Question

Which following statement is correct? I. Transaction exposure and operating exposure exist because of expected changes...

Which following statement is correct?

I. Transaction exposure and operating exposure exist because of expected changes in future cash flows.

II. Accounting exposure, also called translation exposure, is the potential for accounting-derived changes in owner’s equity to occur because of the need to “translate” foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements.

III. The difference between transaction exposure and operating exposure is that operating exposure is concerned with future cash flows already contracted for, while transaction exposure focuses on expected (not yet contracted for) future cash flows that might change because a change in exchange rates has altered international competitiveness.

(a)  I only.

(b)  II only.

(c)  III only.

(d)  I and II.

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Answer #1

Ans (d)  I and II.

I. Transaction exposure and operating exposure exist because of expected changes in future cash flows. CORRECT

II. Accounting exposure, also called translation exposure, is the potential for accounting-derived changes in owner’s equity to occur because of the need to “translate” foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements. CORRECT

III. The difference between transaction exposure and operating exposure is that operating exposure is concerned with future cash flows already contracted for, while transaction exposure focuses on expected (not yet contracted for) future cash flows that might change because a change in exchange rates has altered international competitiveness. INCORRECT

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