International Accounting 3rd Ed By Doupnik – Test Bank

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International Accounting 3rd Ed By Doupnik – Test Bank

Chapter 02

Worldwide Accounting Diversity

 

Multiple Choice Questions

 

  1. What is the equivalent of U.S. balance sheet common stock on the balance sheet of a British company?
  2. A) Capital redemption reserve
  3. B) Share premium account
  4. C) Own shares held
  5. D) Called-up share capital

 

Answer: D   Level: Medium   LO: 1

 

  1. Which of the following is not a problem caused by accounting diversity?
  2. A) Lack of qualified international auditors
  3. B) Preparation of consolidated financial statements
  4. C) Access to foreign capital markets
  5. D) Comparability of financial statements

 

Answer: A   Level: Medium   LO: 2

 

  1. Differences in legal systems used in various countries have been cited as one reason for diversity in accounting practice.  What are the major types of legal systems?
  2. A) commercial law and accounting law
  3. B) rules and regulations
  4. C) written law and unwritten law
  5. D) common law and code law

 

Answer: D   Level: Easy   LO: 3

 

  1. The accounting standards in code law countries tend to be:
  2. A) very detailed.
  3. B) formulated by organizations such as the FASB.
  4. C) stated broadly without much guidance on accounting procedures.
  5. D) very conservative.

 

Answer: C   Level: Medium   LO: 3

 

 

  1. What is likely to be the source of accounting standards in common law countries?
  2. A) Tax law
  3. B) Non-government entities such as the FASB
  4. C) Federal and local legislatures
  5. D) The International Accounting Standards Board

 

Answer: B   Level: Medium   LO: 3

 

  1. When accounting rules are left up to professional associations rather than being legislated by governmental bodies, what is the likely result?
  2. A) Very general accounting rules are created, as in code law countries.
  3. B) Very detailed rules for practice are created, as in common law countries.
  4. C) Very general accounting rules are created, as in common law countries.
  5. D) Very detailed rules for practice are created, as in code law countries.

 

Answer: B   Level: Hard   LO: 3

 

  1. Relative to accounting standards in countries such as Germany, whose accounting laws are only 47 pages long, accounting practice in the U.S. is often described as being subject to:
  2. A) standards overload.
  3. B) standards minimization.
  4. C) the optimal amount of accounting regulation.
  5. D) ideal accounting standards.

 

Answer: A   Level: Medium   LO: 3

 

  1. In code law countries such as Germany, France, and Japan, tax law and accounting standards tend to be:
  2. A)
  3. B) very different.
  4. C)
  5. D) more confusing than those in the S.

 

Answer: C   Level: Medium   LO: 3

 

 

  1. If most of a country’s business financing comes from families, banks, and the government what should we expect in terms of information disclosure to the public?
  2. A) Relatively little because the public isn’t a major factor
  3. B) A great deal of disclosure because it will be the only way for interested parties to learn about the company
  4. C) Complete openness of accounting records
  5. D) No disclosure at all

 

Answer: A   Level: Medium   LO: 3

 

  1. In countries such as the U. S., there is great demand for public disclosure of accounting information.  What is the reason for this?
  2. A) Corporate management isn’t trustworthy.
  3. B) Businesses rely heavily on financing through issuance of stock to the public.
  4. C) The American populace is better able to read financial statements than people in other countries.
  5. D) S. government officials are generally members of corporate boards of directors and can get all the information they require.

 

Answer: B   Level: Medium   LO: 3

 

  1. Historical cost is the primary basis for asset valuation under U.S. GAAP.  Why is historical cost NOT as important in the accounting systems of Latin America as in the U.S.?
  2. A) Historical costs are too difficult to calculate in the currencies used in Central and South America.
  3. B) The countries of Latin America have experienced very high rates of inflation, which would make historical costs meaningless to readers of financial statements.
  4. C) There is very little foreign direct investment in the countries of Latin America, so few assets need to be accounted for.
  5. D) In Latin America, asset prices are very stable, making historical costs equal to replacement costs, so it doesn’t matter which valuation basis is used.

 

Answer: B   Level: Medium   LO: 3

 

  1. What does “harmonization” mean in the context of international accounting?
  2. A) The process of combining the financial statements of foreign subsidiaries into the parent company’s financial statements
  3. B) Reducing the diversity of accounting standards
  4. C) Disclosing the accounting methods used in preparing the financial statements
  5. D) Assessing the exposure resulting from inadequate internal controls

 

Answer: B   Level: Medium   LO: 2

 

 

  1. The extent to which hierarchy and unequal authority distribution in institutions and organizations are accepted within a culture is referred to as:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

Answer: D   Level: Medium   LO: 5

 

  1. A cultural preference for loosely knit social fabric rather than tightly knit social fabric is referred to by the term:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

Answer: C   Level: Medium   LO: 5

 

  1. A cultural emphasis on values of performance and achievement rather than values of relationships, caring, and nurturing is referred to as:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

Answer: B   Level: Medium   LO: 5

 

  1. What term is used to refer to a cultural aversion to ambiguous situations?
  2. A) Uncertainty avoidance.
  3. B)
  4. C) Power distance.
  5. D)

 

Answer: A   Level: Medium   LO: 5

 

  1. A cultural preference for accounting systems that rely on compliance with legal requirements is called:
  2. A)
  3. B)
  4. C) Statutory control.
  5. D)

 

Answer: C   Level: Medium   LO: 5

 

 

  1. Countries such as the U.S. tend to value self-regulation of accounting.  What term is used to define this subculture?
  2. A) Uniformity
  3. B) Flexibility
  4. C) Conservatism
  5. D) Professionalism

 

Answer: D   Level: Medium   LO: 5

 

  1. What does “transparency” mean in accounting?
  2. A) An emphasis on confidentiality
  3. B) Restricted disclosure of accounting information
  4. C) Flexibility in the application of accounting standards
  5. D) Openness of accounting information

 

Answer: D   Level: Easy   LO: 5

 

  1. What term is used to describe accounting standards that encourage risk-taking in financial reporting?
  2. A) Optimism
  3. B) Conservatism
  4. C) Professionalism
  5. D) Transparency

 

Answer: A   Level: Medium   LO: 5

 

  1. Which of the following countries tends to have a relatively high degree of transparency in their companies’ financial statements?
  2. A) Germany
  3. B) Switzerland
  4. C) United Kingdom
  5. D) Saudi Arabia

 

Answer: C   Level: Hard   LO: 5

 

  1. Which of the following countries tends to show a relatively high preference for conservative accounting standards?
  2. A) Norway
  3. B) United Kingdom
  4. C) United States of America
  5. D) Japan

 

Answer: D   Level: Hard   LO: 5

 

 

  1. Optimism is a value of accounting standards that would most likely be found in which country?
  2. A) Japan
  3. B) Australia
  4. C) Mexico
  5. D) Brazil

 

Answer: B   Level: Hard   LO: 5

 

  1. In Gray’s framework for accounting system development, the cultural dimensions of individualism, power distance, uncertainty avoidance and masculinity directly affect:
  2. A) accounting systems.
  3. B) accounting values.
  4. C) external influences.
  5. D) institutional consequences.

 

Answer: B   Level: Hard   LO: 5

 

  1. Individualism, power distance, uncertainty avoidance, and masculinity are examples of:
  2. A) accounting values.
  3. B) ecological factors.
  4. C) cultural dimensions.
  5. D) external forces.

 

Answer: C   Level: Medium   LO: 5

 

  1. How are the concepts of professionalism, uniformity, conservatism, and secrecy classified in Gray’s framework for accounting system development?
  2. A) Accounting values
  3. B) Accounting systems
  4. C) Institutional consequences
  5. D) Cultural dimensions

 

Answer: A   Level: Medium   LO: 5

 

 

  1. According to Gray’s framework for accounting system development, which of the following are directly affected by ecological influences, such as geography, demography, and technology?
  2. A) Accounting values
  3. B) Accounting systems
  4. C) Institutional consequences
  5. D) Cultural dimensions

 

Answer: D   Level: Hard   LO: 5

 

  1. According to Gray’s framework for accounting system development, the counterpart to (i.e. opposite of) the value of “secrecy” is:
  2. A)
  3. B)
  4. C)
  5. D)

 

Answer: B   Level: Medium   LO: 5

 

  1. In their 1993 paper, Doupnik and Salter found that countries tended to cluster in terms of the similarities or differences of their accounting systems.  These researchers attribute the large cluster around Great Britain to:
  2. A) the superiority of the Anglo accounting model.
  3. B) the predominant influence of Great Britain in the world economy.
  4. C) the colonial influence of Great Britain on accounting development.
  5. D) the fact that more of the world’s people speak English than any other language.

 

Answer: C   Level: Medium   LO: 5

 

  1. The 1993 study by Doupnik and Salter found that a cluster of Latin American countries indicated that the similarity of their accounting systems was related to:
  2. A) a common currency.
  3. B) the effect of persistent inflation.
  4. C) the colonial influence of Spain.
  5. D) the colonial influence of the United States of America.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. It is generally believed that the 1997 financial crisis in East Asia was partly due to accounting factors in that part of the world.  Which of the following accounting values was lacking in that part of the world, and thereby contributed to the crisis?
  2. A) Professionalism
  3. B) Statutory control
  4. C) Uniformity
  5. D) Transparency

 

Answer: D   Level: Hard   LO: 2, 5

 

  1. In the Nobes classification of accounting systems, micro-based accounting systems are derived from:
  2. A) government models.
  3. B) business models.
  4. C) tax laws.
  5. D) code law.

 

Answer: B   Level: Hard   LO: 4

 

  1. According to the research of Christopher Nobes, the most relevant factor in determining the purpose of financial reporting is:
  2. A) the way a country finances businesses.
  3. B) religious differences across countries.
  4. C) the population of the country.
  5. D) the strength of the country’s accounting profession.

 

Answer: A   Level: Medium   LO: 4

 

  1. According to the research of Christopher Nobes, what is the primary determinant of the accounting systems in developing countries?
  2. A) The nature of their financing system
  3. B) The accounting system of countries that dominate their culture
  4. C) The size of their capital market
  5. D) The strength of their tax code

 

Answer: B   Level: Medium   LO: 4

 

 

  1. The term “Class A Accounting” as it is used by the researcher Christopher Nobes refers to:
  2. A) preferred accounting systems.
  3. B) the most efficient accounting systems.
  4. C) accounting systems that primarily serve external shareholders.
  5. D) accounting systems that were developed primarily for creditors and taxing authorities.

 

Answer: C   Level: Medium   LO: 6

 

  1. The term “Class B Accounting” as it is used by the researcher Christopher Nobes refers to:
  2. A) less preferred accounting systems
  3. B) less efficient accounting systems.
  4. C) accounting systems that primarily serve external shareholders.
  5. D) accounting systems that were developed primarily for creditors and taxing authorities.

 

Answer: D   Level: Medium   LO: 6

 

  1. Which financial statement is provided by virtually all corporations worldwide?
  2. A) Statement of Cash Flows
  3. B) Statement of Changes in Financial Position
  4. C) Balance Sheet
  5. D) Statement of Changes in Non-current Assets

 

Answer: C   Level: Medium   LO: 7

 

  1. Which of the following statements is NOT universally included in annual reports worldwide?
  2. A) Balance Sheet
  3. B) Cash Flow Statement
  4. C) Income Statement
  5. D) All of the above statements are included in annual reports worldwide.

 

Answer: B   Level: Easy   LO: 7

 

 

  1. International accounting diversity can be found in terms of:
  2. A) terminology used in the financial statements.
  3. B) the amount of information disclosed in the financial statements.
  4. C) the order of items in the financial statements.
  5. D) All of the above are evidence of accounting diversity.

 

Answer: D   Level: Easy   LO: 7

 

  1. What term is used to refer to the decision about whether to report an item in the financial statements?
  2. A) Capitalization
  3. B) Recognition
  4. C) Realization
  5. D) Conservatism

 

Answer: B   Level: Easy   LO: 7

 

  1. What method of fixed asset valuation would most likely be used in countries that regularly experience high rates of inflation?
  2. A) Historical cost
  3. B) Net realizable value
  4. C) Fair value
  5. D) Net present value

 

Answer: C   Level: Medium   LO: 7

 

  1. Under U.S. GAAP, fixed assets are generally reported on the balance sheet at their:
  2. A) historical cost.
  3. B) net realizable value.
  4. C) fair value.
  5. D) market value.

 

Answer: A   Level: Easy   LO: 7

 

  1. Until 2008 Mexico used which of the following bases for fixed asset valuation?
  2. A) Historical cost
  3. B) Historical cost later restated in terms of GPP
  4. C) Current replacement cost
  5. D) Net realizable value

 

Answer: B   Level: Hard   LO: 7

 

 

  1. Which country includes a social report in the notes to financial statements?
  2. A) Japan
  3. B) Israel
  4. C) Brazil
  5. D) Germany

 

Answer: C   Level: Hard   LO: 7

 

  1. IFRS allows for which two methods for valuing property, plant and equipment?
  2. A) Historic cost and general purchasing power
  3. B) Historic cost and fair value
  4. C) Fair value and general purchasing power
  5. D) Fair value and inflation-adjusted

 

Answer: B   Level: Medium   LO: 7

 

  1. In terms of level of detail provided in the individual financial statements, the U.S. tends to:
  2. A) emphasize more line items on the face of the financial statements.
  3. B) rely less on footnote disclosure.
  4. C) condense the amount of line items and supplement with more footnote detail.
  5. D) use footnotes only when absolutely required by GAAP.

 

Answer: C   Level: Medium   LO: 7

 

  1. Which of the following is found in a Mexican income statement in the “Comprehensive Financing Result” section?
  2. A) the depreciation expense on capital leases
  3. B) purchasing power gain or loss during inflationary periods
  4. C) income taxes
  5. D) operating lease rent expense

 

Answer: B   Level: Hard   LO: 7

 

 

  1. In the United States, conformity between financial statement presentation and tax treatment is required only for:
  2. A)
  3. B)
  4. C) gains or losses on securities.
  5. D) the use of the LIFO inventory cost flow assumption.

 

Answer: D   Level: Medium   LO: 3

 

  1. In some countries, financial accounting and tax accounting are so closely related that there is very little need to account for deferred income taxes.  Of the countries listed below, which has a financial accounting system that is most different from its tax laws?
  2. A) United States of America
  3. B) Japan
  4. C) Germany
  5. D) France

 

Answer: A   Level: Medium   LO: 3

 

  1. In some countries, financial institutions operate under Shariah, which also gives guidance about accounting practice in these institutions.  What is “Shariah?”
  2. A) Shariah is the financial accounting standards board in Saudi Arabia.
  3. B) Shariah is the law governing human conduct that is derived from the Koran.
  4. C) Shariah is the codification of banking regulations in the European Union.
  5. D) Shariah is a political system used in South American countries.

 

Answer: B   Level: Medium   LO: 5

 

  1. Assets are commonly shown in order of their liquidity, or in reverse order of their liquidity.   What does “liquidity” mean?
  2. A) Liquidity refers to how easily the assets are converted to cash.
  3. B) Liquidity means that assets are inflation-adjusted.
  4. C) Liquidity refers to whether the asset is depreciable or not.
  5. D) Liquidity means that the assets are closely matched to specific liabilities.

 

Answer: A   Level: Easy   LO: 7

 

 

  1. The “Fair Presentation/Full Disclosure Model” is a classification scheme used by:
  2. A) Germany
  3. B) Japan
  4. C) the United States and the United Kingdom
  5. D) Brazil

 

Answer: C   Level: Medium   LO: 4

Chapter 08

Translation of Foreign Currency Financial Statements

 

Multiple Choice Questions

 

  1. What is meant by the “translation” of foreign currency financial statements?
  2. A) converting financial statements prepared under foreign GAAP into domestic GAAP
  3. B) converting financial statements of a foreign currency into a domestic currency
  4. C) converting the language used in financial statements from foreign to domestic
  5. D) converting historic cost financial statements into current cost financial statements

 

Answer: B   Level: Easy   LO: 1

 

  1. Companies must choose between which exchange rates for consolidating foreign subsidiaries?
  2. A) spot rate and forward rate
  3. B) spot rate and current rate
  4. C) current rate and historical rate
  5. D) domestic rate and international rate

 

Answer: C   Level: Easy   LO: 1

 

  1. What is the cause of balance sheet exposure?
  2. A) converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates
  3. B) completing international transactions in currency other than the currency of the home company
  4. C) translating subsidiary account balances to amounts denominated in the parent company’s currency
  5. D) none of the above

 

Answer: D   Level: Medium   LO: 2

 

  1. What is another term for “balance sheet exposure?”
  2. A) transaction exposure
  3. B) exchange exposure
  4. C) translation exposure
  5. D) negative exposure

 

Answer: C   Level: Easy   LO: 2

 

 

  1. Which items in the balance sheet are subject to accounting exposure?
  2. A) only assets
  3. B) only liabilities and owners’ equity
  4. C) all accounts translated at historical exchange rates
  5. D) all accounts translated at current exchange rates

 

Answer: D   Level: Medium   LO: 2

 

  1. Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany.  When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial statements?
  2. A) When there is net asset exposure, the translation adjustment will be positive.
  3. B) When there is net liability exposure, the translation adjustment will be positive.
  4. C) The direction of the adjustment is indeterminate.
  5. D) There will be no adjustment necessary unless the difference is realized.

 

Answer: A   Level: Medium   LO: 2

 

  1. What is the primary difference between transaction exposure and accounting exposure?
  2. A) Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.
  3. B) Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
  4. C) Transaction exposure must be hedged, but accounting exposure does not need to be hedged.
  5. D) Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

 

Answer: B   Level: Medium   LO: 2

 

  1. Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?
  2. A) Temporal method
  3. B) Current/Noncurrent method
  4. C) Current rate method
  5. D) None of these methods are allowed under GAAP.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. Which of the following methods for translating foreign currency financial statements may be used under IAS 21?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Temporal method
  5. D) All of the above may be used under IAS 21.

 

Answer: C   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a subsidiary had actually used the parent company’s currency for all its transactions?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Current rate method
  5. D) Temporal method

 

Answer: D   Level: Medium   LO: 3

 

  1. Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?
  2. A) Current rate method
  3. B) Current/Noncurrent method
  4. C) Temporal method
  5. D) Monetary/Nonmonetary method

 

Answer: C   Level: Medium   LO: 3

 

  1. Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule.  When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method?
  2. A) historical rate
  3. B) current rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Medium   LO: 3

 

 

  1. What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Easy   LO: 3

 

  1. Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?
  2. A) average rate
  3. B) current rate
  4. C) historical rate
  5. D) forward rate

 

Answer: C   Level: Medium   LO: 3

 

  1. When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
  2. A) current rate method
  3. B) current/noncurrent method
  4. C) monetary/nonmonetary method
  5. D) temporal method

 

Answer: A   Level: Medium   LO: 1

 

  1. Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?
  2. A) current rate method
  3. B) temporal method
  4. C) current/noncurrent method
  5. D) none of the above

 

Answer: D   Level: Easy   LO: 4

 

 

  1. Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
  2. A) It is equal to the amount of assets recorded by the subsidiary.
  3. B) It is equal to the amount of liabilities recorded by the subsidiary.
  4. C) It is equal to total assets minus total liabilities.
  5. D) It is equal to total assets plus total liabilities.

