Deck 13: International Accounting Standards & Translating Foreign Currency Transactions

Question 1

The organization that establishes international accounting standards is the ______________________________.

Answer 1

International Accounting Standards Board

Question 2

The pronouncements of the International Accounting Standards Board are called ___________________________________.
Exchange Rates

Answer 2

International Accounting Standards

Question 3

Currencies are ___________________________________.

Answer 3

commodities

Question 4

The actual changing of one currency into another currency is called ____________ ___________________________________.

Question 5

The process of expressing amounts stated in one currency in terms of another currency through the use of an appropriate currency exchange rate between the two currencies is called ______________________________.

Question 6

The number of units of a foreign currency needed to acquire one unit of the domestic currency is referred to as the _______________________________________ quotation of the exchange rate.

Question 7

The number of units of a domestic currency needed to acquire one unit of the foreign currency is referred to as the _______________________________________ quotation of the exchange rate.

Question 8

Exchange rates that are determined by market conditions are termed ___________ ___________________________ or _________________________________ rates.

Question 9

The exchange rate for immediate delivery of currencies exchanged is the ________ ________________________________ rate.
Causes of Exchange Rate Changes

Question 10

The primary long-run cause of exchange rate changes is attributable to _________ __________________________________.

Question 11

A theory that explains long-run changes in exchange rates is called _____________ _____________________________.
Importing and Exporting Transactions

Question 12

When a transaction is to be settled by the receipt or payment of a fixed amount of a specified currency, the receivable or payable, respectively, is said to be __________________________________________ in that currency.

Question 13

A party to a foreign transaction _________________________________________ and records the transaction in the currency of the country in which the party is located.

Question 14

When a domestic exporter is to receive payment in a foreign currency at a date later than the transaction date, the domestic exporter is said to be in a(n) _________________________________________.

Question 15

When a domestic importer is to make payment in a foreign currency at a date later than the transaction date, the domestic importer is said to be in a(n) ________________________________________.

Question 16

The date at which a transaction to import or sell inventory is recorded is called the ________________________________.

Question 17

In settling foreign currency transactions, companies usually use _______________ __________________________________.

Question 18

International accounting standards are promulgated by the International Organization of Securities Commissioners.

Question 19

U.S. accounting standards currently do not comply with international accounting standards in all areas.

Question 20

In general, international accounting standards are more demanding than U.S. accounting standards.

Question 21

In general, U.S. accounting standards are more stringent than international accounting standards.

Question 22

It is a major effort to bring a U.S. company's financial statements into compliance with international accounting standards.

Question 23

The process of actually changing one currency into another currency is called translation.

Question 24

The number of units of the foreign currency needed to acquire one unit of the domestic currency (the U.S. dollar) is referred to as the indirect quotation of the exchange rate.

Question 25

The number of units of the domestic currency (the U.S. dollar) needed to acquire one unit of the foreign currency is referred to as the indirect quotation of the exchange rate.

Question 26

To determine the U.S. dollar equivalent of an amount stated in a foreign currency, multiply the foreign currency by the direct exchange rate.

Question 27

To determine the U.S. dollar equivalent of an amount stated in a foreign currency, multiply the foreign currency by the indirect exchange rate.

Question 28

A foreign currency is strengthening; as a result, the indirect exchange rate will decrease.

Question 29

A foreign currency is weakening; as a result, the indirect exchange rate will decrease.

Question 30

The U.S. dollar is weakening; as a result, the direct exchange rate will increase.

Question 31

The U.S. dollar is strengthening; as a result, the direct exchange rate will increase.

Question 32

Floating rates and forward rates mean different things.

Question 33

Fixed rates and forward rates mean the same thing.

Question 34

Denominated means the currency in which settlement must be made.

Question 35

Importing and exporting transactions are always measured in one currency and denominated in a different currency.

Question 36

An importing transaction is initially recorded on the books at the order (or commitment) date.

Question 37

In importing and exporting transactions, the transaction date and the settlement date can never coincide.

Question 38

In importing and exporting transactions, bank wire transfers must be used.

Question 39

For foreign currency transactions, the FASB adopted the two-transaction perspective-not the one-transaction perspective.

Question 40

Adjusting foreign currency receivables and payables to the spot rate at intervening financial reporting dates is essentially current-value accounting.

Question 41

Under the one-transaction perspective, the existence of intervening financial reporting dates between the transaction date and the settlement date is irrelevant.

Question 42

Under the two-transaction perspective, changes in the exchange rate between the transaction date and the settlement date would not result in an adjustment to the amount initially recorded as a sale in an exporting transaction.

Question 43

Under the one-transaction perspective, FX transaction gains or losses are not reported currently in the income statement.

Question 44

In a foreign currency transaction in which the exchange rate changes between the transaction date and the settlement date, one party will report an exchange gain while the other party will report an exchange loss.

Question 45

Exchange gains from foreign currency transactions are taxable when recognized.

Question 46

Exchange gains from foreign currency transactions are taxable when realized.

Question 47

Exchange losses from foreign currency transactions are tax deductible when recognized.

Question 48

FX transaction gains and losses recognized at intervening financial reporting dates as a result of adjusting foreign currency receivables and payables are always unrealized.

Question 49

From the perspective of both domestic importers and domestic exporters who have exposed positions, it is better to have the direct exchange rate increase rather than decrease.

Question 50

Domestic exporters having exposed positions prefer the U.S. dollar to get stronger.

Question 51

Domestic importers having exposed positions prefer the U.S. dollar to get stronger.

