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Chapter_11_Translation_of_Foreign_Financial_Statements
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Chapter_11_Translation_of_Foreign_Financial_Statements

Advanced Accounting 12e Paul M Fischer William J Taylor Rita H Cheng

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Chapter_11_Translation_of_Foreign_Financial_Statements

 

Complete Chapter Questions With Answers

 

Sample Questions Are Posted Below

 

 

1. The functional currency approach adopted by FASB 52 requires:

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

 

ANSWER:   d
RATIONALE:   The FASB adopted a functional approach which focuses on whether the domestic reporting entity’s cash flows will be indirectly or directly affected by changes in the exchange rate of the foreign entity’s currency.
DIFFICULTY:   M
LEARNING OBJECTIVES:   ADAC.FISC.11-1

 

2. Exchange rates will not usually directly affect the cash flows of the parent entity in which of the following cases?

  a. ​The foreign entity operates in a currency other than its own.
  b. ​The foreign entity operates in its local currency.
  c. ​The foreign entity functions in a currency other than its local currency.
  d. ​The foreign entity functions in the parent’s currency.

 

ANSWER:   b
RATIONALE:   If the foreign entity operates in its own currency, changes in exchange rates will not usually directly affect the cash flows of the parent entity.
DIFFICULTY:   D
LEARNING OBJECTIVES:   ADAC.FISC.11-1

 

3. When the functional currency is the foreign entity’s currency:

  a. ​exchange rate changes do not affect the economic well-being of the parent
  b. ​the subsidiary operates as an entity, independent of the parent
  c. ​exchange rate changes do not have immediate impact on the cash flows of the parent
  d. ​All of the above are correct

 

ANSWER:   d
RATIONALE:   When the functional currency is the foreign entity’s currency, the subsidiary primarily generates and expends cash in that currency. Exchanges in the exchange rate between the foreign entity’s currency and the dollar do not have an economic impact on the foreign entity or its parent. The foreign company’s day-to-day operations are not dependent on the economic environment of the dollar, and the exchange rate changes do not have an immediate impact on the cash flows of the parent.
DIFFICULTY:   D
LEARNING OBJECTIVES:   ADAC.FISC.11-1

 

4. A U.S. firm owns 100% of a Japanese automobile manufacturer. The cost of automobile parts is typically 75% of the firm’s total product. In which of the following circumstances would neither the U.S. dollar nor the Japanese yen be considered the functional currency?

  a. ​The Japanese firm buys German automobile parts with euros to produce cars sold in Latin America for dollars.
  b. ​The Japanese firm buys German automobile parts with dollars to produce cars sold in Latin America for dollars.
  c. ​The Japanese firm buys German automobile parts with euros to produce cars sold in Latin America for euros.
  d. ​The FASB requires that either the parent’s or the subsidiary’s local currency be used as the functional currency.

 

ANSWER:   c
RATIONALE:   In this case, the euro is the currency that primarily influences cash flows.
DIFFICULTY:   M
LEARNING OBJECTIVES:   ADAC.FISC.11-1

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