 

Answer: C   Level: Medium   LO: 4

 

  1. When would the balance sheet exposure arising from the current rate method become realized?
  2. A) It is realized once the financial statements of the subsidiary and the parent are consolidated.
  3. B) It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date.
  4. C) It is realized when the subsidiary is sold at book value and the proceeds are converted to parent company currency.
  5. D) It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary’s dividends into parent company currency?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) Any of the above methods may be used under both the temporal and current method.

 

Answer: B   Level: Medium   LO: 4

 

  1. Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: B   Level: Medium   LO: 4

 

 

  1. Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: D   Level: Medium   LO: 4

 

  1. Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the “lower of cost or market” rule for inventory valuation?
  2. A) lower of parent currency cost or parent currency market at current exchange rate
  3. B) lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate
  4. C) lower of parent currency cost or parent currency market at appropriate exchange rate
  5. D) lower of subsidiary currency cost or parent currency market at current exchange rate

 

Answer: C   Level: Medium   LO: 4

 

Use the following to answer questions 23-24:

 

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010.

 

Inventory, 1/1/10                                £ 100,000

Purchases                                               900,000

Cost of Goods Available for Sale       1,000,000

Inventory, 12/31/10                               200,000

Cost of Goods Sold                            £ 800,000

 

Exchange rates/£

December 31, 2010                             $0.522

December 31, 2009                             $0.560

2010 average                                       $0.547

 

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the current rate method?
  2. A) $417,600
  3. B) $437,600
  4. C) $448,000
  5. D) $443,900

 

Answer: B   Level: Medium   LO: 4

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the temporal method?
  2. A) $443,900
  3. B) $437,600
  4. C) $432,500
  5. D) $448,000

 

Answer: A   Level: Medium   LO: 4

 

  1. Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
  2. A) Temporal method for all subsidiaries
  3. B) Current rate method for all subsidiaries
  4. C) S. parent companies may choose between the temporal method and the current rate method.
  5. D) Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

 

Answer: D   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: A   Level: Medium   LO: 5

 

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: C   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
  2. A) the primary currency used by the parent company
  3. B) the currency that minimizes the translation adjustment on the consolidated financial statements
  4. C) the currency in which the subsidiary does its financial reporting
  5. D) the primary currency used by the subsidiary

 

Answer: D   Level: Medium   LO: 5

 

  1. In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency.  What reason did the researchers give for this management decision?
  2. A) It was easier than proving to the FASB that a subsidiary’s functional currency was the U.S. dollar.
  3. B) Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements.
  4. C) This allows the use of the current method, which defers recognizing translation gains or losses in income.
  5. D) This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary?
  2. A) Financial Accounting Standards Board
  3. B) International Accounting Standards Board
  4. C) Securities and Exchange Commission
  5. D) Company management

 

Answer: D   Level: Easy   LO: 5

 

 

  1. What is the “disappearing plant” problem that is addressed by FASB ASC 830, Foreign Currency Matters?
  2. A) This refers to the accelerated depreciation methods that are popular for fixed asset valuation.
  3. B) High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.
  4. C) Cheap foreign currency results in S. companies moving factory operations offshore.
  5. D) Investment in fixed assets was not being reported on foreign subsidiary financial statements.

 

Answer: B   Level: Medium   LO: 5

 

  1. How does FASB ASC 830, Foreign Currency Matters define a “highly inflationary economy?”
  2. A) Inflation rate over 50% annually
  3. B) Inflation rate over 10% annually
  4. C) Cumulative three-year inflation over 26%
  5. D) Cumulative three-year inflation over 100%

 

Answer: D   Level: Medium   LO: 5

 

  1. Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?
  2. A) Current rate method
  3. B) Current/noncurrent method
  4. C) Temporal method
  5. D) Monetary/nonmonetary method

 

Answer: C   Level: Medium   LO: 5

 

  1. International accounting standards define functional currency as:
  2. A) the currency of the parent company.
  3. B) the currency of the primary economic environment in which the subsidiary operates.
  4. C) the currency of the primary economic environment in which the parent operates.
  5. D) the currency used by a subsidiary for its financial reporting.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the parent company’s currency?
  2. A) active local sales market
  3. B) sales price not affected by changes in exchange rate in the short run
  4. C) high volume of intercompany transactions
  5. D) All of the above are indicators that the functional currency is the parent company’s currency.

 

Answer: C   Level: Medium   LO: 5

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the foreign currency?
  2. A) sales price not affected by changes in exchange rate in the short run
  3. B) high volume of intercompany transactions
  4. C) sales in the local market not significant
  5. D) Most of the subsidiary’s financing comes from the parent.

 

Answer: A   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements is required under IAS 21?
  2. A) Current rate method
  3. B) Temporal method
  4. C) Current rate method or temporal method, depending on the functional currency of the subsidiary
  5. D) Current rate method or temporal method may be chosen by management of the parent.

 

Answer: C   Level: Medium   LO: 5

 

  1. When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:
  2. A) appreciation or depreciation of the foreign currency
  3. B) the nature of the balance sheet exposure
  4. C) both (A) and (B)
  5. D) None of the above

 

Answer: C   Level: Easy   LO: 5

 

 

  1. Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko.  How must Parentco handle this translation adjustment when it records the sale of Subko?
  2. A) as an increase in income (gain on disposal)
  3. B) as a decrease in income (loss on disposal)
  4. C) The cumulative translation adjustment will not be affected by the sale.
  5. D) It will be a prior period adjustment to retained earnings.

 

Answer: B   Level: Hard   LO: 5

 

  1. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
  2. A) Fluctuations in reported income may affect stock price.
  3. B) Management compensation may be tied to accounting income.
  4. C) Hedging can smooth income.
  5. D) all of the above

 

Answer: D   Level: Medium   LO: 6

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the temporal method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) none of the above

 

Answer: B   Level: Hard   LO: 3

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the current rate method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) None of the above.

 

Answer: D   Level: Hard   LO: 3

 

 

  1. Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
  2. A) The translated asset and liability amounts have no meaningful interpretation.
  3. B) The translation adjustment will usually have a negative impact on income.
  4. C) Financial ratios after translation will be distorted.
  5. D) All of the above are limitations of the temporal method.

 

Answer: C   Level: Medium   LO: 4

 

  1. Which of the following actions could a company use to hedge balance sheet exposure?
  2. A) forward contract on foreign currency
  3. B) foreign currency option
  4. C) foreign currency borrowing
  5. D) All of the above may be used to hedge balance sheet exposure.

 

Answer: D   Level: Medium   LO: 6

 

  1. Which of the following is a non-derivative hedging instrument?
  2. A) forward contract on foreign currency
  3. B) foreign currency call option
  4. C) foreign currency loan
  5. D) foreign currency put option

 

Answer: C   Level: Easy   LO: 6

 

  1. What is the objective in hedging balance sheet exposure?
  2. A) Controlling the movement of foreign currency exchange rates.
  3. B) Balancing foreign currency assets and foreign currency liabilities affected by exchange rates
  4. C) To control the cash flow resulting from changes in the foreign currency exchange rates
  5. D) All of the above.

 

Answer: B   Level: Medium   LO: 6

 

 

  1. What is the paradox of hedging balance sheet exposure?
  2. A) Real costs can be incurred to hedge an unrealized translation adjustment.
  3. B) The hedging process rarely works the way management intended.
  4. C) Hedging is a conceptual process that is nearly impossible to undertake in the real world.
  5. D) Markets have yet to be developed that offer the kinds of derivative instruments required for hedging.

 

Answer: A   Level: Medium   LO: 6

 

  1. Which of the following is not among the four methods which have been used to translate foreign currency financial statements globally?
  2. A) the historic/non-historic method
  3. B) the monetary/nonmonetary method
  4. C) the temporal method
  5. D) the current/noncurrent method

 

Answer: A   Level: Medium   LO: 1

 

  1. High inflationary economies, when considering compounding, have an approximate annual inflation rate of:
  2. A) 25% for four years in a row.
  3. B) 100% for three years in a row.
  4. C) 26% for three years in a row.
  5. D) 50% for two years in a row.

 

Answer: C   Level: Medium   LO: 5

 

 

  1. How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?
  2. A) IAS 21 requires that the subsidiary’s financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
  3. B) IAS 21 requires that the temporal method be used for translating the foreign currency financial statement.
  4. C) IAS 21 requires the current rate method without taking into consideration any inflation adjustment.
  5. D) S. GAAP requires that foreign subsidiary financial statements be restated to account for inflation before applying the current rate method.

 

Answer: A   Level: Hard   LO: 5

 

  1. Under IAS 21, which of the following is not a factor in determining functional currency?
  2. A) It is the currency that influences sales prices for goods and services.
  3. B) It is the currency that mainly influences labor, material and other costs of providing goods and services.
  4. C) It is the currency least likely to experience hyperinflation.
  5. D) It is the currency in which funds from financing activities are generated.

 

Answer: C   Level: Medium   LO: 5

 

  1. Nonmonetary assets do not include:
  2. A) fixed assets.
  3. B)
  4. C) accounts receivable.
  5. D) customer deposits.

