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The Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary’s 2001 income statement shows ￡500 of net income and a ￡50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under the provisions of SFAS 52?

A) $715.

B) $725.

C) $750.

Which of the following statements regarding foreign currency translation under SFAS 52 are FALSE? Under the:

A) temporal method, sales are remeasured using the average rate.

B) current rate method, the foreign currency translation gain or loss appears on the parent firm's income statement.

C) temporal method, COGS and depreciation are remeasured using the historical rate.

An important distinction between remeasurement under the temporal method and translation under the all-current method is that:

A) translation (all-current method) results in an adjustment to the equity account on the balance sheet, remeasurement (temporal method) results in a gain or loss appearing on the income statement.

B) monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (all-current method) at current rates.

C) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (all-current method), but a function of the average rate under remeasurement (temporal method).

Global International Corp. (GIC) has three subsidiaries: GIC Europe whose local currency is the euro and whose functional currency is the euro; GIC China whose local currency is the yuan and whose functional currency is the Hong Kong dollar; and GIC Bahamas whose local currency is the Bahamian dollar and whose functional currency is the U.S. dollar. GIC’s reporting currency is the U.S. dollar. Which conversion methods should be used by GIC for each of its subsidiaries?

A) GIC Europe’s data should be remeasured under the temporal method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the all current method into U.S. dollars; and GIC Bahamas’ data should be translated under the all-current method into U.S. dollars.

B) The financial data for all three subsidiaries should be remeasured under the temporal method.

C) GIC Europe’s data should be translated under the all-current method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the all current method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars.

Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in Yen/dollars.

Yen / Dollar Exchange Rate
December 31, 2005	150
December 31, 2004	130
2005 Average	140
2004 Average	120
Exchange rate on date that 2005 dividends were paid to Wasson Brothers	145
Exchange rate on date of stock issue and acquisition of fixed assets	100

Ashley Jameson is an analyst with Henderson-Wells, an investment banking firm in New York, and is the chief analyst covering WB. She believes that the enormous success of the trading cards has contributed greatly to WB's bottom line. However, she believes that this effect may be misstated in the company's financial statements because of the recent volatility in exchange rates. Many analysts at other major investment banking firms have been raising their ratings on WB because of the recent earnings growth. Jameson, however, wants to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's hot new product and not a result of an exchange rate fluctuation. The following are the financial statements of Kasamatsu, stated in thousands of yen.

Financial Statements for Year Ending December 31, 2005 (in thousands of yen)
Statement of Income and Retained Earnings
Sales			700,000
Expenses
	Cost of goods sold (COGS)		280,000
	Depreciation		126,000
	SG&A		77,000
		Total Expenses	483,000
Earnings before taxes (EBT)			217,000
Income Tax Expense			98,000
Net Income			119,000
Retained Earnings: December 31, 2004			250,000
			369,000
Dividends			58,000
Retained Earnings: December 31, 2005*			311,000
*Retained earnings on 12/31/2005 were US $2 million

Balance Sheet
Assets
	Cash and receivables		60,000
	Inventory		180,000
	Land		200,000
	Fixed assets		346,000
		Total assets	786,000
Liabilities and stockholder's equity
	Liabilities		300,000
	Capital stock		175,000
	Retained earnings		311,000
		Total liabilities and stockholder's equity	786,000

Before Jameson can perform any financial statement analysis she needs to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the following is the most accurate method and reasoning?

A) Current method because the functional currency is the yen.

B) Current method because the local currency is the USD.

C) Temporal method because the local currency differs from the functional currency.

A) decreased because the yen is depreciating versus the USD.

B) increased because the yen is depreciating versus the USD.

C) increased because the yen is appreciating versus the USD.

If the functional currency has been determined to be the local currency, then:

A) use remeasurement to translate the foreign subsidiary's results.

B) use the current rate method to translate the foreign subsidiary's results.

C) use the temporal method to translate the foreign subsidiary's results.

Which of the following statements regarding the functional currency under SFAS 52 is FALSE?

A) The functional currency is defined as the primary currency of the economic environment in which the parent firm operates.

B) Self-contained, independent subsidiaries whose operations are primarily located in the local market will use the local currency as the functional currency.

C) If a firm operates in a country or environment which is subject to cumulative inflation of 100% or more over a three year period, that firm will use the parent's currency as the functional currency.

Each of the following items is considered a monetary asset or liability account under the temporal method for foreign currency translation EXCEPT:

A) accounts payable.

B) long-term debt.

C) inventory.

Which of the following statements regarding the foreign currency translation under SFAS 52 is FALSE? The functional currency is the:

A) parent firm's home currency if the foreign subsidiary operates in a country with high inflation.

B) subsidiary's local currency for self-contained, independent foreign subsidiaries.

C) parent firm's home currency for self-contained independent foreign subsidiaries.

Which of the following situations does NOT require the use of the temporal method? The:

A) local currency is the functional currency.

B) foreign subsidiary is operating in a highly inflationary economy.

C) functional currency is some currency other that the local currency or the U.S. dollar.

Under the temporal method, the inventory and cost of goods sold (COGS) accounts are both nonmonetary accounts. Which of the following statements is least accurate regarding these accounts?

A) The Inventory account is remeasured using the historical rate under both LIFO and FIFO.

B) If the firm accounts for inventory using last in, first out (LIFO), then the beginning-of-period rate is used to remeasure COGS.

C) If the firm accounts for inventory using first in, first out (FIFO), then a more current rate will be applied to the inventory account.

Which of the following statements is least accurate regarding accounting for foreign currency translations? The:

A) temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company.

B) current rate method applies the average exchange rate to all income statement accounts.

C) current rate method applies the current exchange rate to all balance sheet accounts.

Which of the following general statements is CORRECT with respect to the temporal method? Monetary assets are:

A) translated at the current rate.

B) translated at the average rate.

C) not translated.

Which of the following general statements is most accurate with respect to the temporal method? Nonmonetary assets are translated at:

A) historical rates at the time of the transaction.

B) the average rate during the year.

C) the current rate.

Which of the following statements is FALSE regarding the use of the temporal method for foreign exchange accounting?

A) All nonmonetary assets and liabilities are translated at the historical rate of exchange.

B) All monetary assets are translated at the current rate of exchange.

C) Under the temporal method, the foreign exchange gain or loss is placed on the balance sheet in the equity section.

Which of the following statements is NOT a characteristic of the all-current method of accounting for foreign currency translation?

A) All asset accounts are translated at the current rate of exchange as of the balance sheet date.

B) Nonmonetary liabilities are translated at the historical rate of exchange.

C) The common stock account is translated at the rate of exchange that applied when the equity was issued.

Which of the following general statements is most accurate with respect to the all-current method? Revenues:

A) and operating expenses are translated at the current rate.

B) are translated at the average rate while operating expenses are translated at the current rate.

C) and operating expenses are translated at the average rate.

Which of the following general statements is CORRECT with respect to the temporal method? Revenues and operating expenses (excluding COGS) are translated at the:

A) historical rate.

B) current rate.

C) average rate.

Under the all-current method, common stock is translated by using the:

A) rate that existed when the equity was issued.

B) exchange rate as of the balance sheet date.

C) present value of weighted average rate.

Dave Iverson, CFA, is analyzing the recently released financial statement of Global Corp., a large multinational manufacturing company with production facilities across Europe and Southeast Asia. The company’s choice of functional currency is not disclosed, but Iverson does notice that Global Corp. does not have any cumulative translation adjustments (CTA) on its balance sheet. Which of the following statements is most accurate based upon Iverson’s observation?

A) The all-current method of foreign currency translation is used exclusively.

B) The temporal method of foreign currency translation is used for at least some of its subsidiaries.

C) The temporal method of foreign currency translation is used exclusively.

Which of the following currency translation methods is most appropriate in a hyperinflationary economy? The:

A) current/non-current method since current assets and liabilities are translated at the current exchange rate.

B) all-current method since the translation gain or loss is shown on the income statement.

C) temporal method because all non-monetary accounts are translated at the historical rate.

Which of the following statements regarding foreign currency disclosures in the footnotes to financial statements is most accurate?

A) A multinational firm with small liability balances generally has minimal foreign currency exposure on its balance sheet.

B) If the parent currency is the functional currency, the temporal method is applied and exposure is equal to net monetary assets.

C) All U.S.-based multinational firms must disclose the accounting method used for foreign currency translation in order to be in compliance with GAAP standards.