What Is One Problem in Translating Retained Earnings Using Either

question 46

Multiple Choice

What is one problem in translating retained earnings using either the temporal or current rate method?

• A) There is no problem, since both methods use the historic rate method for stockholders' equity accounts.
• B) Dividends are based on an average cost method.
• C) Net income is calculated differently, depending upon which method is used.
• D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

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Definitions:

Consolidating Financial Statements

The process of combining the financial statements of a parent company with those of its subsidiaries to present as one set of financial statements.

Foreign Currency

Currency used in a country other than the one in which a company operates, affecting financial transactions and statements when converted.

Economic Indicator

A statistic about the economy that provides insight into current or future economic performance and perspective on economic cycles.

Functional Currency

The currency of the primary economic environment in which the company operates.