 

Answer: C   Level: Easy   LO: 1

 

  1. What is one problem in translating retained earnings using either the temporal or current rate method?
  2. A) There is no problem, since both methods use the historic rate method for stockholders’ equity accounts.
  3. B) Dividends are based on an average cost method.
  4. C) Net income is calculated differently, depending upon which method is used.
  5. D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

 

Answer: C   Level: Medium   LO: 4

Chapter 08

Translation of Foreign Currency Financial Statements

 

Multiple Choice Questions

 

  1. What is meant by the “translation” of foreign currency financial statements?
  2. A) converting financial statements prepared under foreign GAAP into domestic GAAP
  3. B) converting financial statements of a foreign currency into a domestic currency
  4. C) converting the language used in financial statements from foreign to domestic
  5. D) converting historic cost financial statements into current cost financial statements

 

Answer: B   Level: Easy   LO: 1

 

  1. Companies must choose between which exchange rates for consolidating foreign subsidiaries?
  2. A) spot rate and forward rate
  3. B) spot rate and current rate
  4. C) current rate and historical rate
  5. D) domestic rate and international rate

 

Answer: C   Level: Easy   LO: 1

 

  1. What is the cause of balance sheet exposure?
  2. A) converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates
  3. B) completing international transactions in currency other than the currency of the home company
  4. C) translating subsidiary account balances to amounts denominated in the parent company’s currency
  5. D) none of the above

 

Answer: D   Level: Medium   LO: 2

 

  1. What is another term for “balance sheet exposure?”
  2. A) transaction exposure
  3. B) exchange exposure
  4. C) translation exposure
  5. D) negative exposure

 

Answer: C   Level: Easy   LO: 2

 

 

  1. Which items in the balance sheet are subject to accounting exposure?
  2. A) only assets
  3. B) only liabilities and owners’ equity
  4. C) all accounts translated at historical exchange rates
  5. D) all accounts translated at current exchange rates

 

Answer: D   Level: Medium   LO: 2

 

  1. Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany.  When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial statements?
  2. A) When there is net asset exposure, the translation adjustment will be positive.
  3. B) When there is net liability exposure, the translation adjustment will be positive.
  4. C) The direction of the adjustment is indeterminate.
  5. D) There will be no adjustment necessary unless the difference is realized.

 

Answer: A   Level: Medium   LO: 2

 

  1. What is the primary difference between transaction exposure and accounting exposure?
  2. A) Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.
  3. B) Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
  4. C) Transaction exposure must be hedged, but accounting exposure does not need to be hedged.
  5. D) Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

 

Answer: B   Level: Medium   LO: 2

 

  1. Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?
  2. A) Temporal method
  3. B) Current/Noncurrent method
  4. C) Current rate method
  5. D) None of these methods are allowed under GAAP.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. Which of the following methods for translating foreign currency financial statements may be used under IAS 21?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Temporal method
  5. D) All of the above may be used under IAS 21.

 

Answer: C   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a subsidiary had actually used the parent company’s currency for all its transactions?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Current rate method
  5. D) Temporal method

 

Answer: D   Level: Medium   LO: 3

 

  1. Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?
  2. A) Current rate method
  3. B) Current/Noncurrent method
  4. C) Temporal method
  5. D) Monetary/Nonmonetary method

 

Answer: C   Level: Medium   LO: 3

 

  1. Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule.  When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method?
  2. A) historical rate
  3. B) current rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Medium   LO: 3

 

 

  1. What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Easy   LO: 3

 

  1. Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?
  2. A) average rate
  3. B) current rate
  4. C) historical rate
  5. D) forward rate

 

Answer: C   Level: Medium   LO: 3

 

  1. When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
  2. A) current rate method
  3. B) current/noncurrent method
  4. C) monetary/nonmonetary method
  5. D) temporal method

 

Answer: A   Level: Medium   LO: 1

 

  1. Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?
  2. A) current rate method
  3. B) temporal method
  4. C) current/noncurrent method
  5. D) none of the above

 

Answer: D   Level: Easy   LO: 4

 

 

  1. Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
  2. A) It is equal to the amount of assets recorded by the subsidiary.
  3. B) It is equal to the amount of liabilities recorded by the subsidiary.
  4. C) It is equal to total assets minus total liabilities.
  5. D) It is equal to total assets plus total liabilities.

 

Answer: C   Level: Medium   LO: 4

 

  1. When would the balance sheet exposure arising from the current rate method become realized?
  2. A) It is realized once the financial statements of the subsidiary and the parent are consolidated.
  3. B) It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date.
  4. C) It is realized when the subsidiary is sold at book value and the proceeds are converted to parent company currency.
  5. D) It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary’s dividends into parent company currency?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) Any of the above methods may be used under both the temporal and current method.

 

Answer: B   Level: Medium   LO: 4

 

  1. Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: B   Level: Medium   LO: 4

 

 

  1. Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: D   Level: Medium   LO: 4

 

  1. Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the “lower of cost or market” rule for inventory valuation?
  2. A) lower of parent currency cost or parent currency market at current exchange rate
  3. B) lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate
  4. C) lower of parent currency cost or parent currency market at appropriate exchange rate
  5. D) lower of subsidiary currency cost or parent currency market at current exchange rate

 

Answer: C   Level: Medium   LO: 4

 

Use the following to answer questions 23-24:

 

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010.

 

Inventory, 1/1/10                                £ 100,000

Purchases                                               900,000

Cost of Goods Available for Sale       1,000,000

Inventory, 12/31/10                               200,000

Cost of Goods Sold                            £ 800,000

 

Exchange rates/£

December 31, 2010                             $0.522

December 31, 2009                             $0.560

2010 average                                       $0.547

 

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the current rate method?
  2. A) $417,600
  3. B) $437,600
  4. C) $448,000
  5. D) $443,900

 

Answer: B   Level: Medium   LO: 4

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the temporal method?
  2. A) $443,900
  3. B) $437,600
  4. C) $432,500
  5. D) $448,000

 

Answer: A   Level: Medium   LO: 4

 

  1. Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
  2. A) Temporal method for all subsidiaries
  3. B) Current rate method for all subsidiaries
  4. C) S. parent companies may choose between the temporal method and the current rate method.
  5. D) Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

 

Answer: D   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: A   Level: Medium   LO: 5

 

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: C   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
  2. A) the primary currency used by the parent company
  3. B) the currency that minimizes the translation adjustment on the consolidated financial statements
  4. C) the currency in which the subsidiary does its financial reporting
  5. D) the primary currency used by the subsidiary

 

Answer: D   Level: Medium   LO: 5

 

  1. In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency.  What reason did the researchers give for this management decision?
  2. A) It was easier than proving to the FASB that a subsidiary’s functional currency was the U.S. dollar.
  3. B) Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements.
  4. C) This allows the use of the current method, which defers recognizing translation gains or losses in income.
  5. D) This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary?
  2. A) Financial Accounting Standards Board
  3. B) International Accounting Standards Board
  4. C) Securities and Exchange Commission
  5. D) Company management

 

Answer: D   Level: Easy   LO: 5

 

 

  1. What is the “disappearing plant” problem that is addressed by FASB ASC 830, Foreign Currency Matters?
  2. A) This refers to the accelerated depreciation methods that are popular for fixed asset valuation.
  3. B) High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.
  4. C) Cheap foreign currency results in S. companies moving factory operations offshore.
  5. D) Investment in fixed assets was not being reported on foreign subsidiary financial statements.

 

Answer: B   Level: Medium   LO: 5

 

  1. How does FASB ASC 830, Foreign Currency Matters define a “highly inflationary economy?”
  2. A) Inflation rate over 50% annually
  3. B) Inflation rate over 10% annually
  4. C) Cumulative three-year inflation over 26%
  5. D) Cumulative three-year inflation over 100%

 

Answer: D   Level: Medium   LO: 5

 

  1. Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?
  2. A) Current rate method
  3. B) Current/noncurrent method
  4. C) Temporal method
  5. D) Monetary/nonmonetary method

 

Answer: C   Level: Medium   LO: 5

 

  1. International accounting standards define functional currency as:
  2. A) the currency of the parent company.
  3. B) the currency of the primary economic environment in which the subsidiary operates.
  4. C) the currency of the primary economic environment in which the parent operates.
  5. D) the currency used by a subsidiary for its financial reporting.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the parent company’s currency?
  2. A) active local sales market
  3. B) sales price not affected by changes in exchange rate in the short run
  4. C) high volume of intercompany transactions
  5. D) All of the above are indicators that the functional currency is the parent company’s currency.

 

Answer: C   Level: Medium   LO: 5

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the foreign currency?
  2. A) sales price not affected by changes in exchange rate in the short run
  3. B) high volume of intercompany transactions
  4. C) sales in the local market not significant
  5. D) Most of the subsidiary’s financing comes from the parent.

 

Answer: A   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements is required under IAS 21?
  2. A) Current rate method
  3. B) Temporal method
  4. C) Current rate method or temporal method, depending on the functional currency of the subsidiary
  5. D) Current rate method or temporal method may be chosen by management of the parent.

 

Answer: C   Level: Medium   LO: 5

 

  1. When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:
  2. A) appreciation or depreciation of the foreign currency
  3. B) the nature of the balance sheet exposure
  4. C) both (A) and (B)
  5. D) None of the above

 

Answer: C   Level: Easy   LO: 5

 

 

  1. Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko.  How must Parentco handle this translation adjustment when it records the sale of Subko?
  2. A) as an increase in income (gain on disposal)
  3. B) as a decrease in income (loss on disposal)
  4. C) The cumulative translation adjustment will not be affected by the sale.
  5. D) It will be a prior period adjustment to retained earnings.

 

Answer: B   Level: Hard   LO: 5

 

  1. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
  2. A) Fluctuations in reported income may affect stock price.
  3. B) Management compensation may be tied to accounting income.
  4. C) Hedging can smooth income.
  5. D) all of the above

 

Answer: D   Level: Medium   LO: 6

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the temporal method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) none of the above

 

Answer: B   Level: Hard   LO: 3

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the current rate method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) None of the above.

