Question #1 of 126 Question ID: 1472542

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) $1,845 and $2,401.

B) $1,771 and $2,361.
C) $1,845 and $2,361.

Question #2 of 126 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:

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

Question #3 of 126 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) long-term debt.
B) inventory.
C) accounts payable.

Question #4 of 126 Question ID: 1472507

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

hyperinflationary economy under US GAAP? The:

current rate method since the translation gain or loss is shown on the income
A)
statement.
current/non-current method since current assets and liabilities are translated at the
B)
current exchange rate.
temporal method because all non-monetary accounts are translated at the historical
C)
rate.
Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 20X7 the $/SF
exchange rate was 0.77. Assume that this is the historical rate, except as noted below. One
year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The
average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that Scud
uses a periodic inventory system and that inventory is accounted for using the LIFO
inventory assumption, was bought and sold evenly throughout the year.

Scud Co. Int'l

Balance Sheet (in SF thousands)

Dec. 31, 20X7 Dec. 31, 20X8

Cash & A/R 400 600

Inventory 500 500

Net Fixed Assets 700 600

Total Assets 1,600 1,700

A/P 100 200

Long-term debt 200 100

Common Stock 1,300 1,300

Retained Earnings 0 100

Total Liabilities 1,600 1,700

Income Statement (in SF thousands)

December 31, 20X8

In SF

Sales 7,000

COGS (6,800)

Depreciation (100)

Remeasurement Gain/Loss --

Net Income 100

Assume that the functional currency is the U.S. dollar when answering the following
questions.
Question #5 - 8 of 126 Question ID: 1586118

Assuming closing retained earnings for the year 20X8 was $110, the translation gain on the
income statement would be:

A) $17.
B) $0.
C) $27.

Question #6 - 8 of 126 Question ID: 1586119

The level of net fixed assets on the remeasured 20X8 balance sheet would be:

A) $510.
B) $462.
C) $480.

Question #7 - 8 of 126 Question ID: 1586120

The level of retained earnings on the remeasured 20X8 balance sheet would be:

A) $101.
B) $85.
C) $305.

Question #8 - 8 of 126 Question ID: 1586121

As compared to the local currency ratio, fixed asset turnover in the reporting currency would
most likely be:

A) higher.
B) lower.
C) the same.
Walter Jameson, CFA®, is an analyst for Continental Corp., a global investment bank.
Jameson has been assigned coverage of Wasson Brothers (WB), a large U.S. based
conglomerate with many subsidiaries in both the U.S. and abroad. Jameson has completed
his review of the firm's U.S. operations, but his research report is due at the end of the week
and he has yet to assess the impact of Wasson's foreign subsidiaries on his earnings model.

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/$.

Yen/Dollar Exchange Rate

December 31, 2002 150

December 31, 2001 130

2002 Average 140

2001 Average 120

Exchange rate on date that 2002

145
dividends were declared (payable to Wasson Brothers)

Exchange rate on date of stock

100
issue and acquisition of fixed assets

Kasamatsu Industries Financial Data (12/31/02)

Yen U.S. Dollars

Exchange Rate
(in thousands) (in thousands)

Sales 700,000

COGS 280,000

Depreciation 126,000

SG & A 77,000
Income Tax Expense 98,000

Net Income 119,000

2001 Retained Earnings 0

Dividends 58,000

2002 Retained Earnings 61,000

Current Assets 50,000

Fixed Assets 486,000

Current Liabilities 46,000

Long Term Debt 254,000

Capital Stock 175,000

Accumulated Translation
Adjustment

Question #9 - 12 of 126 Question ID: 1586103

The first step in Jameson's analysis is to compute Kasamatsu's impact on WB's net income.
What is Kasamatsu's impact on WB's net income (in thousands dollars)?

A) $821.
B) $793.
C) $850.

Question #10 - 12 of 126 Question ID: 1586104

Jameson now computes the adjustment to WB's financial data due to Kasamatsu's payment
of dividends. What is the U.S. dollar amount of this adjustment (in thousands)?

A) $400.
B) $414.
C) $446.
Question #11 - 12 of 126 Question ID: 1586105

The carrying value of Kasamatsu's total assets on December 31, 2002, using the current rate
method of accounting for translations is:

A) $2,938.
B) $3,573.
C) $3,240.

Question #12 - 12 of 126 Question ID: 1586106

Having converted all of Kasamatsu's accounts using the current rate methods, Jameson is
curious to compare the difference between the temporal and current rate methods on
balance sheet accounts. The difference in translated fixed assets and long term debt
respectively if Jameson were to use the temporal method rather than the current rate
method is:

Long-Term
Fixed Assets
Debt

A) $0 $0

B) $1620 $0

C) $1620 $121

Question #13 of 126 Question ID: 1472533

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

the current rate method results in an adjustment to the equity account on the
A) balance sheet. The temporal method results in a gain or loss appearing on the
income statement.
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).
 monetary assets and liabilities are remeasured (temporal method) at historical rates
C)
but translated (current rate method) at current rates.

