Multiple Choice: Financial Statement Translation Select the correct answer for each of the following:

1, A U.S. company has subsidiaries in several different countries. The subsidiaries prepare their financial statements stated in the local currencies. The U.S. parent company:

a. Cannot prepare consolidated financial statements.

b. Must identify the functional currency of each subsidiary and prepare consolidated financial statements in that currency.

c. Must prepare consolidated financial statements in U.S.
dollars and include the foreign subsidiaries.

d. Must require each of the subsidiaries to keep their records in U.S. dollars.
The current rate method of foreign currency translation converts:

a. Income and inventory at the average exchange rate for the year and all other financial statement items at the year-end exchange rate.

b. All of the asset and liability accounts at the average exchange rate.

c. All of the income statement accounts at the average exchange rate for the year.

d. Property, plant, and equipment at historical exchange rates.
When a company reports a cumulative translation adjustment in its balance sheet, the information can be used to help determine:

a. Whether the company has subsidiaries or divisions that keep records stated in foreign currencies.

b. Whether the company’s foreign operations have been profitable.

c. The length of time the subsidiary has been owned.

d. The amount of sales to a foreign subsidiary.
The Avante Company’s Italian subsidiary has completed 1 year of operation as a Western European distribution center. The financial statements for the year, in lira, have been sent to Avante’s home office in New York for consolidation using the current rate method. You are surprised to find that the converted statements do not balance unless a significant positive cumulative translation adjustment (gain) is included. This gain may be the result of:

a. A significant exposed asset position of the subsidiary and a decrease in the value of the lira during the year.

b. A significant exposed liability position of the subsidiary and a decrease in the value of the lira during the year.

c. An insufficient original investment in the subsidiary.

d. None of the above.