Important Questions on Financial Accounting Essay
1. Which of the following statements is true about hedge accounting under U.S. GAAP? a. If a derivative qualifies as a cash flow hedge, a company may choose to account for it as a fair value hedge.
2. When a currency is allowed to increase or decrease in value relative to other currencies, the currency is said to: a. Float
3. What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today? a. the company has acquired a call option.
4. Under U.S. GAAP, what method is required to account for foreign currency transactions? a. The two-transaction perspective must be used.
5. When accounting for forward contracts, what is meant by the term “executory contract”? a. No cash changes hands
6. What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP? a. They must be shown on the balance sheet at fair value
7. Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973? a. Countries linked their currency to the U.S. dollar, which was backed by gold reserves.
8. 4. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions? a. The two-transaction perspective must be used.
1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?” a. the primary currency used by the subsidiary
2. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The
current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted? a. The U.S. parent would have to pay $16,300,000 to acquire the building today b. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010. c. The building is worth $13,200,000 to the U.S. parent today. d. none of the above
3. Nonmonetary assets do not include:
a. accounts receivable
4. Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule. When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method? a. current rate
5. Under IAS 21, which of the following is not a factor in determining functional currency? a. it is the currency least likely to experience hyperinflation
6. What is the cause of balance sheet exposure?
a. translating subsidiary account balances to amounts denominated in the parent company’s currency b. converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates c. completing international transactions in currency other than the currency of the home company d. none of the above
7. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the parent company’s currency? a. high volume of intercompany transactions
8. Homeko, Inc is located in the U.S., bit it has its subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial
statements? a. when there is a net asset exposure, the translation adjustment will be positive
1. Translating foreign financial statements into a convenience language: a. does not always clarify accounting terminology unique to a particular country
2. Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000. If the exchange rate changes to ¥110=$1, what will be the change in the debt ratio assuming the account balances remain constant? a. no change
3. Which of the following is likely to affect an analyst’s ability to make meaningful comparisons of financial statement ratios for companies in different countries? a. accounting diversity
b. varying business traditions
c. unique terminology
d. all of the above
4. Because differences in business traditions and practices could make cross-country ratio analysis difficult, what should an analyst do to overcome this problem? a. learn more about the business environment in relevant countries
5. What U.S. term was equivalent to “inventories” as it was used in financial statements of companies located in the United Kingdom, prior to adoption of IFRS in 2005? a. stocks
6. What would be a logical first step that should be taken to restate foreign financial statements to conform to U.S. GAAP, assuming a four-column worksheet will be used to post debit and credit adjustments and reclassifications to arrive at U.S. GAAP statements? a. re-order foreign financial statements to U.S. format
7. What is the basis for Morgan Stanley Dean Witter’s “Apples to Apples” system for financial statement analysis? a. adjustments needed to compare
international companies with specific industries
1. Under the citizenship approach of tax jurisdiction, if Company A, incorporated in Country X, was based in Country Y and earned dividends in Country Z, the dividends would be ultimately taxed in which country? a. Country X
2. What is the meaning of “tax system neutrality?”
a. Tax systems should not be a major factor in business decisions