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Name: Date: 1. Cash flow risks A) can relate to forecasted purchases or sales of a commodity. B) can relate to the risks associated with fixed rates of interest. C) can relate to the risks associated with variable rates of interest. D) Both A and C are truce. 2. Assume that our company has an inventory of aluminum alloy that it will sell to a customer in 90 days and that you face the following market prices. Today. 90 days later.. Spot Price $2.60 $2.57 $2.55 In 90 days A) we will be able to realize $2.60 for our inventory. B) we will be able to realize $2.55 for our inventory. C) we will be able to realize $2.57 for our inventory D) we will be able to realize the current market price for our inventory 3. A swap contract relates to the trading of an asset owned by one company for another owned by a second company is an arrangement between two or more parties to exchange future cash flows can be used to increase or decrease the ratio of fixed and variable interest costs in its cost structure. Both B and C are true. A) B) C) D) 4. If a forward or futures contract is to be an effective hedge of a net asset or future cash flow A) then the net settlement value of the forward or futures will increase and decrease in value in the same direction to the fair value of the asset (or to the future cash flows) to which they relate. then the net settlement value of the forward or futures will increase and decrease in value in the opposite direction to the fair value of the asset (or to the future cash flows) to which they relate. then the net settlement value of the forward or futures remains unchanged, thus reducing price fluctuation risk. None of the above are true. B) C) D) Page 1 5. Financial derivatives A) are only used by foreign currency traders to speculate on currency fluctuations. B) are generally legal contracts or exchange traded securities that are designed to transfer risk for a price. C) generally involve three parties. D) Both B and C are true 6. If a comparty reports a payable denominated in Euros () and the SUS weakens vis--vis the Euro A) the company will not report the change in the relative value of the payable until the B) the company will accrue the gain in its financial statements as of the statement date C) the company will accrue the loss in its financial statements as of the statement date D) the company will recognize the increase in the SUS value of the payable on its payable is paid. even before the payable is paid. even before the payable is paid. balance sheet as of the statement date, but the unrealized loss will not be recognized in its income statement until the payable is paid. 7. An option contract A) requires a relatively large up-front payment and are, therefore, rarely used in practice. B) has an intrinsic value that is never less than zero. C) has an intrinsic value that decreases with time to maturity D) gives a party the obligation to execute a transaction. 8. Which of the following is not a characteristic of a derivative? A) A contract that has one or more underlyings B) A contract that permits net settlement C) A contract that does not permit net settlement D) It is a financial instrument. 9. Assume that our company has an inventory of aluminum alloy that it will sell to a customer in 90 days and that you face the following market prices Spot Price $2.60 $2.57 0 Day Futures Price $2.55 90 days later.. If we purchase a futures contract today, A) we will lock in a $0.05 loss. B) we will lock in a SO.05 gain. C) we will lock in a SO0.03 loss. D) we will lock in a $0.03 gain. 10. Which of the following best describes current GAAP with respect to the required reporting currency? A) A currency other than the U.S. dollar may be the reporting currency in financial statements. Only the SUS may be the reporting currency in financial statements. C) B) Companies can change their reporting currency as much as they wish. D) Companies can never change their reporting currency. 11. Which of the following best describes the accounting for foreign currency-denominated receivables and payables? A) No gains or losses are recorded until the receivable is collected or the payable is paid. No gains or losses are recorded because there has been no cash effect. Companies are required to report the foreign-currency denominated receivables and payables at their current market value on the statement date, but no gain or loss is recognized in the income statement. Companies are required to accrue gains and losses on foreign currency- denominated receivables and payments as of the statement date. B) C) D) 12. Hedge accounting means that A) the financial derivative is reported on the balance at fair value, but no gains and B) the financial derivative is marked to market together with the asset (liability) to C) the financial derivative is marked to market together with the asset (liability) to D) the financial derivative is marked to market together with the asset (liability) to losses are recognized, thus reducing income volatility which it relates and unrealized gains and losses are always reflected in net income. which it relates and unrealized gains and losses on fair value hedges are immediately reflected in net income which it relates and unrealized gains and losses on cash flow hedges are immedintely reflected in net income. 13. Which of the following is true of a firm commitment? The agreement specifies all significant terms. The agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. Neither of the above is true. Both A and B above are true. A) B) C) D) 14. A futures contract A) is not similar to a forward contract for accounting purposes. is not traded on an organized exchange. B) C) is traded on an organized exchange. None of the above are true. D) 15. Assume that our company incurs a Euro-denominated payable when the exchange rate is S1.20: 1 and that the SUS weakens to $1.27:1 before the payable is paid: A) Our company will not recognize the gain until the payable is paid. B) Our company will not recognize the loss until the payable is paid. C) Our company will recognize the gain on its next statement date. D) Our company will recognize the loss on its next statement date. 16. Net settlement means that neither party is required to deliver an asset. one or both parties are required