Question 1

According to FAS #52, all income statement items are translated at the current exchange rate.

Accepted Answer

A) True 
 B)False  True

Question 2

Adverse selection costs arise from ______.

Accepted Answer

A)  differential taxes 
B)  information asymmetries 
C)  large bid-ask spreads 
D)  the perfect market assumptions 
E)  None of the above 
A)  differential taxes 
B)  information asymmetries 
C)  large bid-ask spreads 
D)  the perfect market assumptions 
E)  None of the above B

Question 3

Accounting standard setters have failed to respond to the recent growth in derivatives usage for risk management purposes.

Accepted Answer

A) True 
 B)False  False

Question 4

Most businesses maintain positive net working capital, so a foreign currency appreciation is more likely to be associated with a translation gain than a translation loss.

Accepted Answer

A) True 
 B)False

Question 5

According to studies cited in the text, increased disclosure about financial price risks and risk management activities results in each of the following EXCEPT

Accepted Answer

A)  higher trading volumes 
B)  increased risks of litigation over accounting disclosure practices 
C)  increased share price sensitivity to underlying financial prices 
D)  lower trading volume sensitivity to changes in underlying financial prices 
E)  lower bid-ask spreads 
A)  higher trading volumes 
B)  increased risks of litigation over accounting disclosure practices 
C)  increased share price sensitivity to underlying financial prices 
D)  lower trading volume sensitivity to changes in underlying financial prices 
E)  lower bid-ask spreads

Question 6

Finance theory states that the firm should only consider hedging risk exposures that are related to firm value.

Accepted Answer

A) True 
 B)False

Question 7

According to FAS #52, translation gains or losses are reported on the balance sheet as a cumulative translation adjustment.

Accepted Answer

A) True 
 B)False

Question 8

The response of accounting standard setters to derivatives-related losses in the 1990s was to place a moratorium on corporate reporting of derivatives transactions.

Accepted Answer

A) True 
 B)False

Question 9

Under FAS #52, translation gains and losses are not flowed through the income statement. Instead, they are accumulated in an account in the equity portion of the balance sheet.

Accepted Answer

A) True 
 B)False

Question 10

Translation exposure refers to the impact of exchange rate changes on the parent firm's consolidated financial statements.

Accepted Answer

A) True 
 B)False

Question 11

Translation exposure is defined as change in the value of contractual cash flows due to unexpected changes in currency values.

Accepted Answer

A) True 
 B)False

Question 12

In the United States, FAS #133 "Accounting for Derivative Instruments and Hedging Activities" values financial derivatives at ______.

Accepted Answer

A)  book value 
B)  historical cost 
C)  historical exchange rates 
D)  market 
E)  None of the above 
A)  book value 
B)  historical cost 
C)  historical exchange rates 
D)  market 
E)  None of the above

Question 13

FAS #52 specifies each of the following rules EXCEPT

Accepted Answer

A)  all assets and liabilities (including common equity) are translated at the current exchange rate 
B)  dividends paid are translated at the current exchange rate 
C)  income statement items are translated at an exchange rate (or an exchange rate average) from the reporting period 
D)  All of the above are elements of FAS #52 
E)  None of the above are elements of FAS #52 
A)  all assets and liabilities (including common equity) are translated at the current exchange rate 
B)  dividends paid are translated at the current exchange rate 
C)  income statement items are translated at an exchange rate (or an exchange rate average) from the reporting period 
D)  All of the above are elements of FAS #52 
E)  None of the above are elements of FAS #52

Question 14

According to FAS #52, all assets and liabilities are translated at the current exchange rate.

Accepted Answer

A) True 
 B)False

Question 15

FAS #52 assumes the domestic currency values of the real assets of foreign subsidiaries are ______.

Accepted Answer

A)  fully exposed to currency risk 
B)  negative related to the domestic currency 
C)  not exposed to currency risk 
D)  partially exposed to currency risk 
E)  positively related to the domestic currency 
A)  fully exposed to currency risk 
B)  negative related to the domestic currency 
C)  not exposed to currency risk 
D)  partially exposed to currency risk 
E)  positively related to the domestic currency

Question 16

Bodnar, Hayt, and Marston's "1998 Wharton Survey of Financial Risk Management by U.S. Non-Financial Firms" in Financial Management found that financial officers' biggest concern regarding derivatives was ______.

Accepted Answer

A)  accounting treatment 
B)  credit risk 
C)  reaction by analysts or investors 
D)  SEC disclosure requirements 
E)  secondary market liquidity 
A)  accounting treatment 
B)  credit risk 
C)  reaction by analysts or investors 
D)  SEC disclosure requirements 
E)  secondary market liquidity

Question 17

Information-based reasons for hedging translation exposure include each of the following EXCEPT

Accepted Answer

A)  The quality of accounting information can be improved. 
B)  Meeting profit forecasts retains management's credibility in the marketplace 
C)  Information costs can be reduced in a perfect market. 
D)  Credit ratings are tied to accounting performance rather than cash flow. 
E)  Loan covenants are tied to accounting income. 
A)  The quality of accounting information can be improved. 
B)  Meeting profit forecasts retains management's credibility in the marketplace 
C)  Information costs can be reduced in a perfect market. 
D)  Credit ratings are tied to accounting performance rather than cash flow. 
E)  Loan covenants are tied to accounting income.