Question #14 of 126 Question ID: 1472556

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

The receivables turnover ratio is identical under both the temporal method and the
A)
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.
In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the
C) 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.

Question #15 of 126 Question ID: 1482619

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) $1,923.
B) $2,133.
C) $2,178.
Question #16 of 126 Question ID: 1472546

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

A) Fixed asset turnover ratio.

B) Net profit margin.
C) Debt/Assets ratio.

Question #17 of 126 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.

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

Question #18 of 126 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 last in, first out (LIFO), then the beginning-of-
A)
period rate is used to remeasure COGS.
The Inventory account is remeasured using the historical rate under both LIFO and
B)
FIFO.
If the firm accounts for inventory using first in, first out (FIFO), then a more recent
C)
rate will be applied to the inventory account.
Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico.
Giant Company uses either the temporal or the current rate method of foreign currency
translation for its subsidiaries.

Grande, Inc., began operations January 1, 2012.

Common Stock and Fixed Assets were acquired January 1, 2011.
Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with
a slow rate of turnover.
The beginning U.S. dollar value of Giant's retained earnings was $2,600,000.
The inventory in the January 1, 2012, Balance Sheet was acquired on January 1, 2012.

Exchange Rates were: January 1, 2011 $0.14/peso

January 1, 2012 $0.12/peso

$0.11/peso (this is the 2012 average

June 30, 2012
rate)

December 31, 2012 $0.10/peso

Grande, Inc.

Balance Sheet (in M Pesos)

Jan. 1, 2012 Dec. 31, 2012

Cash 5,000,000 20,000,000

Accounts Receivable (A/R) 20,000,000 35,000,000

Inventory 15,000,000 15,000,000

Fixed Assets (net) 90,000,000 60,000,000

Accounts Payable (A/P) 10,000,000 10,000,000

Long Term Debt 40,000,000 35,000,000

Common Stock 80,000,000 80,000,000

Retained Earnings 5,000,000

2012 Income Statement

(in Pesos)

Sales 60,000,000

Cost of Goods Sold (COGS) (45,000,000)

 Depreciation (10,000,000)

Net Income 5,000,000

Assume that Giant Company considers the Mexican peso to be both the local currency and
the functional currency of Grande, Inc.

Question #19 - 22 of 126 Question ID: 1586083

To reflect the results of Grande, Inc., in its financial statements, it would be most
appropriate for Giant Company to use the:

A) current rate method followed by the temporal method.

B) temporal method.
C) current rate method.

Question #20 - 22 of 126 Question ID: 1586084

The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31,
2012, is closest to:

A) $250,000.
B) $550,000.
C) $500,000.

Question #21 - 22 of 126 Question ID: 1586085

The translation gain or loss from the activities of Grande, Inc., should be reported in the:

A) income statement.
B) equity accounts.
C) statement of cash flows.
Question #22 - 22 of 126 Question ID: 1586086

Compared to the current ratio before translation, the current ratio after translation is most
likely to be:

A) higher.
B) lower.
C) the same.

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in
Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The
Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.

Assets Liabilities and Equity

Cash 200 A/P 180

A/R 240 Common Stock 720

Maintenance Supplies 180

Fixed Assets 280

Total Assets 900 Total Liab & Equity 900

APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars
as:

Sales 3,500

Total Costs 2,900

Net Income 600

The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the
exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had
deteriorated to 3 Australian dollars = $1.

The Dec. 31, 2005 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 Liab. & Equity 1,530

Question #23 - 26 of 126 Question ID: 1586133

On APJ's 2005 income statement, the level of net income in U.S. dollars would be:

A) $200.00.
B) $240.00.
C) $300.00.

Question #24 - 26 of 126 Question ID: 1586134

On APJ's 2005 balance sheet, the level of common stock (not including retained earnings) in
U.S. dollars would be:

A) $360.
B) $288.
C) $240.

Question #25 - 26 of 126 Question ID: 1586135

On APJ's 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars
would be:

A) −$220.
B) −$160.
C) −$280.
Question #26 - 26 of 126 Question ID: 1586136

Which one of the following statements correctly describes the effect on Dell's financial
statements if the U.S. dollar had been chosen as the functional currency?

A) The current rate method would apply.

B) The translation adjustment would appear as a line item on Dell's income statement.
C) The translation adjustment would appear as a line item on Dell's balance sheet.