 

Answer: D   Level: Hard   LO: 3

 

 

  1. Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
  2. A) The translated asset and liability amounts have no meaningful interpretation.
  3. B) The translation adjustment will usually have a negative impact on income.
  4. C) Financial ratios after translation will be distorted.
  5. D) All of the above are limitations of the temporal method.

 

Answer: C   Level: Medium   LO: 4

 

  1. Which of the following actions could a company use to hedge balance sheet exposure?
  2. A) forward contract on foreign currency
  3. B) foreign currency option
  4. C) foreign currency borrowing
  5. D) All of the above may be used to hedge balance sheet exposure.

 

Answer: D   Level: Medium   LO: 6

 

  1. Which of the following is a non-derivative hedging instrument?
  2. A) forward contract on foreign currency
  3. B) foreign currency call option
  4. C) foreign currency loan
  5. D) foreign currency put option

 

Answer: C   Level: Easy   LO: 6

 

  1. What is the objective in hedging balance sheet exposure?
  2. A) Controlling the movement of foreign currency exchange rates.
  3. B) Balancing foreign currency assets and foreign currency liabilities affected by exchange rates
  4. C) To control the cash flow resulting from changes in the foreign currency exchange rates
  5. D) All of the above.

 

Answer: B   Level: Medium   LO: 6

 

 

  1. What is the paradox of hedging balance sheet exposure?
  2. A) Real costs can be incurred to hedge an unrealized translation adjustment.
  3. B) The hedging process rarely works the way management intended.
  4. C) Hedging is a conceptual process that is nearly impossible to undertake in the real world.
  5. D) Markets have yet to be developed that offer the kinds of derivative instruments required for hedging.

 

Answer: A   Level: Medium   LO: 6

 

  1. Which of the following is not among the four methods which have been used to translate foreign currency financial statements globally?
  2. A) the historic/non-historic method
  3. B) the monetary/nonmonetary method
  4. C) the temporal method
  5. D) the current/noncurrent method

 

Answer: A   Level: Medium   LO: 1

 

  1. High inflationary economies, when considering compounding, have an approximate annual inflation rate of:
  2. A) 25% for four years in a row.
  3. B) 100% for three years in a row.
  4. C) 26% for three years in a row.
  5. D) 50% for two years in a row.

 

Answer: C   Level: Medium   LO: 5

 

 

  1. How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?
  2. A) IAS 21 requires that the subsidiary’s financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
  3. B) IAS 21 requires that the temporal method be used for translating the foreign currency financial statement.
  4. C) IAS 21 requires the current rate method without taking into consideration any inflation adjustment.
  5. D) S. GAAP requires that foreign subsidiary financial statements be restated to account for inflation before applying the current rate method.

 

Answer: A   Level: Hard   LO: 5

 

  1. Under IAS 21, which of the following is not a factor in determining functional currency?
  2. A) It is the currency that influences sales prices for goods and services.
  3. B) It is the currency that mainly influences labor, material and other costs of providing goods and services.
  4. C) It is the currency least likely to experience hyperinflation.
  5. D) It is the currency in which funds from financing activities are generated.

 

Answer: C   Level: Medium   LO: 5

 

  1. Nonmonetary assets do not include:
  2. A) fixed assets.
  3. B)
  4. C) accounts receivable.
  5. D) customer deposits.

 

Answer: C   Level: Easy   LO: 1

 

  1. What is one problem in translating retained earnings using either the temporal or current rate method?
  2. A) There is no problem, since both methods use the historic rate method for stockholders’ equity accounts.
  3. B) Dividends are based on an average cost method.
  4. C) Net income is calculated differently, depending upon which method is used.
  5. D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

 

Answer: C   Level: Medium   LO: 4

Chapter 08

Translation of Foreign Currency Financial Statements

 

Multiple Choice Questions

 

  1. What is meant by the “translation” of foreign currency financial statements?
  2. A) converting financial statements prepared under foreign GAAP into domestic GAAP
  3. B) converting financial statements of a foreign currency into a domestic currency
  4. C) converting the language used in financial statements from foreign to domestic
  5. D) converting historic cost financial statements into current cost financial statements

 

Answer: B   Level: Easy   LO: 1

 

  1. Companies must choose between which exchange rates for consolidating foreign subsidiaries?
  2. A) spot rate and forward rate
  3. B) spot rate and current rate
  4. C) current rate and historical rate
  5. D) domestic rate and international rate

 

Answer: C   Level: Easy   LO: 1

 

  1. What is the cause of balance sheet exposure?
  2. A) converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates
  3. B) completing international transactions in currency other than the currency of the home company
  4. C) translating subsidiary account balances to amounts denominated in the parent company’s currency
  5. D) none of the above

 

Answer: D   Level: Medium   LO: 2

 

  1. What is another term for “balance sheet exposure?”
  2. A) transaction exposure
  3. B) exchange exposure
  4. C) translation exposure
  5. D) negative exposure

 

Answer: C   Level: Easy   LO: 2

 

 

  1. Which items in the balance sheet are subject to accounting exposure?
  2. A) only assets
  3. B) only liabilities and owners’ equity
  4. C) all accounts translated at historical exchange rates
  5. D) all accounts translated at current exchange rates

 

Answer: D   Level: Medium   LO: 2

 

  1. Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany.  When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial statements?
  2. A) When there is net asset exposure, the translation adjustment will be positive.
  3. B) When there is net liability exposure, the translation adjustment will be positive.
  4. C) The direction of the adjustment is indeterminate.
  5. D) There will be no adjustment necessary unless the difference is realized.

 

Answer: A   Level: Medium   LO: 2

 

  1. What is the primary difference between transaction exposure and accounting exposure?
  2. A) Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.
  3. B) Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
  4. C) Transaction exposure must be hedged, but accounting exposure does not need to be hedged.
  5. D) Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

 

Answer: B   Level: Medium   LO: 2

 

  1. Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?
  2. A) Temporal method
  3. B) Current/Noncurrent method
  4. C) Current rate method
  5. D) None of these methods are allowed under GAAP.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. Which of the following methods for translating foreign currency financial statements may be used under IAS 21?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Temporal method
  5. D) All of the above may be used under IAS 21.

 

Answer: C   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a subsidiary had actually used the parent company’s currency for all its transactions?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Current rate method
  5. D) Temporal method

 

Answer: D   Level: Medium   LO: 3

 

  1. Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?
  2. A) Current rate method
  3. B) Current/Noncurrent method
  4. C) Temporal method
  5. D) Monetary/Nonmonetary method

 

Answer: C   Level: Medium   LO: 3

 

  1. Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule.  When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method?
  2. A) historical rate
  3. B) current rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Medium   LO: 3

 

 

  1. What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

Answer: B   Level: Easy   LO: 3

 

  1. Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?
  2. A) average rate
  3. B) current rate
  4. C) historical rate
  5. D) forward rate

 

Answer: C   Level: Medium   LO: 3

 

  1. When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
  2. A) current rate method
  3. B) current/noncurrent method
  4. C) monetary/nonmonetary method
  5. D) temporal method

 

Answer: A   Level: Medium   LO: 1

 

  1. Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?
  2. A) current rate method
  3. B) temporal method
  4. C) current/noncurrent method
  5. D) none of the above

 

Answer: D   Level: Easy   LO: 4

 

 

  1. Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
  2. A) It is equal to the amount of assets recorded by the subsidiary.
  3. B) It is equal to the amount of liabilities recorded by the subsidiary.
  4. C) It is equal to total assets minus total liabilities.
  5. D) It is equal to total assets plus total liabilities.

 

Answer: C   Level: Medium   LO: 4

 

  1. When would the balance sheet exposure arising from the current rate method become realized?
  2. A) It is realized once the financial statements of the subsidiary and the parent are consolidated.
  3. B) It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date.
  4. C) It is realized when the subsidiary is sold at book value and the proceeds are converted to parent company currency.
  5. D) It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary’s dividends into parent company currency?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) Any of the above methods may be used under both the temporal and current method.

 

Answer: B   Level: Medium   LO: 4

 

  1. Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: B   Level: Medium   LO: 4

 

 

  1. Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

Answer: D   Level: Medium   LO: 4

 

  1. Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the “lower of cost or market” rule for inventory valuation?
  2. A) lower of parent currency cost or parent currency market at current exchange rate
  3. B) lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate
  4. C) lower of parent currency cost or parent currency market at appropriate exchange rate
  5. D) lower of subsidiary currency cost or parent currency market at current exchange rate

 

Answer: C   Level: Medium   LO: 4

 

Use the following to answer questions 23-24:

 

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010.

