Q-Bank's Incorrect Answers likely

dvilayphet

Has anyone experienced multiple issues with the Schweser Qbank giving incorrect answers in the FRA section?

Example:
The U.S. dollar has been depreciating relative to the local currency over the past year. The use of the current rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on return on equity (ROE) relative to what the ratio would have been without the effects of translation?

A) ROE will most likely decline.
B) ROE will most likely rise.
C) The impact of the depreciation of the US dollar on ROE is indeterminate.

The Qbank chooses 'A' as the correct answer and then goes on to explain that Equity accounts as a whole are translated at the current rate. Its my understanding that equity accounts are translated at historical rates (excluding Retained Earnings).

tikfed

The currency translation for the current rate method is just the impact of the FX on the equity (TA - TL) because every asset and liability line item is based on the current rate. Since the US dollar has depreciated, the equity amount will be higher (more US dollars needed to convert the foreign equity) and ROE will be lower.

scarecrow

Remember that -- in the Current Rate method --

1. Common Stock is valuated at the Historical Rate.
2. Total Assets are valued at Current Rate
3. Total Liabilities are valued at Current Rate.

4. So using 2 and 3 above - Equity = TA - TL would be valued (as a whole) at the Current Rate. That statement is correct.

Now the apparent discrepancy between the statement 1 and 4 - is what shows up in the adjustment Cumulative Translation Adjustment (CTA) entry which is a part of the Equity as well.

CP