Question #27 of 126 Question ID: 1472528

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

current rate method applies the current exchange rate to all balance sheet
A)
accounts.
current rate method applies the average exchange rate to all income statement
B)
accounts.
temporal method uses the historical exchange rate to translate non-monetary
C)
assets and liabilities into the currency of the country of the parent company.

Question #28 of 126 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.

Question #29 of 126 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 the same.

B) The ratio will be lower.
C) The ratio will be higher.

Question #30 of 126 Question ID: 1472539

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

would be most accurate to state that:

under the temporal method, monetary assets and monetary liabilities are translated
A)
at a historical exchange rate.
under the current rate method, revenues and expenses are translated at the
B)
exchange rate that existed when the underlying transaction occurred.
under the current rate method, individual components of stockholder’s equity are
C)
translated at the current exchange rates.

Navratov Corp. is a designer and manufacturer of high end sporting goods. The majority of
the firm's business comes from Olympic athletes from Russia and the United States. On
January 1, 2003, Navratov was purchased by a U.S. competitor, Evert Industries. Because
Evert's business focuses on professional athletes in North America and Asia, Evert's
management feels the acquisition of Navratov is a natural extension of their business and
that buying the Russian firm should generate economies of scale.

Peter Capriati is an analyst for Evert and has been assigned the task of integrating
Navratov's financial statements into Evert's. Capriati knows that Evert's management pays a
great deal of attention to making sure the firm's financial ratios are above the industry
average. Because Navratov's sales are split evenly between the U.S. and Russia,
management has given him the flexibility to designate the either the Ruble (Navratov's local
currency) or the U.S. dollar (Evert's reporting currency) as Navratov's functional currency. As
a result of choosing the functional currency, Capriati will use either the temporal or current
rate method to convert Navratov's financial statements, depending on which method will
have the most favorable impact on Evert's financial ratios.

Selected financial data for Navratov Corp is shown below:

Navratov Corporation

Income Statement (in Russian Rubles)

12 months ended December 31, 2003

Revenue 7,400,000

Cost of Goods Sold (COGS) (5,200,000)

Depreciation (1,200,000)

Taxes (250,000)

Net Income 750,000

Navratov Corporation

Balance Sheet (in Russian Rubles)

December 31, 2002

Assets Liabilities and Equity

Cash 500,000 Accounts Payable 3,450,000

Accounts Receivable 2,500,000 Long Term Debt 5,000,000

Inventory 3,700,000 Common Stock 3,500,000

Net Fixed Assets 6,000,000 Retained Earnings 750,000

Total Liabilities and

Total Assets 12,700,000 12,700,000
Equity

Navratov Corporation

Balance Sheet (in Russian Rubles)

December 31, 2003

Assets Liabilities and Equity

 Cash 1,000,000 Accounts Payable 2,000,000

Accounts Receivable 2,500,000 Long Term Debt 5,000,000

Inventory 3,700,000 Common Stock 3,500,000

Net Fixed Assets 4,800,000 Retained Earnings 1,500,000

Total Liabilities and

Total Assets 12,000,000 12,000,000
Equity

Navratov Corp. did not pay dividends in 2003.

The common stock was acquired on January 1, 2002.
January 1, 2003 retained earnings in USD is $300,000.
Depreciation is being taken on a straight-line basis over ten years for equipment
which was acquired on January 1, 2002, at a cost of 12,000,000 rubles.
Navratov uses FIFO inventory accounting and goods were sold evenly throughout the
year. The average rate applicable to inventory and COGS is $0.37 / ruble.

Exchange rates:

January 1, 2002, $0.40 / ruble

January 1, 2003, $0.40 / ruble
June 30, 2003, $0.37 / ruble (avg. rate)
December 31, 2003, $0.33 / ruble

Question #31 - 34 of 126 Question ID: 1586108

Which of the following statements about the temporal method and the current rate method
is least accurate?

Net income is generally more volatile under the temporal method than under the
A)
current rate method.
Subsidiaries that operate in highly inflationary environments will generally use the
B)
temporal method under U.S. GAAP.
Subsidiaries whose operations are well integrated with the parent will generally use
C)
the current rate method.

Question #32 - 34 of 126 Question ID: 1586109

If Capriati uses the current rate method to translate Navratov's income statement, the net
profit margin will be:

A) 11.7%.
B) 8.6%.
C) 10.1%.

Question #33 - 34 of 126 Question ID: 1586110

What is the difference in the translated receivables turnover ratio for Navratov Corp.
between the temporal and current rate methods? The receivables turnover rate is:

A) the same under both methods.