 

Inventory, 1/1/10                                £ 100,000

Purchases                                               900,000

Cost of Goods Available for Sale       1,000,000

Inventory, 12/31/10                               200,000

Cost of Goods Sold                            £ 800,000

 

Exchange rates/£

December 31, 2010                             $0.522

December 31, 2009                             $0.560

2010 average                                       $0.547

 

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the current rate method?
  2. A) $417,600
  3. B) $437,600
  4. C) $448,000
  5. D) $443,900

 

Answer: B   Level: Medium   LO: 4

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the temporal method?
  2. A) $443,900
  3. B) $437,600
  4. C) $432,500
  5. D) $448,000

 

Answer: A   Level: Medium   LO: 4

 

  1. Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
  2. A) Temporal method for all subsidiaries
  3. B) Current rate method for all subsidiaries
  4. C) S. parent companies may choose between the temporal method and the current rate method.
  5. D) Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

 

Answer: D   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: A   Level: Medium   LO: 5

 

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

Answer: C   Level: Medium   LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
  2. A) the primary currency used by the parent company
  3. B) the currency that minimizes the translation adjustment on the consolidated financial statements
  4. C) the currency in which the subsidiary does its financial reporting
  5. D) the primary currency used by the subsidiary

 

Answer: D   Level: Medium   LO: 5

 

  1. In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency.  What reason did the researchers give for this management decision?
  2. A) It was easier than proving to the FASB that a subsidiary’s functional currency was the U.S. dollar.
  3. B) Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements.
  4. C) This allows the use of the current method, which defers recognizing translation gains or losses in income.
  5. D) This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

 

Answer: C   Level: Hard   LO: 1

 

  1. Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary?
  2. A) Financial Accounting Standards Board
  3. B) International Accounting Standards Board
  4. C) Securities and Exchange Commission
  5. D) Company management

 

Answer: D   Level: Easy   LO: 5

 

 

  1. What is the “disappearing plant” problem that is addressed by FASB ASC 830, Foreign Currency Matters?
  2. A) This refers to the accelerated depreciation methods that are popular for fixed asset valuation.
  3. B) High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.
  4. C) Cheap foreign currency results in S. companies moving factory operations offshore.
  5. D) Investment in fixed assets was not being reported on foreign subsidiary financial statements.

 

Answer: B   Level: Medium   LO: 5

 

  1. How does FASB ASC 830, Foreign Currency Matters define a “highly inflationary economy?”
  2. A) Inflation rate over 50% annually
  3. B) Inflation rate over 10% annually
  4. C) Cumulative three-year inflation over 26%
  5. D) Cumulative three-year inflation over 100%

 

Answer: D   Level: Medium   LO: 5

 

  1. Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?
  2. A) Current rate method
  3. B) Current/noncurrent method
  4. C) Temporal method
  5. D) Monetary/nonmonetary method

 

Answer: C   Level: Medium   LO: 5

 

  1. International accounting standards define functional currency as:
  2. A) the currency of the parent company.
  3. B) the currency of the primary economic environment in which the subsidiary operates.
  4. C) the currency of the primary economic environment in which the parent operates.
  5. D) the currency used by a subsidiary for its financial reporting.

 

Answer: B   Level: Medium   LO: 5

 

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the parent company’s currency?
  2. A) active local sales market
  3. B) sales price not affected by changes in exchange rate in the short run
  4. C) high volume of intercompany transactions
  5. D) All of the above are indicators that the functional currency is the parent company’s currency.

 

Answer: C   Level: Medium   LO: 5

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the foreign currency?
  2. A) sales price not affected by changes in exchange rate in the short run
  3. B) high volume of intercompany transactions
  4. C) sales in the local market not significant
  5. D) Most of the subsidiary’s financing comes from the parent.

 

Answer: A   Level: Medium   LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements is required under IAS 21?
  2. A) Current rate method
  3. B) Temporal method
  4. C) Current rate method or temporal method, depending on the functional currency of the subsidiary
  5. D) Current rate method or temporal method may be chosen by management of the parent.

 

Answer: C   Level: Medium   LO: 5

 

  1. When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:
  2. A) appreciation or depreciation of the foreign currency
  3. B) the nature of the balance sheet exposure
  4. C) both (A) and (B)
  5. D) None of the above

 

Answer: C   Level: Easy   LO: 5

 

 

  1. Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko.  How must Parentco handle this translation adjustment when it records the sale of Subko?
  2. A) as an increase in income (gain on disposal)
  3. B) as a decrease in income (loss on disposal)
  4. C) The cumulative translation adjustment will not be affected by the sale.
  5. D) It will be a prior period adjustment to retained earnings.

 

Answer: B   Level: Hard   LO: 5

 

  1. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
  2. A) Fluctuations in reported income may affect stock price.
  3. B) Management compensation may be tied to accounting income.
  4. C) Hedging can smooth income.
  5. D) all of the above

 

Answer: D   Level: Medium   LO: 6

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the temporal method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) none of the above

 

Answer: B   Level: Hard   LO: 3

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the current rate method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) None of the above.

 

Answer: D   Level: Hard   LO: 3

 

 

  1. Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
  2. A) The translated asset and liability amounts have no meaningful interpretation.
  3. B) The translation adjustment will usually have a negative impact on income.
  4. C) Financial ratios after translation will be distorted.
  5. D) All of the above are limitations of the temporal method.

 

Answer: C   Level: Medium   LO: 4

 

  1. Which of the following actions could a company use to hedge balance sheet exposure?
  2. A) forward contract on foreign currency
  3. B) foreign currency option
  4. C) foreign currency borrowing
  5. D) All of the above may be used to hedge balance sheet exposure.

 

Answer: D   Level: Medium   LO: 6

 

  1. Which of the following is a non-derivative hedging instrument?
  2. A) forward contract on foreign currency
  3. B) foreign currency call option
  4. C) foreign currency loan
  5. D) foreign currency put option

 

Answer: C   Level: Easy   LO: 6

 

  1. What is the objective in hedging balance sheet exposure?
  2. A) Controlling the movement of foreign currency exchange rates.
  3. B) Balancing foreign currency assets and foreign currency liabilities affected by exchange rates
  4. C) To control the cash flow resulting from changes in the foreign currency exchange rates
  5. D) All of the above.

 

Answer: B   Level: Medium   LO: 6

 

 

  1. What is the paradox of hedging balance sheet exposure?
  2. A) Real costs can be incurred to hedge an unrealized translation adjustment.
  3. B) The hedging process rarely works the way management intended.
  4. C) Hedging is a conceptual process that is nearly impossible to undertake in the real world.
  5. D) Markets have yet to be developed that offer the kinds of derivative instruments required for hedging.

 

Answer: A   Level: Medium   LO: 6

 

  1. Which of the following is not among the four methods which have been used to translate foreign currency financial statements globally?
  2. A) the historic/non-historic method
  3. B) the monetary/nonmonetary method
  4. C) the temporal method
  5. D) the current/noncurrent method

 

Answer: A   Level: Medium   LO: 1

 

  1. High inflationary economies, when considering compounding, have an approximate annual inflation rate of:
  2. A) 25% for four years in a row.
  3. B) 100% for three years in a row.
  4. C) 26% for three years in a row.
  5. D) 50% for two years in a row.

 

Answer: C   Level: Medium   LO: 5

 

 

  1. How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?
  2. A) IAS 21 requires that the subsidiary’s financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
  3. B) IAS 21 requires that the temporal method be used for translating the foreign currency financial statement.
  4. C) IAS 21 requires the current rate method without taking into consideration any inflation adjustment.
  5. D) S. GAAP requires that foreign subsidiary financial statements be restated to account for inflation before applying the current rate method.

 

Answer: A   Level: Hard   LO: 5

 

  1. Under IAS 21, which of the following is not a factor in determining functional currency?
  2. A) It is the currency that influences sales prices for goods and services.
  3. B) It is the currency that mainly influences labor, material and other costs of providing goods and services.
  4. C) It is the currency least likely to experience hyperinflation.
  5. D) It is the currency in which funds from financing activities are generated.

 

Answer: C   Level: Medium   LO: 5

 

  1. Nonmonetary assets do not include:
  2. A) fixed assets.
  3. B)
  4. C) accounts receivable.
  5. D) customer deposits.

 

Answer: C   Level: Easy   LO: 1

 

  1. What is one problem in translating retained earnings using either the temporal or current rate method?
  2. A) There is no problem, since both methods use the historic rate method for stockholders’ equity accounts.
  3. B) Dividends are based on an average cost method.
  4. C) Net income is calculated differently, depending upon which method is used.
  5. D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

 

Answer: C   Level: Medium   LO: 4

Chapter 14

Comparative International Auditing and Corporate Governance

 

Multiple Choice Questions

 

  1. What term is used to describe the relationships between a company’s management, its board, shareholders, and other stakeholders that create a structure through which the objectives of the company are set, attained, and monitored?
  2. A) management control
  3. B) corporate governance
  4. C) internal auditing
  5. D) government regulation

 

Answer: B   Level: Medium   LO: 1

 

  1. According to OECD guidelines, what group is ultimately responsible for governing a multinational organization?
  2. A) regulatory agencies in the host country
  3. B) management
  4. C) board of directors
  5. D) common shareholders

 

Answer: C   Level: Medium   LO: 1

 

  1. In multinational corporations, to whom are the external auditors responsible according to OECD guidelines?
  2. A) corporate management
  3. B) stockholders
  4. C) government of the host country
  5. D) creditors

 

Answer: B   Level: Medium   LO: 2

 

  1. The OECD believes which group in a multinational corporation should oversee the financial reporting function to ensure that appropriate controls are in place to safeguard information integrity?
  2. A) corporate management
  3. B) internal auditors
  4. C) board of directors
  5. D) information systems department

 

Answer: C   Level: Medium   LO: 1

 

 

  1. What act of the U.S. Congress advocated creating the Public Company Accounting Oversight Board, required financial statement certification by the CEO and CFO, and requires external auditors to report directly to an audit committee?
  2. A) Securities Act of 1933
  3. B) Securities and Exchange Act of 1934
  4. C) Sherman Anti-Trust Act of 1890
  5. D) Sarbanes-Oxley Act of 2002

 

Answer: D   Level: Medium   LO: 1

 

  1. Recently enacted listing requirements of the New York Stock Exchange focuses attention on independent directors.  How does the NYSE define an independent director?
  2. A) no material relationship with the listed corporation
  3. B) not a member of corporate management
  4. C) owns fewer than 10,000 shares of the corporation’s stock
  5. D) does not meet regularly with the board of directors

 

Answer: A   Level: Medium   LO: 1

 

