming
no new fixed assets were purchased throughout the year?

A) The ratio will be lower.

B) The ratio will be higher.
C) There will be no effect on the ratio.
A. Since the dollar has appreciated, the local currency has depreciated, so each foreign currency unit
bought more dollars in the past relative to the present. Fixed assets are remeasured at the historical rate
and sales are remeasured at the average rate under the temporal method. Since the historical rate is
buying more dollars relative to the average rate, the denominator is staying the same whereas the
numerator is getting smaller. Thus, the ratio is lower

Question #84 of 102 Question ID: 1472567

The nation of Deadoa is experiencing hyperinflation. A subsidiary of a multinational

operating in Deadoa will notice changes in its purchasing power and in its financial results as
reported on its parent company's financial statements. Which of the following best describes
the situation for a subsidiary operating in Deadoa? Purchasing power will:

quickly deteriorate and the local currency will be rapidly depreciating against the
A)
presentation currency.
dramatically appreciate and the local currency will be rapidly appreciating against
B)
the presentation currency.
quickly deteriorate and the local currency will be rapidly appreciating against the
C)
presentation currency.

Question #85 of 102 Question ID: 1472527

Which of the following general statements is most accurate with respect to the current rate
method? Revenues:

A) and operating expenses are translated at the average rate.

B) and operating expenses are translated at the current rate.

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are translated at the average rate while operating expenses are translated at the
C)
current rate.

Question #86 of 102 Question ID: 1472530

At what exchange rate are revenues and accounts receivable translated under the current
rate method?

Accounts
Revenues
receivable

A) Average rate Current rate

B) Average rate Historical rate

C) Current rate Current rate

A

The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die
Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance
sheet and income statement of Acer Tool & Die Company for the year-ended December 31,
2005, is shown below. The balance sheet has been restated using the U.S. dollar as the
functional currency.

Acer Tool & Die Company Balance Sheet As of December 31, 2005

Chad Exchange Rate U.S. $

(millions) (Chad/US$) (millions)

Cash 20 0.25 $80

Accounts receivable 30 0.25 120

Inventory 100 0.3125 320

Fixed assets (net) 500 0.3333 1,500

Total assets 650 $2,020

Accounts payable 50 0.25 $200

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Capital stock 380 0.3333 1,140

Retained earnings 220 -- 680

Total liabilities and equity 650 $2,020

Acer Tool & Die Company Income Statement

For year ending December 31, 2005

(Amounts in millions of Chad)

Revenues 1,000

Cost of sales 700

Depreciation expense 50

Selling expense 30

Translation gain (or loss)

Net income 220

Acer has determined that the exchange rate exposure at the beginning of 2005 is −260
Chad.

The exchange rate at the beginning of 2005 was 0.3333 Chad/US$ and that is the historical
rate applicable to beginning inventory of 90 Chad. The exchange rate at the end of 2005 was
0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Purchases occurred evenly
throughout the year. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed
assets using the straight-line method. Assume that retained earnings at year end 2004 were
zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid
during 2005.

Question #87 - 88 of 102 Question ID: 1472553

What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?

A) $2,240.00
B) $2,242.00 C. Purchases = COGS - Beginning inventory + ending inventory = 710 Chad

C) $2,222.00

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Question #88 - 88 of 102 Question ID: 1472554

What is the remeasurement gain or loss for the period using the temporal method?

A) $32 loss.
B) $52 loss. B

C) $50 gain.

Question #89 of 102 Question ID: 1472510

Which of the following general statements is CORRECT with respect to the temporal method?
Monetary assets are:

A) translated at the current rate.

B) not translated.
C) translated at the average rate. A

Question #90 of 102 Question ID: 1472541

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The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The
U.S. dollar (USD) has been determined to be the functional currency. All the common stock
of the subsidiary was issued at the beginning of the year and the subsidiary uses the
weighted-average inventory cost-flow assumption. In addition, the value of the SF is as
follows:

Beginning of year $0.5902

Average throughout the year $0.6002

End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as
follows:

Accounts receivable = 3,000

Inventory = 4,000

Fixed assets = 12,000

Accounts payable = 2,000

Long-term debt = 5,000

Common stock = 10,000

Retained earnings = 2,000

Net income = 2,000

The total value of net monetary assets is equal to:

A) 12,000 SF.
B
B) -4,000 SF.
C) 3,000 SF.