B) higher under the current rate method by 0.36x.
C) lower under the current rate method by 0.30x.

Question #34 - 34 of 126 Question ID: 1586111

What is the difference in the total asset turnover ratio for Navratov Corp. between the
temporal and current rate methods? The total asset turnover ratio is:

A) higher under the current rate method.

B) lower under the current rate method.
C) the same under both methods.

Question #35 of 126 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) The impact of the depreciation of the US dollar on ROE is indeterminate.
C) ROE will most likely rise.

Question #36 of 126 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) Equity.
B) Cost of goods sold.
C) Tax expense.

Question #37 of 126 Question ID: 1472560

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) $5,902 and $3,075.

B) $6,150 and $3,075.
C) $5,902 and $3,001.

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 #38 - 41 of 126 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.
C) Hirauye’s statement is correct; Wilkins’ statement is correct.

Question #39 - 41 of 126 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.

Question #40 - 41 of 126 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.

Question #41 - 41 of 126 Question ID: 1472494

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.
Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2012 the $/SF
exchange rate was 0.77. (Each Swiss Franc buys 77 cents) and is the historical rate applicable
for fixed assets and common stock. One year later the Swiss Franc had appreciated to 0.85
$/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF.
Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO)
inventory assumption and was bought and sold evenly throughout the year.

Scud Co. Int'l

Balance Sheet (in SF thousands)

Dec. 31, 2012 Dec. 31, 2013

Cash & accounts receivables (A/R) 400 600

Inventory 500 500

Net Fixed Assets 700 600

Total Assets 1,600 1,700

Accounts payable (A/P) 100 200

Long-term debt 200 100

Common Stock 1,300 1,300

Retained Earnings 0 100

Total Liabilities 1,600 1,700

Income Statement (in SF thousands)

December 31, 2013

In SF

Sales 7,000

Cost of Goods Sold (COGS) (6,800)

Depreciation (100)

Translation Gain/Loss --

Net Income 100

Assume that the functional currency is the U.S. dollar when answering the following
questions.
Question #42 - 45 of 126 Question ID: 1586088

After remeasurement, depreciation will be closest to:

A) $85.
B) $77.
C) $80.

Question #43 - 45 of 126 Question ID: 1586089

The value of common stock on the 2013 balance sheet should be closest to:

A) $1,000.
B) $1,100.
C) $1,050.

Question #44 - 45 of 126 Question ID: 1586090

For Scud Co. under the temporal method, the monetary exposures and the foreign currency
movements resulted in a:

A) cumulative translation adjustment gain on the balance sheet.

B) remeasurement loss on the income statement.
C) remeasurement gain on the income statement.

Question #45 - 45 of 126 Question ID: 1586091

If Scud Co.'s functional currency is the Euro, then to adjust the currency exposure to the
parent's currency, the US$, start with the:

Euro and use the current rate method to convert to the local currency, the Swiss
A) franc; then use the temporal method to convert to the presentation currency, the
US$.
 Swiss franc and use the current rate method to convert to the functional currency,
B) the Euro; then use the temporal method to convert to the presentation currency,
the US$.
Swiss franc and use the temporal method to convert to the functional currency, the
C) Euro; then use the current rate method to convert to the presentation currency, the
US$.

Question #46 of 126 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.
B) The current ratio is a pure balance sheet ratio.
When multiplying both the numerator and denominator by the current exchange
C)
rate, the current rate is cancelled.

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

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 #47 - 48 of 126 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) $2,222.00
C) $2,242.00
Question #48 - 48 of 126 Question ID: 1472554

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

A) $50 gain.
B) $32 loss.
C) $52 loss.

Question #49 of 126 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

A) Balance sheet Balance sheet

Income
B) Balance sheet
statement

Income
C) Balance sheet
statement

Question #50 of 126 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.
B) $725.
C) $715.
Question #51 of 126 Question ID: 1472497

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) The company shows a 12.5% growth in revenues in 2002.

B) The company shows a 0.1% decline in revenues in 2002.
C) There is no change is revenue growth between 2001 and 2002.

Hise Home Supply is a large, profitable home improvement retailer located in the United
Kingdom. Hise has recently been acquiring niche retailers with popular brand names in
certain segments of the home improvement market. One of these retailers was Wilson Tile
and Stone, a U.S. business that derived a large part of its sales from the UK.

The management team for Hise now makes all operating, financing, and investment
decisions. Brian Heltzel, a financial analyst for Hise, is responsible for translating Wilson's
financial statements from U.S. dollars to the reporting currency. Hise conducts its business
and issues financial statements in British pounds (£). Extracts from the financial statements
of Wilson are shown below in Exhibit 1.

