Question 1

How does a company develop a hedged balance sheet?

Accepted Answer

A balance sheet hedge is accomplished by

Question 2

Accounting or translation exposures give rise to gains or losses (in most cases) if the exchange rate between the local currency and the reporting currency changes. When considering whether these exposures should be hedged, the following points are considered to be valid except

Accepted Answer

A)  If the temporal method for translation is required, the gains or losses must flow through the income statement thus affecting taxes paid and reported net income. 
B)  Because it is possible that gains during one accounting period will be offset by losses during the next one, there is little reason to engage in costly economic transactions (even if the cost is low) to offset risks that might be reversed by themselves and, anyway, have no impact on economic cash flows. 
C)  If the company has debt covenants specifying minimum accounting ratios, because accounting gains and losses affect consolidated equity, it is conceivable that a debt ratio covenant could be violated if a company has significant translation losses, so hedging may deserve consideration. 
D)  If there is hyperinflation in a country and it is unlikely to be reversed in the future, then exposed assets will lose value and hedging may deserve consideration. 
E)  None of the statements above; all are correct. 
A)  If the temporal method for translation is required, the gains or losses must flow through the income statement thus affecting taxes paid and reported net income. 
B)  Because it is possible that gains during one accounting period will be offset by losses during the next one, there is little reason to engage in costly economic transactions (even if the cost is low) to offset risks that might be reversed by themselves and, anyway, have no impact on economic cash flows. 
C)  If the company has debt covenants specifying minimum accounting ratios, because accounting gains and losses affect consolidated equity, it is conceivable that a debt ratio covenant could be violated if a company has significant translation losses, so hedging may deserve consideration. 
D)  If there is hyperinflation in a country and it is unlikely to be reversed in the future, then exposed assets will lose value and hedging may deserve consideration. 
E)  None of the statements above; all are correct.

Question 3

Which of the following statements is incorrect?

Accepted Answer

A)  An operating unit located in another country that operates as a separate going concern and is largely independent of the parent has the local currency as its functional currency and its financial statements in this case are translated using the current rate method. 
B)  An operating unit located in another country that functions as an extension of the parent and whose cash flows are interrelated with those of the parent has the local currency as its functional currency and its financial statements in this case are translated using the temporal method. 
C)  When translating from a local currency into a functional currency, the procedure is called remeasuring the financial statements. 
D)  When translating from a functional currency into a reporting currency, the procedure is called restating the financial statements. 
E)  None of the statements above; all are correct correct. 
A)  An operating unit located in another country that operates as a separate going concern and is largely independent of the parent has the local currency as its functional currency and its financial statements in this case are translated using the current rate method. 
B)  An operating unit located in another country that functions as an extension of the parent and whose cash flows are interrelated with those of the parent has the local currency as its functional currency and its financial statements in this case are translated using the temporal method. 
C)  When translating from a local currency into a functional currency, the procedure is called remeasuring the financial statements. 
D)  When translating from a functional currency into a reporting currency, the procedure is called restating the financial statements. 
E)  None of the statements above; all are correct correct.

Question 4

The Financial Accounting Standards Board (FASB) in the U.S. uses what it calls a "functional currency approach" to differentiate among various intracorporate relationship scenarios and, on that basis, specify how financial statement translation must be done. The International Accounting Standards Board (IASB) uses a different approach, but the end result is usually identical. Basically,

Accepted Answer

A)  If an operating affiliate is classified as a "self-sustaining foreign entity," in the absence of hyperinflation, its functional currency will be its local currency and translation will be done using the current rate method. 
B)  If the functional currency is neither the local currency nor the reporting currency (assume the U.S. dollar), then the local currency financial statements must be remeasured into the functional currency using the temporal method and then restated into the U.S. dollar (the reporting currency) using the current rate method. 
C)  If an operating affiliate is classified as an "integrated foreign entity," in the absence of hyperinflation, its functional currency will be the reporting currency (U.S. dollar) and translation will be done using the temporal method. 
D)  All of the statements above are correct. 
E)  Only statements a and c are correct. 
A)  If an operating affiliate is classified as a "self-sustaining foreign entity," in the absence of hyperinflation, its functional currency will be its local currency and translation will be done using the current rate method. 
B)  If the functional currency is neither the local currency nor the reporting currency (assume the U.S. dollar), then the local currency financial statements must be remeasured into the functional currency using the temporal method and then restated into the U.S. dollar (the reporting currency) using the current rate method. 
C)  If an operating affiliate is classified as an "integrated foreign entity," in the absence of hyperinflation, its functional currency will be the reporting currency (U.S. dollar) and translation will be done using the temporal method. 
D)  All of the statements above are correct. 
E)  Only statements a and c are correct.

Question 5

Witten Publishing, a U.S. multinational, has a subsidiary in Mexico with the following balance sheet (denominated in pesos).
   The spot exchange rate is $0.097430/peso. The company's CFO has estimated the following average exchange rates for inventories, fixed assets, common stock, and retained earnings: $0.109240, $0.103580, $0.101160, and $0.121641, respectively. The subsidiary is classified as an integrated foreign entity. Translate the balance sheet into U.S. dollars, which is the reporting currency. (Hint: Depending upon the translation method used, all of the exchange rates may not be used.)
Financial statement translation Diff: T

Accepted Answer

Since the subsidiary is an integrated fo

How does a company develop a hedged balance sheet?

Accounting or translation exposures give rise to gains or losses (in most cases) if the exchange rate between the local currency and the reporting currency changes. When considering whether these exposures should be hedged, the following points are considered to be valid except

Which of the following statements is incorrect?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters

Exam 7: Translating and Consolidating Subsidiary Financial Statements

How does a company develop a hedged balance sheet?

Accounting or translation exposures give rise to gains or losses (in most cases) if the exchange rate between the local currency and the reporting currency changes. When considering whether these exposures should be hedged, the following points are considered to be valid except

Which of the following statements is incorrect?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters