Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico. Giant Company uses either the temporal or the current rate method of foreign currency translation for its subsidiaries.

• Grande, Inc., began operations January 1, 2001.

• Common Stock and Fixed Assets were acquired January 1, 2000.

• Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover.

• The beginning U.S. dollar value of Giant's retained earnings was $2,600,000.

• The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001.

Exchange Rates were:	January 1, 2000	$0.14/M peso
	January 1, 2001	$0.12/M peso
	June 30, 2001	$0.11/M peso (this is the 2001 average rate)
	December 31, 2001	$0.10/M peso

	Grande, Inc.
	Balance Sheet (in M Pesos)
	Jan. 1, 2001	Dec. 31, 2001
Cash	5,000,000	20,000,000
Accounts Receivable (A/R)	20,000,000	35,000,000
Inventory	15,000,000	15,000,000
Fixed Assets (net)	90,000,000	60,000,000
Accounts Payable (A/P)	10,000,000	10,000,000
Long Term Debt	40,000,000	35,000,000
Common Stock	80,000,000	80,000,000
Retained Earnings		5,000,000
	2001 Income Statement
	(in M Pesos)
Sales	60,000,000
Cost of Goods Sold (COGS)	(45,000,000)
Depreciation	(10,000,000)
Net Income	5,000,000

Assume that Giant Company considers the Mexican peso to be the local currency and the functional currency of Grande, Inc.

Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:

A) the current rate method.

B) the current rate method followed by the temporal method.

C) the temporal method.

The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31, 2001, is:

A) $500,000.

B) $550,000.

C) $250,000.

What is the change in exposure for Grande, Inc., for the year ended December 31, 2001?

A) +$85,000,000 pesos.

B) +$5,000,000 pesos.

C) +$35,000,000 pesos.

The translation gain or loss from the activities of Grande, Inc., should be reported in:

A) the statement of cash flows.

B) the equity accounts.

C) the income statement.

The U.S. 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 U.S. GAAP?

A) $725.

B) $715.

C) $750.

Which of the following statements regarding foreign currency translation are least accurate? Under the:

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

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

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

An important distinction between the temporal method and the current rate method is that:

A) the current rate method results in an adjustment to the equity account on the balance sheet. The 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 (current rate method) at current rates.

C) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (current rate 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 current rate method into U.S. dollars; and GIC Bahamas’ data should be translated under the current rate method into U.S. dollars.

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

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

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 local currency is the USD.

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

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

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

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

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

Which of the following statements regarding the functional currency under US GAAP is least accurate?

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

B) 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.

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

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) inventory.

C) long-term debt.

Which of the following statements regarding the foreign currency translation under US GAAP is least accurate? The functional currency is the:

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

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

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

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

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

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

C) local currency is the functional currency.

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

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

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

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

A) translated at the average rate.

B) translated at the current 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 least accurate 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) Under the temporal method, the foreign exchange gain or loss is placed on the balance sheet in the equity section.

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

Which of the following statements is NOT a characteristic of the current rate 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 current rate method? Revenues:

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

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

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

B) historical rate.

C) current rate.

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

A) exchange rate as of the balance sheet date.

B) present value of weighted average rate.

C) rate that existed when the equity was issued.

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 current rate method of foreign currency translation is used exclusively.

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

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

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

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

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

C) current rate method since the translation gain or loss is shown on the income statement.

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) 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.

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

At what exchange rate are revenues and accounts receivable translated under the current rate method?

Revenues

Accounts receivable

A) Average rate Historical rate

B) Average rate Current rate

C) Current rate Current rate