Exhibit 1: Wilson Financial Statement Extracts

Wilson Tile and Stone – December 31, 20X7 and 20X8 Balance Sheets

20X7 20X8

Cash $1,200 $1,400

Accounts receivable 6,500 9,900

Inventory 10,400 12,400

Current assets $18,100 $23,700

Fixed assets 40,000 40,000

Accumulated depreciation 10,000 15,000

Net fixed assets $30,000 $25,000

TOTAL ASSETS $48,100 $48,700

Accounts payable $5,000 $6,000

Current portion of LT debt 1,500 1,500

Long term debt 25,000 23,500

Total liabilities $31,500 $31,000

Common stock 10,000 10,000

Retained earnings 6,600 7,700

Total equity $16,600 $17,700

TOTAL LIABILITIES and EQUITY $48,100 $48,700

Wilson Tile and Stone – 20X8 Income Statement

Revenue $75,000

Cost of goods sold (60,000)

Gross margin $15,000

Other expenses (2,300)

Depreciation expense (5,000)

Net Income 7,700

Wilson uses the FIFO method for inventory accounting.

Applicable exchange rates are as follows:

December 31, 20X7: £1.00 = $1.60

December 31, 20X8: £1.00 = $1.80
Average for 20X8 = £1.00 = $1.70
Historical rate for fixed assets, inventory, and equity: £1.00 = $1.50
Dividend declaration date: £1.00 = $1.75.
Heltzel is also using some information that has been provided by the accounts department
of Wilson. He made the notes shown below in Exhibit 2 from an email the accounts
department sent.

Exhibit 2: Accounting Department Notes

20X8 income before remeasurement gain/loss £4,138

Dividends paid during the year £2,250

Opening retained earnings £5,150

Ending retained earnings £7,323

Hertzel has also discussed the future of Wilson's role in the group with board members from
both Wilson and Hise. These discussions resulted in a concern as outline below.

Concern

Wilson's board have warned Heltzel that they are likely to engage in transactions next year
which will lead to significant deferred revenue balances remaining on the balance sheet at
the year end.

Question #52 - 55 of 126 Question ID: 1586123

As Heltzel is translating the balance sheet and income statement, which of the following are
closest to the values Heltzel determines for revenues and accounts payable for 20X8?

Accounts
Revenues
Payable

A) £41,667 £3,333

B) £44,118 £3,529

C) £44,118 £3,333

Question #53 - 55 of 126 Question ID: 1586124

If Wilson assumes the numbers in Exhibit 2 are correct, the remeasurement gain/loss for
20X8 will be closest to:
A) £285.
B) –£77.
C) £1,012.

Question #54 - 55 of 126 Question ID: 1586125

Which of the following treatments is most likely correct regarding the items outlined in
Heltzel's concern?

A) The balance should be translated at the historic rate as it is a monetary item.

B) The balance should be translated at the closing rate as it is a monetary item.
C) The balance should be translated at the historic rate as it is a non-monetary item.

Question #55 - 55 of 126 Question ID: 1586126

Which of the following statements regarding the treatment of subsidiaries in a hyper-

inflationary environment under U.S. GAAP is most likely correct?

The subsidiary should be translated using the temporal method regardless of the
A)
level of autonomy, and then no further restatement is required.
The subsidiary should be translated using the temporal method regardless of the
B)
level of autonomy, and non-monetary items restated for the effect of local inflation.
The subsidiary should be translated using the current rate method regardless of the
C)
level of autonomy, and non-monetary items restated for the effect of local inflation.

Question #56 of 126 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) higher 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) lower than the gross profit margin as computed under the temporal method.

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

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

Question #57 - 58 of 126 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) The current rate method.

B) The temporal method.
C) First the temporal method, followed by the current rate method.

Question #58 - 58 of 126 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) decreased because the yen is depreciating versus the USD.

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

Question #59 of 126 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?

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

Question #60 of 126 Question ID: 1472564

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

A) high balance sheet values for long term assets.

B) high translation gains.
C) low balance sheet values for long term liabilities.

Question #61 of 126 Question ID: 1472495

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) gain of $280,000.
B) gain of $580,000.
C) loss of $300,000.

Question #62 of 126 Question ID: 1472532

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

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

Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a
subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and
manufacturing connection fittings that are vital for the proper operation of its parent
company's reactors.

Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc.
Grande, Inc., began operations January 1, 2001.
Common Stock and Fixed Assets were acquired January 1, 2000.
Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, and
was purchased evenly through the year.
The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001.

Exchange Rates were: January 1, 2000 $0.14/M peso

January 1, 2001 $0.12/M peso

$0.11/M peso (this is the 2001 average

June 30, 2001
rate)

December 31, 2001 $0.10/M peso

Grande, Inc.

