- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 12. Multinational Operations
- Subject 6. Impact on Financial Statements and Ratios
CFA Practice Question
Which of the following statements is (are) true with respect to the effects that the various translation methods will have on the financial ratios of both the parent and the subsidiary?
II. The temporal method mandates that any translation gains or losses be recorded in the equity section of the parent's balance sheet.
III. Under the temporal method, the currency exposure is equal to total net assets.
IV. The statement of cash flows of the subsidiary, when translated into the presentation currency, should not be impacted by the choice of translation method.
I. Under the all current method, the effects on the parent's income won't be as volatile as it would be the case had the temporal method been used.
II. The temporal method mandates that any translation gains or losses be recorded in the equity section of the parent's balance sheet.
III. Under the temporal method, the currency exposure is equal to total net assets.
IV. The statement of cash flows of the subsidiary, when translated into the presentation currency, should not be impacted by the choice of translation method.
Correct Answer: I and IV
II is incorrect because it is the all current method that mandates that any translation gains or losses be recorded in the equity section of the parent's balance sheet.
III is incorrect because under the temporal method, the currency exposure is equal to the total net monetary assets.
User Contributed Comments 1
| User | Comment |
|---|---|
| quanttrader | I is true since for current method, income statements components (ie COGS) is translated at avg rate, while for temporal COGS is translated at historic. Thus income is less volatile under current method. |