Advanced Accounting 10th Edition By Fischer -Test Bank

Chapter 11—Translation of Foreign Financial Statements

MULTIPLE CHOICE

1. The functional currency approach adopted by FASB 52 requires:
a. separate statements be maintained by the domestic parent company and the foreign branch both in their own currencies
b. separate statements be maintained by the domestic parent company and the foreign branch with the foreign branch translated into the functional currency
c. results from foreign currency changes to be ignored
d. a focus on whether the domestic reporting entity’s cash flows will be indirectly or directly affected by changes in the exchange rates of the foreign entity’s currency

ANS: D DIF: M OBJ: 11-1

2. In which of the following circumstances surrounding a Mexican subsidiary of an U.S. parent is the peso most likely to be considered the functional currency?
a. Sales are made globally and collected in U.S. dollars. Plant uses local materials and labor and pays in pesos. Intercompany transaction volume is high.
b. The Mexican subsidiary sells product only in Mexico and receives pesos. The materials and labor are also secured in Mexico and paid for with pesos.
c. The Mexican subsidiary receives their debt capital from a U.S. bank in dollars and products produced are sold globally for U.S. dollars.
d. Raw materials are acquired from the parent and paid for in U.S. dollars. Labor is acquired locally and paid in pesos. Financing is secured from the parent in U.S. dollars.

ANS: B DIF: M OBJ: 11-1

3. A U.S. firm owns 100% of a Japanese automobile manufacturer. The cost of automobile parts is typically 75% of the firm’s total product. In which of the following circumstances would neither the U.S. dollar nor the Japanese yen be considered the functional currency?
a. The Japanese firm buys German automobile parts with marks to produce cars sold in Latin America for dollars.
b. The Japanese firm buys German automobile parts with dollars to produce cars sold in Latin America for dollars.
c. The Japanese firm buys German automobile parts with marks to produce cars sold in Latin America for marks.
d. The FASB requires that either the parent’s or the subsidiary’s local currency be used as the functional currency.

ANS: C DIF: M OBJ: 11-1

4. Which of the following best describes the normal required method of accounting for statements of foreign entities whose functional currency is the foreign entity’s local currency, and in which a U.S. firm has an equity interest?
a. The functional method
b. The monetary-nonmonetary method
c. The current-noncurrent method
d. The temporal method

ANS: A DIF: M OBJ: 11-5

5. When the functional currency is the foreign entity’s currency:
a. exchange rate changes do not affect the economic well being of the parent
b. the subsidiary operates as an entity, independent of the parent
c. Exchange rate changes do not have immediate impact on the cash flows of the parent
d. All of the above are correct

ANS: D DIF: D OBJ: 11-1

6. The translation (remeasurement) adjustment reported in a translation when the functional currency is not the foreign currency is included
a. as a separate component of other comprehensive income
b. in the current liability section of the balance sheet as deferred revenue
c. in the calculation of net income
d. none of the above

ANS: C DIF: M OBJ: 11-2

7. Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity’s assets are translated using
a. the current rate.
b. a simple average rate.
c. a weighted average rate.
d. a historical rate.

ANS: A DIF: M OBJ: 11-2 | 11-3

8. Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity’s capital stock is translated using
a. the current rate.
b. a simple average rate.
c. a weighted average rate.
d. a historical rate.

ANS: D DIF: M OBJ: 11-2 | 11-3

9. If the functional currency is determined to not be the foreign entity’s local currency, translation is done using
a. the current rate method
b. the functional method
c. the remeasurement method
d. the derivative method

ANS: C DIF: M OBJ: 11-6

10. In most cases, which of the following is NOT a component of translated retained earnings?
a. Translated retained earnings at the end of the prior period
b. Income from the period translated at the historical rate
c. The value of dividends translated at the exchange rate on the date of declaration
d. All are components of translated retained earnings

ANS: B DIF: D OBJ: 11-3 | 11-6