Balance Sheet (in M Pesos)

Jan. 1, 2001 Dec. 31, 2001

Cash 5,000,000 20,000,000

Accounts Receivable 20,000,000 35,000,000

Inventory 15,000,000 15,000,000

Fixed Assets (net) 70,000,000 60,000,000

Accounts Payable 10,000,000 10,000,000

Long Term Debt 40,000,000 35,000,000

Common Stock 80,000,000 80,000,000

Retained Earnings 5,000,000

2001 Income Statement

(in M Pesos)

Sales 60,000,000

Cost of Goods Sold (45,000,000)

Depreciation (10,000,000)

Net Income 5,000,000

Question #63 - 66 of 126 Question ID: 1586098

Giant Company should use the following method to reflect the results of Grande, Inc., in its
financial statements:

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

B) the current rate method.
C) the temporal method.

Question #64 - 66 of 126 Question ID: 1586099

Which of the following statements regarding the current rate method is the most accurate?

This method is not typically used when the subsidiary is relatively independent of
A)
the parent.
B) Translation gains and losses are reported in equity.
C) Income statements items are translated at the current exchange rate.

Question #65 - 66 of 126 Question ID: 1586100

The translation gain or loss from the activities of Grande, Inc., should be reported in:

A) the statement of shareholder’s equity.

B) the statement of cash flows.
C) the income statement.

Question #66 - 66 of 126 Question ID: 1586101

Revenues for 2001 translated into U.S. dollars amount to:

A) $6,000,000.
B) $7,800,000.
C) $6,600,000.

Question #67 of 126 Question ID: 1472529

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

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

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

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 #68 - 71 of 126 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.
C) $1,377.
Question #69 - 71 of 126 Question ID: 1472513

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

A) $110.
B) $132.
C) $330.

Question #70 - 71 of 126 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.

Question #71 - 71 of 126 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.

Question #72 of 126 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:

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

Question #73 of 126 Question ID: 1472572

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) remain unchanged.
C) decrease.

Question #74 of 126 Question ID: 1472541

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

Question #75 of 126 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:
 highly integrated with the parent where the local currency, prices, and some costs
A)
are controlled or restricted.
B) mostly independent from the parent.
highly integrated with the parent where the local currency, prices, and some costs
C)
are not controlled or restricted.

Question #76 of 126 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, liabilities, and future sales.
C) company’s assets only.

Question #77 of 126 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) A plant purchased several years ago.

B) Dividends payable.
C) Accounts receivable.

Question #78 of 126 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) loss of $1,789,500.
C) gain of $625,666.

Question #79 of 126 Question ID: 1472570

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

A) Parent's currency.
B) Local currency.
C) Subsidiary's operating currency.

A U.S. company has a subsidiary based in Malaysia, which has the following income
statement for 20X6 and balance sheets for 20X5 and 20X6 (in million Ringgit).

Sales 1,000

Cost of goods sold 600

Depreciation 80

Operating expenses 120

Earnings before taxes 200

Taxes 60

Net income 140

Dividends 20

20X5 20X6

Cash 50 60

Accounts receivables 100 110

Inventories 100 110

Other current assets 100 110

Gross PP&E 700 800

 Less accumulated depreciation 70 150

Net PP&E 630 650

Other fixed assets 20 40

Total assets 1,000 1,080

Account payable 70 80

Current portion of LTD 100 100

Notes payable 100 150

Other current liabilities 30 30

Long-term debt 300 200

Common stock 100 100

Paid in capital 50 50

Retained earnings 250 370

The value of the Ringgit at various times over the past two years is as follows:

January 1, 20X5 $0.37

April 1, 20X5 $0.38

December 31, 20X5 $0.40

June 30, 20X6 $0.47

December 31, 20X6 $0.50

Average for 20X5 $0.39

Average for 20X6 $0.45

The common stock and long-term debt were originally issued in January of 20X5. The fixed
assets and first inventory purchases were made in April of 20X5. Additional fixed asset
purchases were made in June 20X6. Inventory is measured using the FIFO method. It can be
assumed that all of the ending inventory was acquired in June when the last major purchase
was made. The operations of the subsidiary are independent from the operations of the U.S.
parent. Inflation over the past three years has averaged 15% per year.

Question #80 - 83 of 126 Question ID: 1586113

The amount of 20X6 cost of goods sold in USD is:

(Note: if needed, use $0.40 as the rate to convert 20X5 ending inventory)

A) $300,000,000.00
B) $262,800,000.00
C) $270,000,000.00

Question #81 - 83 of 126 Question ID: 1586114

The value of December 31, 20X6, gross property, plant, and equipment reported in USD is:

A) $313,000,000.
B) $400,000,000.
C) $304,000,000.