to deliver an asset. both parties are required to deliver an asset. None of the above A) B) C) D) 17. Which of the following best describes the effects of foreign currency fluctuations on the financial statements of companies with foreign currency-denominated assets and liabilities? A) Fluctuations in the SUS value of foreign currency-denominated assets and B) Fluctuations in the SUS value of foreign currency-denominated assets and C) Fluctuations in the SUS value of foreign currency-denominated assets and D) None of the above liabilities affect both the balance sheet and the income statement. liabilities affect only the balance sheet and have no effect in net income. liabilities affect only stockholders' equity and do not affect the income statement directly 18. Fair value risks generally relate to which of the following? A) Risks relating to forecasted transactions B) Unrecognized firm commitments C) Risks relating to fluctuations in the market price of the company's own stock D) None of the above 19. Assume that our US-based company purchases 2,000 units of inventories from a UK supplier at 6/unit. To record the purchase, A) our conmpany will debit inventories and credit accounts payable for 12,000. B) our company will debit inventories and credit accounts payable for the SUS C) D) equivalent of 12,000. our company will not record the purchase of inventory until the payable is paid. Either A or B is current. 20. In the past decade, the SUS has A) strengthened with respect to the Euro (). B) remain unchanged with respect to the Euro (). C) weakened with respect to the Euro (). D) Both weakened and strengthened with respect to the Euro () 21. Current US GAAP requires the following accounting for financial derivatives: A) Financial derivatives are reported at historical cost. Financial derivatives are reported at fair value at each statement date with unrealized gains (losses) reflected in Accumulated Other Comprehensive Income. B) C) Financial derivatives are reported at fair value at each statement date with D) Financial derivatives are only written down to reflect losses that are other than unrealized gains (losses) reflected in Net Income. temporary 22. If our company borrows money with a foreign currency-denominated loan A) it must record the loan and the accrued interest at the current SUS value on each B) t must recordthe loan, but not the accrued interest, at the current SUS value on C) t must recordtheaccrued interest, but not the loan, at the current SUS value on D) No adjusting entries to reflect currency fluctuations need to be made. statement date. each statement date. each statement date. 23. Companies invest in financial derivatives A) to reduce exposure to currency-related risks. B) in order to realize capital gains as their value increases. C) as a means in which to enter desirable markets. D) None of the above 24. If a company reports a receivable denominated in Euros () and the SUS weakens vis- vis the Euro A) the company will not report the change in the relative value of the receivable unti B) the company will accrue the gain in its financial statements as of the statement dat C) the company will accrue the loss in its financial statements as of the statement date D) the company will recognize the increase in the SUS value of the receivable on its the receivable is collected. even before the receivable is collected. even before the receivable is collected balance sheet as of the statement date, but the unrealized gain will not be recognized in its income statement until the receivable is collected 25. Which of the following statements is true about options? A) Options generally require a large up-front payment. B) The time value of an option reflects the probability that the underlying asset's price C) D) will rise. An option's value generally decreases with time to maturity to reflect the time value of money A company might purchase a call option to limit potential price declines in the value of a financial asset or commodity. 26. Which of the following statements is true? A) Direct computation of the translation adjustment only involves the current year and B) Net income is multiplied by the difference between the end-of-year exchange rate C) Net income is multiplied by the difference between the end-of-year exchange rate D) The cumulative translation adjustment computation contains an adjustment to begins at a zero amount. and the beginning-of-year exchange rate. and the average exchange rate. reflect changes in the fair value of the net assets of the company 27. A highly inflationary economy is best defined as A) one which has a cumulative inflation of over 100% over a three-year period. B) one in which the rate of inflation is greater than that of the parent company C) one with inflation that is greater than its neighboring countries None of the above. 28. Which of the following statements is true? The functional currency cannot be changed once it is selected. If the functional currency is changed, prior financial statements continue to be reported in the previous functional currency The functional currency can be changed as often as is deemed necessary to minimize fluctuations in reported earnings. If the functional currency is changed, previously issued financial statements should be restated into the new functional currency A) B) C) D) 29. Which of the following are indications that the subsidiary is not autonomous? A) B) C) D) All of the above Significant assets may be acquired from the parent or otherwise by expending the parent's functional currency The sale of assets may make available to the parent units of the parent's functional currency Financing is primarily by the parent or otherwise in the parent's functional currency 30, Which of the following best describes the translation of financial statements? A) All asset, liability and equity accounts are translated at the current exchange rate orn B) C) D) All equity accounts are translated at their respective historical exchange rates the financial statement date. All asset, liability and equity accounts are translated at an average exchange rate for the period Common stock and APIC accounts are translated at their respective historical exchange rates. 