Question 18

In the United States, FAS #133 "Accounting for Derivative Instruments and Hedging Activities" requires each of a) through d) EXCEPT

Accepted Answer

A)  Derivatives are assets and liabilities that should be reported in financial statements. 
B)  Market value is the most relevant measure of value. 
C)  Only assets and liabilities should be reported as such. Income and expenses should be reported on the income statement. 
D)  Hedge transactions should be fully capitalized on the balance sheet. 
E)  FAS #133 requires all of the above 
A)  Derivatives are assets and liabilities that should be reported in financial statements. 
B)  Market value is the most relevant measure of value. 
C)  Only assets and liabilities should be reported as such. Income and expenses should be reported on the income statement. 
D)  Hedge transactions should be fully capitalized on the balance sheet. 
E)  FAS #133 requires all of the above

Question 19

Which of a) through d) is a reasonable guideline for currency risk management?

Accepted Answer

A)  All noncash currency risk exposures should be hedged with currency derivatives. 
B)  Do not hedge unless the purpose is to reduce translation exposure to currency risk. 
C)  Treasury should hold the managers of individual operating units responsible for the consequences of unexpected changes in currency values. 
D)  Treasury should quote market prices for currency hedges to the individual units. 
E)  None of the above 
A)  All noncash currency risk exposures should be hedged with currency derivatives. 
B)  Do not hedge unless the purpose is to reduce translation exposure to currency risk. 
C)  Treasury should hold the managers of individual operating units responsible for the consequences of unexpected changes in currency values. 
D)  Treasury should quote market prices for currency hedges to the individual units. 
E)  None of the above

Question 20

Under the current rate method of FAS #52, changes in the translated value of balance sheet items are placed in a contra account on the asset side of the balance sheet.

Accepted Answer

A) True 
 B)False

Exam 11: Managing Translation Exposure and Accounting for Financial Transactions

According to FAS #52, all income statement items are translated at the current exchange rate.

Adverse selection costs arise from ______.

Accounting standard setters have failed to respond to the recent growth in derivatives usage for risk management purposes.

Most businesses maintain positive net working capital, so a foreign currency appreciation is more likely to be associated with a translation gain than a translation loss.

According to studies cited in the text, increased disclosure about financial price risks and risk management activities results in each of the following EXCEPT

Finance theory states that the firm should only consider hedging risk exposures that are related to firm value.

According to FAS #52, translation gains or losses are reported on the balance sheet as a cumulative translation adjustment.

The response of accounting standard setters to derivatives-related losses in the 1990s was to place a moratorium on corporate reporting of derivatives transactions.

Under FAS #52, translation gains and losses are not flowed through the income statement. Instead, they are accumulated in an account in the equity portion of the balance sheet.

Translation exposure refers to the impact of exchange rate changes on the parent firm's consolidated financial statements.

Translation exposure is defined as change in the value of contractual cash flows due to unexpected changes in currency values.

In the United States, FAS #133 "Accounting for Derivative Instruments and Hedging Activities" values financial derivatives at ______.

FAS #52 specifies each of the following rules EXCEPT

According to FAS #52, all assets and liabilities are translated at the current exchange rate.

FAS #52 assumes the domestic currency values of the real assets of foreign subsidiaries are ______.

Bodnar, Hayt, and Marston's "1998 Wharton Survey of Financial Risk Management by U.S. Non-Financial Firms" in Financial Management found that financial officers' biggest concern regarding derivatives was ______.

Information-based reasons for hedging translation exposure include each of the following EXCEPT

In the United States, FAS #133 "Accounting for Derivative Instruments and Hedging Activities" requires each of a) through d) EXCEPT

Which of a) through d) is a reasonable guideline for currency risk management?

Under the current rate method of FAS #52, changes in the translated value of balance sheet items are placed in a contra account on the asset side of the balance sheet.

An Introduction to Multinational Finance

World Trade and the International Monetary System

Foreign Exchange and Eurocurrency Markets

The International Parity Conditions and Their Consequences

Extension: the International Parity Conditions and Their Consequences

Currency Futures and Futures Markets

Currency Options and Options Markets

Currency Swaps and Swaps Markets

Multinational Treasury Management

Extension: Multinational Treasury Management

Managing Transaction Exposure to Currency Risk

Managing Operating Exposure to Currency Risk

Foreign Market Entry and Country Risk Management

Multinational Capital Budgeting

Multinational Capital Structure and Cost of Capital

Taxes and Multinational Corporate Strategy

Real Options and Cross-Border Investment Strategy

Corporate Governance and the International Market for Corporate Control

International Capital Markets

International Portfolio Diversification

International Asset Pricing

Filters