Question #91 of 102 Question ID: 1472539

Regarding the different methods of consolidating foreign subsidiaries' operating results, it

would be most accurate to state that:

under the current rate method, revenues and expenses are translated at the
A)
exchange rate that existed when the underlying transaction occurred.

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under the temporal method, monetary assets and monetary liabilities are translated
B)
at a historical exchange rate.
under the current rate method, individual components of stockholder’s equity are
C)
A. Under the currenttranslated at the
rate method, currentand
revenues exchange rates.
expenses are translated at the exchange rate that existed when the
underlying transaction occurred. (Though, for practical reasons, an average exchange rate is often used to translate
income items.) Under the temporal method, monetary assets and monetary liabilities are translated at the current
exchange rate. Under the current rate method, while shareholder's equity (as a whole, including CTA) is translated at
the current rate, common stock is translated at historical exchange rate.
Deborah Ortiz, CFA®, is the director of Global Research for F.E. Horton & Co. Ortiz recently
hired two junior analysts, Tina Hirauye and Dominique Wilkins to assist in the financial
statement analysis of global conglomerates. Hirauye and Wilkins are both Level II candidates
in the CFA® Program, so Ortiz thought they would be the ideal people to work on a project
dealing with consolidating the results of foreign operating units in the financial statements
of the global parent.

Before starting on the project, Ortiz has a meeting with Hirauye and Wilkins to discuss the
use of different currencies in a company's operations. At the meeting, Hirauye states that
when analyzing multinational firms, there cannot be a difference between local and
functional currencies. Wilkins disagrees with her and states that there can be a difference
between local and functional currencies, but only if the parent of the subsidiary operates in
a hyperinflationary environment. After another 30 minutes of discussion, Ortiz concludes
the meeting by telling them to make sure they understand the different accounting rules for
remeasurement and translation, under SFAS 52.

Hirauye and Wilkins are given projects involving two different firms:

Molsan Industries is a Canadian multinational firm with a subsidiary in Japan. The

subsidiary has operations in both Japan and Singapore.
Neslarone is based in Switzerland and generates the majority of its cash in Swiss
Francs (CHF). The firm issues and prepares its consolidated financial statements in
U.S. dollars.

Hirauye and Wilkins spend the morning reviewing the details of their assignment and decide
to take a break for lunch at a restaurant across the street from F.E. Horton & Co.'s
headquarters. They agree that they have a challenging task and both are nervous about
turning in their consolidated financial statements to Ortiz on the following day.

Question #92 - 95 of 102 Question ID: 1472491

Regarding the statements made at the meeting:

A) Hirauye’s statement is incorrect; Wilkins’ statement is correct.

B) Hirauye’s statement is incorrect; Wilkins’ statement is incorrect.
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C) Hirauye’s statement is correct; Wilkins’ statement is correct.

B

Question #93 - 95 of 102 Question ID: 1472492

Hirauye is working on consolidating the financial statements of Molsan Industries' Japanese

subsidiary. Under SFAS 52, regarding Foreign Currency Translation, if:

more than half of the subsidiary's revenue is from Japanese sources, then the
A) results of the Singapore operation are translated into Japanese yen and then
translated into Canadian dollars.
management determines that the subsidiary's functional currency is the Japanese
B) yen, the results of the Singapore operation are first remeasured into Japanese yen
and then translated into Canadian dollars.
management determines that the subsidiary's functional currency is the Singapore
C) dollar, then the results of the Singapore operation are remeasured into Canadian
dollars.
B

Question #94 - 95 of 102 Question ID: 1472493

Ortiz had told the junior analysts to make sure they understand the different accounting
rules under SFAS 52. When referring to foreign exchange rates, the difference between
remeasurement and translation is that remeasurement:

refers to the conversion of local currency into the functional currency; translation is
A)
the conversion of the functional currency into the reporting currency.
and translation refer to the same process of translating the functional currency into
B)
the reporting currency.
is used to describe historical exchange rates while translation is used for current
C)
rates.