Question #82 - 83 of 126 Question ID: 1586115

The value of December 31, 20X6, inventory reported in USD is:

A) $55,000,000.
B) $51,700,000.
C) $49,500,000.

Question #83 - 83 of 126 Question ID: 1586116

The value of all financing debt (notes payable, current portion of long-term debt, and long-
term debt) on December 31, 20X6, reported in USD is:

A) $225,000,000.
B) $171,000,000.
C) $202,500,000.
Question #84 of 126 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) cumulative inflation that exceeds 100% over a three-year period.
C) an inflation rate that exceeds 10% per year for three consecutive years.

Question #85 of 126 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) translated at the average rate.
C) not translated.

Question #86 of 126 Question ID: 1472563

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

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) $2,600.
C) $2,020.

Question #87 of 126 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:

A) decline by 15%.
B) decrease by 18%.
C) increase by 18%.

Question #88 of 126 Question ID: 1472503

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

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

Question #89 of 126 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.

B) provides better conversions of subsidiary revenues.
results in non-monetary asset values that are a better proxy for the economic values
C)
of those assets.

Question #90 of 126 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.

Question #91 of 126 Question ID: 1472501

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

A) the average rate during the year.

B) the current rate.
C) historical rates at the time of the transaction.

Question #92 of 126 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) There will be no effect on the ratio.
C) The ratio will be higher.

Question #93 of 126 Question ID: 1472530

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

Accounts
Revenues
receivable

A) Average rate Historical rate

B) Average rate Current rate

C) Current rate Current rate

Question #94 of 126 Question ID: 1472502

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

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

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.

 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 #95 - 98 of 126 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.
C) 27,600 USD.

Question #96 - 98 of 126 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) 21,600 USD.
Question #97 - 98 of 126 Question ID: 1472519

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

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

Question #98 - 98 of 126 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 #99 of 126 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?

The financial data for all three subsidiaries should be remeasured under the
A)
temporal method.
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,
B)
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.
 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.

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

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

Question #100 - 103 of 126 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) 145.

Question #101 - 103 of 126 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.
C) 150.

Question #102 - 103 of 126 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) $5,000.
C) $4,667.
Question #103 - 103 of 126 Question ID: 1472525

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.

Question #104 of 126 Question ID: 1472557

Which of the following subsidiary ratios will be affected by the translation adjustment under
the current rate method?

A) Net profit margin.

B) Gross margin.
C) Return on equity.

Geocorp is a global corporation with operations in North America, Asia, and Europe. Its
primary business is marketing industrial machinery for the construction industry. Geocorp
has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S
operations report to its regional and world headquarters located in New York, while all Asian
operations report to Tokyo, and all European operations report to Paris.

The following information is relevant to Geocorp's subsidiaries:

Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD).
The CAD is the functional currency.
All domestic U.S. operations report their results in U.S. dollars (USD).
Consolidated financial statements are reported in USD.
Geocorp's Asian operations report their results in Japanese yen (JPY). The JPY is the
functional currency.
 Geocorp's European headquarters (in Paris) operations report their results in euros
(EUR). The EUR is the functional currency.
Geocorp has a British subsidiary that reports its results in British pounds (GBP). The
USD is the functional currency.

The following table is a summary of selected financial results from Geocorp's foreign
operations:

All values are in millions CAD JPY GBP EUR

Revenues 50 5,000 150 700

Cost of goods sold (COGS) 20 2,700 100 480

Gross profit 30 2,300 50 220

Selling, general & administrative (SGA)

18 1,000 29 200
expenses

EBIT 12 1,300 21 10

Cash 35 4,200 102 400

Accounts receivable 12 1,400 45 170

Inventory 20 3,900 123 300

Fixed assets 62 7,680 370 450

Accounts payable 27 3,300 68 350

Long-term debt 0 8,450 320 550

Common stock 10 2,000 50 350

The following exchange rates apply (USD per foreign currency unit):

Currency Historical Rate Average Rate December 31, 20X2

CAD USD 0.7013 USD 0.6803 USD 0.6592

JPY USD 0.0094 USD 0.0088 USD 0.0082

EUR USD 0.9801 USD 1.0318 USD 1.0834

GBP USD 1.4803 USD 1.5506 USD 1.6209

Question #105 - 108 of 126 Question ID: 1586128

With respect to the Canadian subsidiary, what method should be used to value its revenues,
what is the appropriate exchange rate, and what is the translated value (in USD)?

A) Temporal method, average rate, USD 34.0 million.

B) Current method, current rate, USD 33.0 million.
C) Current method, average rate, USD 34.0 million.

