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Free CFA-Level-II Exam Braindumps (page: 14)

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PDF with 715 Questions

Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.



Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:
• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will the all-current method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?

  1. Gain on the balance sheet.
  2. Gain on the income statement.
  3. Loss on the balance sheet and a gain on the income statement.

Answer(s): A

Explanation:

Exposure under the all-current method is equity. Beginning equity is positive ($4,000) and the change in equity during the year is positive ($6,000 - $4,000 = $2,000). Because the Rho appreciated during the year, the all-current method will report a translation gain for 2008. Under the all-current method gains and losses are reported as part of the cumulative translation adjustment in the equity section of the balance sheet. (Study Session 6, LOS 23.d,e)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.


Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will the temporal method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?

  1. Gain on the balance sheet.
  2. Loss on the income statement.
  3. Gain on the balance sheet and a loss on the income statement.

Answer(s): B

Explanation:

Exposure under the temporal method is cash and accounts receivable minus current liabilities and long-term debt. Beginning exposure is negative ($5,000 - $11,000 = -$6,000) and the change in exposure is also negative [-$6,300 - (-$6,000)] = -$300. Because the Rho appreciated during the year, the temporal method will report a translation loss for 2008. Gains and losses are reported on the income statement under the temporal method. (Study Session 6, LOS 23.d,e)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.


Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will total asset turnover (calculated using end-of-period balance sheet figures) likely be larger when calculated from the Rho financial statements or the financial statements translated into the reporting currency (US$) using the all-current method?

  1. Larger on US$ statements.
  2. Larger on Rho statements.
  3. No difference.

Answer(s): B

Explanation:

If the Rho is appreciating, mixed ratios like return on assets and total asset turnover (using end-of-pcriod balance sheet figures) calculated from the local currency statements will be larger than the same ratios calculated from the reporting currency statements that were translated using the all-current method. For example, under the all-current method net income will be translated at the lower average rate ($0.42) and assets will be rramlared at the higher ending rate ($0.45). Therefore the original return on assets (ner income divided by total assets) from the Rho statements will be higher than the ratio after it is translated into the reporting currency. (Study Session 6, LOS 23.d,e)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.


Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:
• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will fixed asset turnover (calculated using end-of-period balance sheet figures) likely be lower when calculated using the all-current method or remeasured using the temporal method?

  1. Lower under the temporal method.
  2. Lower under the all-current method.
  3. The same under either method.

Answer(s): B

Explanation:

With the Rho appreciating, fixed asset turnover will be lower under the all-current method. (Study Session 6, LOS 23.d,e)






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