CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following is true when comparing the temporal and all current methods?

I. The current rate method does a better job of preserving the trends and relationships of the functional currency of the subsidiary.
II. Under the current rate method, the relationship between all the income statement items remains the same as under the local currency.
III. The gain/loss recorded in the income statement under the temporal method is the same as the change in the cumulative translation account recorded under the current rate method.
A. I and II
B. I and III
C. II and III
Explanation: The gain/loss recorded in the income statement under the temporal method is not the same as the change in the cumulative translation account recorded under the current rate method.

User Contributed Comments 3

User Comment
danlan2 III: gain/loss under temporal method as part of net income, gain/loss under all current method as part of comprehensive income
RNAN How does statement I. work? It would seem like Temporal Method uses more historical rates and so therefore would better "preserve" the trends during the period.
volkovv All-current method uses same conversion rates for IS and BS, i.e. weighted-average for IS and current rates for BS. By using same conversion factors, it preserves the trends in ratios of the subsidiary. In comparison temporal method uses both current and historic rates for BS and thus distorts some ratios. Also, ratios that use both IS and BS data are distorted with temporal methed as well.
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