Question #106 - 108 of 126 Question ID: 1586129

With respect to the Japanese subsidiary, what method should be used to value its accounts
receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?

A) Temporal method, current rate, USD 11.5 million.

B) Current method, current rate, USD 11.5 million.
C) Current method, average rate, USD 12.3 million.

Question #107 - 108 of 126 Question ID: 1586130

With respect to the European HQ subsidiary, what method should be used to value its SG&A
expenses, what is the appropriate exchange rate, and what is the translated value (USD)?

A) Current method, current rate, USD 216.7 million.

B) Temporal method, average rate, USD 206.4 million.
C) Current method, average rate, USD 206.4 million.

Question #108 - 108 of 126 Question ID: 1586131

With respect to the British subsidiary, what method should be used to value its fixed assets,
what is the appropriate exchange rate, and what is the translated value (USD)?

A) Temporal method, historical rate, USD 547.7 million.

B) Current method, historical rate, USD 547.7 million.
C) Current method, current rate, USD 599.7 million.
Neptune Corporation (Neptune) is a U.S. company located in Detroit, Michigan. Neptune
supplies exhaust emission systems to manufacturers of passenger cars and light duty trucks.
In January 2006, Neptune formed a wholly owned subsidiary, Continental Systems GmbH
(Continental), to supply automotive manufacturers located throughout Europe. Continental
is located in Stuttgart, Germany.

Neptune reports its consolidated financial statements in U.S. dollars. The euro has been
consistently appreciating against the dollar.

Continental accounts for its inventory using the first-in, first-out (FIFO) cost flow assumption.
Fixed assets consist of machinery, tools, and equipment.

Contintential has net monetary assets.

Question #109 - 112 of 126 Question ID: 1586093

Assuming the current rate method is used to translate Continental's financial statements, as
compared to the local currency ratios, which of the following statements about translated
operating profit margin and long-term debt to equity ratios is correct?

A) Long-term debt-to-equity ratio will be higher.

B) Operating profit margin will be higher.
C) Neither ratio will change.

Question #110 - 112 of 126 Question ID: 1586094

When stated in U.S. dollars, would Continental most likely report a higher fixed asset
turnover ratio and a higher quick ratio under the temporal method, as compared to the
current rate method?

A) Both ratios will be higher under the temporal method.

B) Only fixed asset turnover will be higher under the temporal method.
C) Only the quick ratio will be higher under the temporal method.

Question #111 - 112 of 126 Question ID: 1586095

Which of the following statements about the temporal method and the current rate method
is least accurate?

Net income is generally more volatile under the temporal method than under the
A)
current rate method.
Subsidiaries whose operations are well integrated with the parent will generally use
B)
the current rate method.
Subsidiaries that operate in highly inflationary environments will generally use the
C)
temporal method under U.S. GAAP.

Question #112 - 112 of 126 Question ID: 1586096

As compared to local currency ratios, which of the following are the most likely impacts on
gross profit margin and net profit margin, assuming the temporal method is used to
remeasure Continental's financial statements?

A) Both will be higher.

B) Higher net income, with a higher funded status.
C) Only net profit margin will be higher.

Question #113 of 126 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) There will be no effect on the ratio.

B) The ratio will rise.
C) The ratio will fall.

Question #114 of 126 Question ID: 1472496

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 decrease by 7.5%.

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

Question #115 of 126 Question ID: 1472545

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.

Question #116 of 126 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.

Question #117 of 126 Question ID: 1477070

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

A) Inventory turnover.
B) Current ratio.
C) Quick ratio.

Question #118 of 126 Question ID: 1472551

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

Fixed assets are relatively overstated under the temporal method compared to the
A)
local currency if the local currency has appreciated.
Leverage is higher under the current rate method as compared to under the local
B)
currency.
Depreciation in the reporting currency under the current rate method is higher than
C)
under the temporal method if the local currency has appreciated.
Question #119 of 126 Question ID: 1472571

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

Monetary/non-monetary, because all monetary accounts are translated at the

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

Question #120 of 126 Question ID: 1472506

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

A) rate that existed when the equity was issued.

B) exchange rate as of the balance sheet date.
C) present value of weighted average rate.

Question #121 of 126 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.

Question #122 of 126 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 decrease to

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

Question #123 of 126 Question ID: 1586081

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

Question #124 of 126 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) historical rate.
B) average rate.
C) current rate.

Question #125 of 126 Question ID: 1472500

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

A) foreign subsidiary is operating in a highly inflationary economy.

B) local currency is the functional currency.
C) functional currency is some currency other that the local currency or the U.S. dollar.

Question #126 of 126 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.

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