A. Translation is between functional and reporting currency. Remeasurement occurs

between local and functional currencies.

Question #95 - 95 of 102 Question ID: 1472494

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Wilkins and Hirauye are working on constructing the consolidated statements for Neslarone.
They know that after they convert from Swiss Francs (CHF) to U.S. dollars (USD), they will be
left with a foreign currency adjustment that needs to be included on the financial
statements. To convert from CHF to USD, the analysts should use the:

current rate method and they should record the foreign currency adjustment on the
A)
balance sheet.
current rate method and they should record the foreign currency adjustment on the
B)
income statement.
temporal method and they should record the foreign currency adjustment on the
C)
income statement.

Question #96 of 102 Question ID: 1472507

Which of the following currency translation methods is most appropriate in a

hyperinflationary economy under US GAAP? The:

current/non-current method since current assets and liabilities are translated at the
A)
current exchange rate.
temporal method because all non-monetary accounts are translated at the historical
B)
rate.
current rate method since the translation gain or loss is shown on the income
C)
statement.

Question #97 of 102 Question ID: 1472569

A hyperinflationary economy is typically defined as one that has:

A) cumulative inflation that exceeds 100% over a twelve-year period.

B) an inflation rate that exceeds 10% per year for three consecutive years.
C) cumulative inflation that exceeds 100% over a three-year period.

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Question #98 of 102 Question ID: 1472499

Edmonton Oilfield Supply has made an equipment sale in Venezuela in the amount of VEF
15,000,000. On the day of the sale, the exchange rate is 1.7519 VEF per 1 Canadian dollar. 90
days later, when the Venezuelan firm pays for the equipment, the exchange rate is 1.6326.
As a result of the change in the exchange rate, Edmonton will recognize a:

A) gain of $1,096,104.
B) gain of $625,666.
B
C) loss of $1,789,500.

Question #99 of 102 Question ID: 1472531

Which of the following statements regarding the functional currency under US GAAP is least
accurate?

The functional currency is defined as the primary currency of the economic

A)
environment in which the parent firm operates.
If a firm operates in a country or environment which is subject to cumulative
B) inflation of 100% or more over a three year period, that firm will use the parent's
currency as the functional currency.
Self-contained, independent subsidiaries whose operations are primarily located in
C)
the local market will use the local currency as the functional currency.

A. he functional currency is defined as the primary currency of the economic environment

in which the foreign subsidiary operates.

Question #100 of 102 Question ID: 1472537

The U.S. Deter Company operates a subsidiary in the UK, and the functional currency is the
British pound. The subsidiary's 2001 income statement shows £500 of net income and a £50
dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The
current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is
the change in retained earnings for the period in U.S. dollars under U.S. GAAP?

A) $750. C. Since the functional currency is the local currency, use the current rate method. The net
income is translated at the average rate, and dividends are translated at the rate that
B) $725. applied when they were paid. Hence: 1.58(£500) - 1.50(£50) = $715.

C) $715.

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Question #101 of 102 Question ID: 1472574

A company is exposed to foreign exchange risk due the impact of changes in currency values
on a:

A) company’s assets and liabilities only.

B) company’s assets only.
C) company’s assets, liabilities, and future sales.

c. Foreign exchange risks include the impact of changes in currency values on assets and
liabilities of a business, as well as on future sales.

Question #102 of 102 Question ID: 1472543

Hann Company is a U.S. multinational firm with operations in several foreign countries.
Hann has a 100 percent stake in a French subsidiary. The foreign subsidiary's local currency
has appreciated against the U.S. dollar over the latest financial statement reporting period.
In addition, the French firm accounts for inventories using the FIFO inventory cost-flow
assumption. The net profit margin as computed under the current rate method would most
likely be: NI/rev

A) lower than the same ratio computed under the temporal method.
B) higher than the same ratio computed under the temporal method.
C) either higher or lower than the same ratio computed under the temporal method.

C. The foreign currency gain or loss appears on the income statement under the temporal
method. Hence, to make any determinations regarding the movements of this ratio, we
need more information regarding the net monetary asset or liability position as of both
the beginning and ending balance sheet date.

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