1. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

2. When a U.S. company prepares its financial statements, it must include its foreign-based operations: a) measured in US dollars b) reported using GAAP

3. The foreign operations may be: a) subsidiaries b) branches c) other investments of the US firm

4. OBJECTIVE OF TRANSLATION PROCESS: Provide information that shows the expected impact of exchange rate changes on the US company’s cash flows and equity.

5. STEPS IN THE TRANSLATION PROCESS: Receive financial statements of foreign subsidiary (reported in a foreign currency). Restate to conform to GAAP (on worksheet). Translate amount in each account into US $. Consolidate the translated accounts with the parent’s accounts.

6. METHODS OF TRANSLATION PERMITTED UNDER GAAP: Current Rate Method Temporal Method Choice based on Functional Currency of the foreign operation.

7. FUNCTIONAL CURRENCY: The currency of the environment in which the entity primarily generates and expends cash. [In highly inflationary economies, the Functional Currency must be the US dollar].

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