Translation Method Analysis for Multinational Operations

Hard Multinational Operations Translation Methods

ABC Corporation is a U.S.-based multinational enterprise with a subsidiary in Germany. The subsidiary's financial statements are prepared in euros. The company's headquarters maintains that the 'current rate method' should be used to translate the financial statements of its foreign subsidiary. Under this method, all assets and liabilities are translated at the current exchange rate at the balance sheet date, while revenues and expenses are translated at the average exchange rate for the period.

Given the importance of translating its financial results properly for the consolidated financial statements, the financial management team is analyzing the potential impact of using different translation methods. The management is particularly interested in how these translation methods may affect the reported earnings.

Which of the following statements is true concerning the translation of financial statements using the current rate method?

Under the current rate method, translation adjustments are included in net income immediately.

Translation gains or losses under the current rate method are recorded in other comprehensive income until the underlying assets are realized.

The current rate method does not impact the reported cash flows from operating activities.

Hint

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