31. Which of the following statements is true? A) B) C) D) Revenues and expenses can only be translated at the exchange rate in effect when recognized. US GAAP permits an averaging of exchange rates in order to facilitate the translation process and prescribes a specific approach for companies to use. Companies are required to use an averaging method that weights transactions by the relative proportion of sales volume during the period. Companies are permitted to use an average exchange rate for the period to translate revenues and expenses under the assumptions that revenues and expenses occur evenly throughout the period Page 7 32. Which of the following best describes current GAAP with respect to the translation process? A) Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when they arose. B) Assets and liabilities are translated at the exchange rate in effect when they arose C) Assets are translated at the exchange rate at the balance sheet date, but liabilities are translated at the exchange rate in effect with the liabilities were incurred D) Revenues and expenses must be translated at the exchange rate in effect then they are recognized. 33. Which of the following statements is true about the treatment of the AAP in the consolidation process? A) The SUS value of the beginning-of-year balance carries over from the previous year. The AAP relating to foreign acquisitions is not amortized like that related to US acquisitions B) C) There is no gain or loss resulting from the translation of the AAP, D) The translation of the AAP requires both amortization and the recognition of gains or losses on the translation. 34. Which of the following statements is correct? The functional currency must always be the currency of the US parent company. Non-US subsidiaries always record transactions in SUS. If the foreign-currency-denominated subsidiary financial statements are already in the functional currency, but not in the parent's currency, then the financial information must be "translated" into the parent's currency None of the above A) B) D) 35. Which of the following best describes the accounting for nonmonetary assets and liabilities? A) They are reported at fair value. enues and expenses arising from these assets are translated at historical cost They are reported at fair value only if less than historical cost. None of the above are true. C) D) 36. Which of the following is not a factor that must be considered in determining the functional currency? A) In which currencies does the subsidiary transact sales and ultimately generate its cash? In which currencies does the subsidiary purchase labor, materials, and other goods and services and ultimately expend cash? In which currencies does the subsidiary obtain its financing? In which currency will fluctuations in SUS value be minimized? B) c) D) 37. Which of the following statements is not true? Gains and losses arising from remeasurement are reflected in current income Cost of Goods Sold is not computed as the product of the foreign currency amount and an exchange rate. There is no cumulative translation adjustment arising from the remeasurement process. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI). A) B) C) D) 38. Which of the following provides the best definition of a functional currency? The currency that is the most useful to companies in order to transact business The currency of the primary economic environment in which the subsidiany operates The currency with the least fluctuation in SUS value None of the above A) B) C) D) 39. Which of the following best describes the accounting for nonmonetary assets and liabilities? A) They are reported at their historical cost. B) They are reported at market value. C) Declines in market value are recognized, but only if other than temporary D) We recognize decreases in fair value, but not increases. 40. which of the following best describes the accounting for the net investment in a foreign subsidiary? A) The net investment in a foreign subsidiary is reported at fair value. B) Companies can hedge the net investment in a foreign subsidiary like any other investment. The net investment in a foreign subsidiary is reported on the consolidated balance sheet at historical cost. C) D) Both A and B are true. 41. Upon the sale of a foreign subsidiary the gain or loss on the sale is affected by the balance of the cumulative translation adjustment account. A) B) the gain or loss on the sale is only reflected in other comprehensive income (OCI) C) D) hot in net income the gain or loss on the sale is not affected by the balance of the cumulative translation adjustment account. the equity adjustment account is first adjusted to current market value before the gain or-loss on sale is recognized. 42. The equity investment account is not recognized in the case of foreign subsidiaries. is reported at fair value on the consolidated balance sheet with unrealized gains or losses reflected in Accumulated Other Comprehensive Income (AOCI. A) B) C) is updated for both the change in the cumulative translation adjustment and for D) is updated for only the change in the cumulative translation adjustment and not for AAP translation gains or losses. AAP translation gains or losses. 43. Monetary assets and liabilities are assets and liabilities A) B) C) D) which include only cash and marketable securities. which are measured at fair value. whose amounts are fixed in terms of units of currency by contract or otherwise. All of the above 44. Which of the following best describes the cumulative translation adjustment? A) The cumulative translation adjustment is a plug figure to balance the trial ba nce B) C) D) Changes in the cumulative translation adjustment are reflected in net income for the period The cumulative translation adjustment reflects changes in the fair values of marketable securities on the balance sheet. The cumulative translation adjustment can only be a positive dollar amount. 45. Which of the following best describes the translation of the statement of cash flows? A) B) C) D) The statement of cash flows is prepared from the translated comparative balance sheet and income statement. All line items on the statement of cash flows are translated at the current exchange rate on the statement date. Translation of the statement of cash flows generally utilizes the weighted average exchange rate for all line items except significant one-time transactions None of the above are true