tb13

KirtC.Butler,MultinationalFinance,3rdedition99Chapter13ManagingTranslationExposuretoCurrencyRiskTrue/False1.Translationexposurereferstotheimpactofexchangeratechangesontheparentfirm’sconsolidatedfinancialstatements.ANS:True.2.Translationexposureisdefinedaschangeinthevalueofcontractualcashflowsduetounexpectedchangesincurrencyvalues.ANS:False.Thisistransactionexposure.3.Historicalcostaccountingisreliableandconsistent,butcanmisrepresentreality.ANS:True.4.Whenmarketpricesareunavailable,historicalcostaccountingismorereliablethanmarketvalueaccounting.ANS:True.5.Underthecurrent/noncurrentmethod,changesinbookvaluearisingfromtranslationexposuretocurrencyriskareplacedinacontraaccountontheassetsideofthebalancesheet.ANS:False.Underthecurrent/noncurrentmethod,commonequityabsorbsanychangesinbookvaluearisingfromtranslationexposuretocurrencyrisk.6.Mostbusinessesmaintainpositivenetworkingcapital,soaforeigncurrencyappreciationismorelikelytobeassociatedwithatranslationgainthanatranslationlossunderthecurrent/noncurrentmethod.ANS:True.7.AccordingtoFAS#8,allbalancesheetitemsaretranslatedathistoricalexchangerates.ANS:False.Monetaryassetsandliabilitiesaretranslatedatcurrentexchangerates.8.AccordingtoFAS#8,allbalancesheetitemsaretranslatedatcurrentexchangerates.ANS:False.Nonmonetaryassetsandliabilitiesaretranslatedathistoricalrates.9.Fromafinancialperspective,FAS#8handlesbothmonetaryassetsandmonetaryliabilitiesappropriately.ANS:True.10.Ifthevalueofmonetaryassetsislessthanthatofmonetaryliabilities,aforeigncurrencyappreciationresultsinatranslationlossunderthemonetary/nonmonetarymethod.ANS:True.11.AccordingtoFAS#52,translationgainsorlossesarereportedonthebalancesheetasacumulativetranslationadjustment.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition10012.ThemostimportantchangeinFAS#52relativetoFAS#8isthattranslationgainsandlossesarenotflowedthroughtheincomestatement.Instead,theyareaccumulatedinanaccountintheequityportionofthebalancesheet.ANS:True.13.AccordingtoFAS#52,allincomestatementitemsaretranslatedatthecurrentexchangerate.ANS:True.14.AccordingtoFAS#52,allassetsandliabilitiesaretranslatedatthecurrentexchangerate.ANS:False.Commonequityistranslatedathistoricalexchangerates.15.Translationexposureisfarmoreimportantthaneconomicexposuretothevalueofthemultinationalcorporation.ANS:False.Translationexposureisonlyimportantifitinvolvescashflowsorrisk.16.FAS#8wasdislikedbymanagersbecauseitincorrectlyvaluedfixedassetsathistoricalcosts.ANS:False.ThebiggestproblemwithFAS#8wasthatchangesinthetranslatedvaluesofbalancesheetaccountsflowedthroughtheincomestatement.17.Financetheorystatesthatthefirmshouldonlyconsiderhedgingriskexposuresthatarerelatedtofirmvalue.ANS:True.18.Empiricalstudieshavefoundthatnon-U.S.firmsarelesswillingthanU.S.firmstohedgetranslationexposure.ANS:False.Severalstudieshavefoundthatnon-U.S.firmsaremorewillingtohedge.19.Theresponseofaccountingstandardsetterstoderivatives-relatedlossesintheearly1990swastoplaceamoratoriumonderivativestrading.ANS:False.Standardsettersrequiredincreaseddisclosureofderivativestransactions.20.Accountingstandardsettershavefailedtorespondtotherecentgrowthinderivativesusageforriskmanagementpurposes.ANS:False.Nationalandinternationalstandardsettersrequiredincreaseddisclosureandhaveproposednewrulesforaccountingforderivatives.MultipleChoice1.Translationaccountingmethodsincludeeachofa)throughd)exceptthe____method.a.current/noncurrentb.temporalc.monetary/nonmonetaryd.currentratee.alloftheabovearetranslationaccountingmethodsANS:EKirtC.Butler,MultinationalFinance,3rdedition1012.ThetemporalmethodofFAS#8identifieseachofa)throughc)except____.a.assetsandliabilitiesaretranslatedathistoricalexchangeratesb.depreciationandcostofgoodssoldaretranslatedathistoricalexchangeratesc.incomestatementitemsaretranslatedatanaverageexchangerateovertheperiodd.alloftheaboveareelementsofFAS#8e.noneoftheaboveareelementsofFAS#8ANS:A3.Netexposedassetsequal____.a.assetslessliabilitiesb.exposedassetslessexposedliabilitiesc.shareholders’equityd.morethanoneoftheabovee.noneoftheaboveANS:B4.FAS#52specifieseachofthefollowingrulesexcept____.a.allassetsandliabilities(includingcommonequity)aretranslatedatthecurrentexchangerateb.dividendspaidaretranslatedatthecurrentexchangeratec.incomestatementitemsaretranslatedatanexchangerate(oranexchangerateaverage)fromthereportingperiodd.alloftheaboveareelementsofFAS#52e.noneoftheaboveareelementsofFAS#52ANS:A5.Tomaximizeshareholderwealth,managersshouldonlyhedgetranslationexposureifit____.a.affectsthetotalriskofthefirmb.involvesaccountingprofitsc.involvescashflowsd.isconveniente.noneoftheaboveANS:C6.FAS#8assumesthatthevalueofthefirm’srealassetsare____tocurrencyrisk.FAS#52assumesthatthevalueofthefirm’srealassetsare____tocurrencyrisk.a.fullyexposed...partiallyexposedb.fullyexposed...unexposedc.partiallyexposed...fullyexposedd.partiallyexposed...unexposede.unexposed...fullyexposedANS:E7.AccountantsandfinancialmanagerspreferFAS#52toFAS#8becauseFAS#52____.a.allowsbalancesheetgainsorlossestobeisolatedfromreportedincom