  1. What caused the U.S. Congress, the OECD, the International Federation of Accountants, and other organizations to enact stricter rules on corporate governance in recent years?
  2. A) sudden increase in world trade
  3. B) high-profile corporate scandals
  4. C) significant decline in world trade
  5. D) expansion of the European Union membership

 

Answer: B   Level: Easy   LO: 1

 

  1. What is the primary role of external auditing in multinational corporations?
  2. A) preparing the annual report to corporate shareholders
  3. B) designing a working system of internal accounting controls
  4. C) assuring that financial statement information is high quality
  5. D) selecting independent members for the board of directors

 

Answer: C   Level: Medium   LO: 2

 

 

  1. What is the primary role of internal auditing in multinational corporations?
  2. A) preparing the annual report to corporate shareholders
  3. B) selecting independent members for the board of directors
  4. C) helping external auditors with the financial statement audit
  5. D) monitoring risks and assessing their effect on the company

 

Answer: D   Level: Medium   LO: 2

 

  1. What is the first line of enforcement of legal and professional financial reporting standards?
  2. A) prosecuting attorney
  3. B) International Accounting Standards Board
  4. C) local civil court system in the home country
  5. D) external auditing

 

Answer: D   Level: Medium   LO: 2

 

  1. What impact did the Asian financial market crisis in the late 1990s and the corporate scandals in the United States this century have on the auditing profession?
  2. A) Regulation of the external auditing profession was reduced.
  3. B) CPAs were no longer allowed to provide external audit services for multinational corporations.
  4. C) Reputation for being the watchdogs of financial reporting integrity was reduced.
  5. D) External auditors were required to sit on the boards of directors of multinational corporations.

 

Answer: C   Level: Medium   LO: 1

 

  1. Who is considered to be the client for external auditors in the United Kingdom?
  2. A) corporate shareholders
  3. B) the government
  4. C) society as a whole
  5. D) all of the above

 

Answer: A   Level: Medium   LO: 3

 

 

  1. In Germany, who do external auditors consider as their clients?
  2. A) the government
  3. B) board of directors
  4. C) society as a whole
  5. D) all of the above

 

Answer: D   Level: Medium   LO: 3

 

  1. Why has corporate financial reporting in China not resembled reporting in Anglo-Saxon countries?
  2. A) There was a lack of distinction between business functions and social service functions in Chinese reporting entities.
  3. B) China has only recently become involved in international trade.
  4. C) The concept of accounting was only introduced to China recently and therefore it has not had time to develop properly.
  5. D) The 1960’s Cultural Revolution eliminated the requirements that Chinese corporations provide information on business operations.

 

Answer: A   Level: Medium   LO: 3

 

  1. Why is litigation against external auditors, which is very common in the United States, virtually unknown in Japan?
  2. A) Japanese auditors rarely make mistakes in their professional work.
  3. B) Such litigation is inconsistent with Japanese values of interpersonal harmony.
  4. C) Japan lacks a sophisticated court system for handling complex cases involving accounting matters.
  5. D) External auditors are not responsible for the quality of work performed for a corporate client.

 

Answer: B   Level: Medium   LO: 3

 

  1. What explains the reason for the historically very low (1/3% to 1/2%) limit on allowance for doubtful accounts in China?
  2. A) The primary customer in China was the government, which was presumed to have very good credit.
  3. B) This is the international accounting standard for companies operating in eastern Asia.
  4. C) Prior to being admitted to the World Trade Organization (WTO), China was required to reduce its bad debt level.
  5. D) all of the above

 

Answer: A   Level: Medium   LO: 3

 

 

  1. What reason has been given to explain the lack of well-developed auditing professions in less-developed economies?
  2. A) inability to train auditors given the lack of educational systems
  3. B) Since investors are not major players in these economies, there is little need for audited financial statements.
  4. C) Investors and creditors in these countries do not want external auditors attesting to financial statement reliability.
  5. D) In these cultures, financial statements are presumed to be accurate and therefore do not require independent audits.

 

Answer: B   Level: Medium   LO: 3

 

  1. In what countries would one expect auditing standards to evolve based on the needs perceived by the auditing profession?
  2. A) code law countries
  3. B) members of the European Union
  4. C) countries that follow common law
  5. D) countries with strong accounting laws

 

Answer: C   Level: Medium   LO: 3

 

  1. What term is used to refer to the probability that an accounting error or irregularity is detected and reported?
  2. A) accounting risk
  3. B) audit risk
  4. C) audit quality
  5. D) transaction risk

 

Answer: C   Level: Medium   LO: 3

 

  1. Which of the following is NOT a factor influencing the probability that an auditor will detect an accounting error?
  2. A) competence of the auditor
  3. B) quality review and monitoring
  4. C) financial reporting requirements
  5. D) independence of the auditor

 

Answer: D   Level: Medium   LO: 3

 

 

  1. Which of the following is a factor influencing the probability that an auditor will report a detected error or irregularity?
  2. A) competence of the auditor
  3. B) independence of the auditor
  4. C) quality review and monitoring
  5. D) financial reporting requirements

 

Answer: B   Level: Medium   LO: 3

 

  1. What is the focus of Section 404 of the Sarbanes-Oxley Act?
  2. A) requirement that all members of the board of directors be independent of the corporation
  3. B) It addresses the need for a consistent set of international auditing standards.
  4. C) attesting to the reliability of internal controls in the annual report
  5. D) This defines the membership in the Public Company Accounting Oversight Board (PCAOB).

 

Answer: C   Level: Medium   LO: 3

 

  1. Which of the following terms is NOT defined by statute in the Companies Act of the United Kingdom?
  2. A) accountant
  3. B) auditor
  4. C) independence
  5. D) None of these terms is defined in the Companies Act of the K.

 

Answer: A   Level: Medium   LO: 3

 

  1. Which group is responsible for establishing auditing standards in the United Kingdom?
  2. A) Department of Trade and Industries (DTI)
  3. B) Consultative Committee of Accountancy Bodies (CCAB)
  4. C) Auditing Practices Board (APB)
  5. D) Institute of Chartered Accountants in England and Wales (ICAEW)

 

Answer: C   Level: Hard   LO: 3

 

 

  1. In China, who is responsible for regulating auditing practice?
  2. A) Chinese Institute of Certified Public Accountants (CICPA)
  3. B) government, through local audit bureaus
  4. C) Chinese stock exchange
  5. D) Auditing Practices Board (APB)

 

Answer: B   Level: Medium   LO: 3

 

  1. Why is international harmonization of auditing standards important?
  2. A) to be consistent with harmonized international accounting standards
  3. B) to ensure the independence of external auditors of multinational corporations
  4. C) to assure international capital markets that auditing has been consistent across companies
  5. D) to reduce the authority of individual governments to enact accounting laws

 

Answer: C   Level: Medium   LO: 4

 

  1. In what area is external auditing consistent internationally?
  2. A) audit report
  3. B) auditing standards
  4. C) regulation of the profession
  5. D) none of the above

 

Answer: D   Level: Easy   LO: 3

 

  1. What group is responsible for developing international auditing standards?
  2. A) International Accounting Standards Board (IASB)
  3. B) International Auditing and Assurance Standards Board (IAASB)
  4. C) International Organization of Securities Commissions (IOSCO)
  5. D) Organization for Economic Cooperation and Development (OECD)

 

Answer: B   Level: Medium   LO: 4

 

 

  1. Why was the issuance of International Standard on Auditing 13 (IAS 13) considered so important to harmonization of auditing standards?
  2. A) It required all multinational corporations to adopt international auditing standards by 2008.
  3. B) It specified the form and content of the annual report.
  4. C) It provided guidance on the form and content of the audit report.
  5. D) It requires the auditor to express an opinion on whether the statements give a true and fair view of corporate performance.

 

Answer: C   Level: Hard   LO: 4

 

  1. According to international auditing standards, if audit work has been limited in its scope, the auditors have had a disagreement with management, or there is significant uncertainty associated with the financial statements, what kind of audit opinion should be rendered?
  2. A) disclaimer of opinion
  3. B) unqualified
  4. C) adverse
  5. D) qualified

 

Answer: D   Level: Medium   LO: 4

 

  1. What does ISA 700 say about the interpretation of an audit opinion?
  2. A) It enhances the credibility of the financial statements of corporation.
  3. B) It guarantees the future viability of the corporation.
  4. C) It assures readers that no errors have been made in the financial statements.
  5. D) It tells shareholders that management has operated the corporation efficiently.

 

Answer: A   Level: Medium   LO: 4

 

  1. According to the International Auditing Practices Committee, financial statements have conformed to International Financial Reporting Standards (IFRS) if:
  2. A) they have complied with at least 75% of the IFRS.
  3. B) they have complied with at least one-half of the provisions of the IFRS.
  4. C) they have complied with all requirements and interpretations of the IFRS.
  5. D) they have complied with most of the IFRS or with U.S. GAAP.

 

Answer: C   Level: Medium   LO: 4

 

 

  1. In an effort to harmonize international auditing standards on a regional level, the European Union has issued directives pertaining to this end.  Its Eighth Directive caused the United Kingdom to change the country’s long-held standard for individuals wishing to be auditors.  Which of the following is a new requirement for auditors in the UK?
  2. A) Auditors must be members of a recognized professional association, such as the ICAEW.
  3. B) New entrants to the auditing profession must hold a university degree in accountancy.
  4. C) Auditors may now be a citizen of any country in the European Union rather than just the UK.
  5. D) New members of the auditing profession must have a university degree.

 

Answer: D   Level: Medium   LO: 4

 

  1. If an auditor breaks a contractual obligation, such as failing to complete an audit within the time frame specified in the engagement letter, what kind of liability does the auditor face?
  2. A) criminal liability
  3. B) civil liability
  4. C) professional sanctions
  5. D) none of the above

 

Answer: B   Level: Medium   LO: 5

 

  1. Who may bring civil litigation against an auditor?
  2. A) only the client company
  3. B) only shareholders
  4. C) the client company and shareholders
  5. D) It depends on a country’s laws governing auditor liability.

 

Answer: D   Level: Medium   LO: 5

 

 

  1. How does the principle of “joint and several liability” affect auditors in countries where it is applied?
  2. A) This limits civil liability to only those people who conducted the audit negligently.
  3. B) All partners in the accounting firm can be personally liable for the negligence of any one partner.
  4. C) All audit partners are liable for the actions of the firm only up to the level of their investment in the firm.
  5. D) It creates limited liability for auditors accused of wrong-doing by their clients.

 

Answer: B   Level: Hard   LO: 5

 

  1. Auditors in the United States may form limited liability partnerships.  What does this mean for civil liability of auditors?
  2. A) It allows negligent auditors to escape civil litigation for their failures.
  3. B) Auditors are limited to serving clients that agree not to pursue litigation for audit negligence.
  4. C) The personal wealth of partners who are not negligent is protected from litigation against the audit firm.
  5. D) It has no impact on civil liability because it provides limitations only on criminal liability.

 

Answer: C   Level: Hard   LO: 5

 

  1. The Institute of Chartered Accountants in New Zealand (ICANZ) proposed a policy of proportionate liability to replace the country’s existing “joint and several liability” approach.  Why was the proposal denied?
  2. A) Proportionate responsibility for damages cannot be determined objectively.
  3. B) Fairness to the defendants was not relevant to ensuring fairness to the injured party.
  4. C) Large auditing firms would be paying proportionately higher damage awards than small firms.
  5. D) Such a policy is inconsistent with harmonization of international auditing standards.

 

Answer: B   Level: Hard   LO: 5

 

 

  1. Auditors in the United Kingdom sometimes include disclaimers of liability in their audit reports.  According to the U.S. Securities and Exchange Commission, how effective is this approach to limiting civil liabilities?
  2. A) It has no effect when included in the financial statements of S. companies.
  3. B) It effectively caps the damage awards that will be made in S. civil courts.
  4. C) It limits who can bring civil action in cases involving the audit of S. companies.
  5. D) It limits both civil and criminal liability against auditors of S. companies.

 

Answer: A   Level: Medium   LO: 5

 

  1. The Canadian Institute of Chartered Accountants (CICA) has taken a principles-based approach to auditor independence, whereas the Federation des Experts Comptables Europeens (FEE) has taken a conceptual approach.  What is the difference?
  2. A) The principles-based approach has been effective, but the conceptual approach has not.
  3. B) The principles-based approach offers more flexibility in compliance than the conceptual approach does.
  4. C) The principles-based approach gives specific rules and prohibitions that must be followed, but the conceptual approach asks auditors to focus on the aim of independence rather than rules.
  5. D) The conceptual approach is only theoretical and hasn’t yet been applied, whereas the principles-based approach is currently in practice.

 

Answer: C   Level: Medium   LO: 5

 

  1. An auditor may be subject to criminal liability under which of the following situations?
  2. A) She willingly participates in defrauding the company’s stockholders.
  3. B) She breaks a contract with the client.
  4. C) She violates a rule on the manner of advertising allowed by the professional accounting and auditing association.
  5. D) none of the above

 

Answer: A   Level: Medium   LO: 5

 

  1. Which of the following is the responsibility of an audit committee?
  2. A) oversee the internal control system
  3. B) oversee internal auditing and the independent public accounting function
  4. C) monitor the financial reporting process
  5. D) all of the above

 

Answer: D   Level: Medium   LO: 6

 

 

  1. What is an audit committee?
  2. A) It is a group of audit firms that develop national or international standards for auditing practice.
  3. B) It is a subset of a corporate board of directors with oversight of the auditing function.
  4. C) It is the team of external auditors (i.e. CPAs) that conducts audit testing and prepares the audit report.
  5. D) It is a management group responsible for negotiating the audit engagement with a public accounting firm.

 

Answer: B   Level: Medium   LO: 6

 

  1. Under the Sarbanes-Oxley Act of 2002, to whom does the audit committee report?
  2. A) management of the corporation
  3. B) external auditor
  4. C) board of directors
  5. D) internal audit department

 

Answer: C   Level: Medium   LO: 6, 9

 

  1. Under the Sarbanes-Oxley Act of 2002, who is responsible for paying the independent auditor?
  2. A) management
  3. B) audit committee
  4. C) government who has jurisdiction over the corporation
  5. D) American Institute of Certified Public Accountants (AICPA)

 

Answer: B   Level: Medium   LO: 6, 9

 

  1. Under Securities and Exchange Commission regulations, who may be a member of an audit committee for a listed company?
  2. A) any member of the corporate board of directors
  3. B) any member of the corporate board of directors who is not a Certified Public Accountant (CPA)
  4. C) only members of the corporate board of directors who do not have a material interest in the company
  5. D) any manager or director of the corporation

 

Answer: C   Level: Medium   LO: 6

 

 

  1. Which of the following is a limitation of SEC requirements for audit committee membership?
  2. A) The additional responsibilities make service on the committee less desirable to competent directors.
  3. B) External auditors are unwilling to report to an independent audit committee.
  4. C) The audit committee compromises the external auditor’s independence.
  5. D) Only the United Kingdom and the United States require audit committees, putting corporations in these countries at a disadvantage.

 

Answer: A   Level: Medium   LO: 6

 

  1. What is the role of internal auditing?
  2. A) to substitute for the external auditor whenever possible
  3. B) to provide assurance and consulting services to improve an organization’s operations
  4. C) to assist the audit committee in negotiations with the external auditor
  5. D) to mediate disagreements between the external auditor and corporate management

 

Answer: B   Level: Medium   LO: 8

 

  1. What is the position of the U.S. Securities and Exchange Commission (SEC) with respect to internal auditing?
  2. A) It requires all companies, including foreign enterprises, listed on S. stock exchanges to have an internal audit function.
  3. B) Since 2000, the SEC has been silent with respect to internal auditing.
  4. C) Internal auditing is recommended by the SEC, but it is not required for listed companies.
  5. D) Only multinational companies are required to have internal auditing systems.

 

Answer: A   Level: Hard   LO: 8

 

  1. What reason can be given for the importance of internal auditing in multinational corporations?
  2. A) a serious lack of external auditors available to audit an international company
  3. B) a growing demand for risk management skills possessed by internal auditors
  4. C) reluctance by multinational corporations to hire external auditors to comply with international regulations
  5. D) decline in the reputation of external auditors

 

Answer: B   Level: Medium   LO: 8

 

 

  1. What does the Foreign Corrupt Practices Act have to do with accounting?
  2. A) It requires that S. companies properly record bribes made to obtain business from foreign clients.
  3. B) It requires that appropriate internal control systems be maintained by publicly traded S. companies.
  4. C) It mandates the use of the temporal method of translating assets obtained illegally in foreign countries.
  5. D) It demands that publicly traded S. companies follow international best-practices when auditing illegal operations abroad.

 

Answer: B   Level: Medium   LO: 8

 

  1. A recent survey of multinational corporations found that the Sarbanes-Oxley Act had the effect of increasing the percentage of U.S. companies with a financial expert on the audit committee from 65% to:
  2. A) 67%
  3. B) 70%
  4. C) 75%
  5. D) 95%

 

Answer: D   Level: Hard   LO: 9

 

  1. Which of the following is NOT a concern in the 2008 IFAC report “Financial Reporting Supply Chain—Current Perspectives and Directions”?
  2. A) governance in name, but not in spirit
  3. B) overregulation
  4. C) the development of a checklist mentality
  5. D) trend towards less disclosure and transparency in business and financial reporting

 

Answer: D   Level: Medium   LO: 1

 

  1. Which of the following is NOT a key driver of audit quality based on the 2008  U.K. FRC publication “The Audit Quality Framework”?
  2. A) the composition of a company’s audit committee
  3. B) the culture within an audit firm
  4. C) the effectiveness of the audit process
  5. D) the skills and personal qualities of audit partners and staff

 

Answer: A   Level: Medium   LO: 1

 

 

  1. What are the two main theories of corporate governance?
  2. A) audit reliance and board of directors’ responsibility
  3. B) agency and stakeholder
  4. C) common law and code law
  5. D) internal auditing and external auditing

 

Answer: B   Level: Medium   LO: 1

 

  1. In proposed PCAOB Rule 4012, “Inspection of Foreign Registered Public Accounting Firms” issued for comment in December 2007, which of the following is NOT one of the broad principles upon which the Board may place full reliance on the inspection program of qualified non-U.S. auditor oversight entities?
  2. A) transparency of the oversight system
  3. B) adequacy and integrity of the oversight system
  4. C) rigidity of professional standards mandated by the oversight system
  5. D) independence of the oversight system’s source of funding

 

Answer: C   Level: Medium   LO: 5

 

  1. According to the 2004 Management Barometer Survey conducted with senior executives of MNCs, in addition to internal control effectiveness, which was the next highest area in need of improvement?
  2. A) security controls
  3. B) internal audit effectiveness
  4. C) fraud programs
  5. D) financial processes

 

Answer: D   Level: Medium   LO: 9

 

  1.    Who oversees the work of the IFAC committees?
  2. A) PIOB
  3. B) PCAOB
  4. C) IOSCO
  5. D) OECD

 

Answer: A   Level: Medium   LO: 7

 

 

 

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