Question

When translating foreign subsidiary income statements using the presentation currency translation (pct) method, why are some accounts translated at an average rate?

a. this approach improves matching.
b. this approach accentuates the conservatism principle.
c. this approach levels out highly volatile exchange rate fluctuations.
d. this approach approximates the effect of transactions which occur continuously during the period.

Answer 1

Accounts are translated at an average rate in the PCT method to level out exchange rate fluctuations and approximate continuous transactions. Purchasing power parity rates are used for more stable long-term comparisons of economic data between countries.

Step-by-step explanation:

When translating foreign subsidiary income statements using the presentation currency translation (PCT) method, some accounts are translated at an average rate to approximate the effect of transactions that occur continuously during the period. This approach is selected because it helps in leveling out highly volatile exchange rate fluctuations and provides a more accurate reflection of economic realities over time. Purchasing power parity (PPP) equivalent exchange rates are often used in macroeconomic perspectives to make cross-country comparisons of GDP per capita because they consider the differences in prices of goods across countries and provide a measure of long-term exchange rate equilibrium, as opposed to market exchange rates that can rapidly change and misrepresent true economic comparisons.