Question 52

_____ The impetus behind the move to upgrade international accounting standards has recently come from

A) The Securities and Exchange Commission.
B) The International Organization of Securities Commissioners.
C) The International Accounting Standards Board.
D) The Financial Accounting Standards Board.
E) The United Nations.

Question 53

_____ Which of the following is false concerning U.S. GAAP relative to GAAP of Western European countries in general?

A) U.S. GAAP requires more disclosure of lines of business than Western European GAAP.
B) Western European GAAP requires more detailed information for interim financial reporting.
C) Western European GAAP is largely based on tax laws.
D) Some Western European countries allow wide latitude in smoothing out earnings.
E) None of the above.

Question 54

_____ Actually changing one currency into another currency is called

A) Translation.
B) Denominating.
C) Measuring.
D) Conversion.
E) None of the above.

Question 55

_____ If one British pound can be exchanged for $1.50 of U.S. money, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

A) 1.50/1
B) 1/1.50
C) 1/.667
D) .667/1
E) None of the above.

Question 56

_____ To express 1,000 Swiss francs in U.S. dollars, it is necessary to

A) Divide the indirect exchange rate by 1,000 francs.
B) Multiply the indirect exchange rate by 1,000 francs.
C) Divide the 1,000 francs by the direct exchange rate.
D) Multiply the 1,000 francs by the direct exchange rate.
E) None of the above.

Question 57

_____ The process of expressing amounts stated in one currency in terms of another currency by using appropriate currency exchange rates is called

A) Measurement.
B) Conversion.
C) Translation.
D) Denominating.
E) None of the above.

Question 58

_____ Floating exchange rates are also referred to as

A) Free rates.
B) Fixed rates.
C) Spot rates.
D) Direct rates.
E) None of the above.

Question 59

_____ Exchange rates determined by market conditions are commonly referred to as

A) Floating rates.
B) Direct rates.
C) Spot rates.
D) Official rates.
E) None of the above.

Question 60

_____ Which of the following exchange rates does not fit under the floating exchange rate system?

A) Future rates. d. Forward rates.
B) Official rates. e. None of the above.
C) Spot rates.
Causes of Exchange Rate Changes

Question 61

_____ In the long run, changes in exchange rates can best be attributed to

A) Foreign trade deficits or surpluses.
B) Foreign investment deficits or surpluses.
C) Differential trade deficits or surpluses.
D) Differential rates of inflation.
E) None of the above.

Question 62

_____ It takes more U.S. dollars to purchase a given quantity of Swiss francs at the end of the year than at the beginning of the year. Which of the following could cause or explain this change?

A) The direct exchange rate went down.
B) The U.S. dollar strengthened.
C) The Swiss franc was devalued.
D) Inflation was greater in Switzerland than in the United States.
E) None of the above.

Question 63

_____ It takes more Irish punts to purchase a given quantity of U.S. dollars at the end of the year than at the beginning of the year. Which of the following could cause or explain this change?

A) The U.S. dollar strengthened.
B) The direct exchange rate went up.
C) Inflation was greater in the United States than in Ireland.
D) Ireland had a foreign trade surplus with the United States.
E) None of the above.

Question 64

_____ For many South American countries, the daily weakening of their currencies is caused primarily by

A) Importing more than exporting.
B) A lack of foreign investment.
C) Inflation.
D) Purchasing power parity theory.
E) None of the above.

Question 65

_____ Which of the following items is not a cause that affects the price of a currency in either the short run or the long run?

A) Interest rates.
B) A foreign trade deficit or surplus.
C) Foreign investment.
D) Purchasing power parity theory.
E) None of the above.

Question 66

_____ On 1/1/06, the direct exchange rate is $7.00. Management forecasts that the United States will have 30% inflation during 2006 and that the foreign country will have 40% inflation during 2006. Under purchasing power parity theory, what is the expected direct exchange rate at 12/31/06?

A) $5.00
B) $6.36
C) $6.50
D) $7.70
E) None of the above.

Question 67

A domestic company having importing and exporting transactions involving credit and requiring settlement in foreign currency will hope that the direct exchange rate

A) Increases for both types of transactions.
B) Decreases for both types of transactions.
C) Increases for exporting transactions and decreases for importing transactions.
D) Decreases for exporting transactions and increases for importing transactions.

Question 68

_____ In unhedged importing or exporting transactions, which of the following dates is not a date having any accounting significance insofar as amounts reportable to stockholders?

A) The intervening financial reporting date.
B) The settlement date.
C) The transaction date.
D) The commitment date.
E) None of the above.

Question 69

_____ For unhedged importing and exporting transactions involving credit and requiring settlement in foreign currency, which of the following dates would never be of concern or have accounting significance?

A) The forward rate date.
B) The transaction date.
C) The settlement date.
D) The intervening financial reporting date(s).
E) None of the above.

Question 70

_____ For importing transactions denominated in a foreign currency, any change in the exchange rate between the transaction date and any intervening financial reporting date(s) is reported as

A) An adjustment to the foreign currency receivable.
B) A gain or loss to be added to or subtracted from the initially recorded cost of inventory.
C) A gain or loss in the current income statement.
D) A deferred gain or loss in the balance sheet pending settlement.
E) None of the above.

Question 71

_____ For importing and exporting transactions, recognizing in the income statement FX transaction gains or losses resulting from adjustments made at intervening financial reporting dates is not

A) A disregarding of the realized versus unrealized concept.
B) Essentially current-value accounting.
C) Consistent with the one-transaction perspective.
D) Allowed unless there is an offsetting loss or gain from a related hedging transaction.
E) None of the above.

Question 72

_____ A domestic exporter has foreign currency receivables. The exporter's risk exposure is that the

A) Foreign currency will strengthen.
B) Direct exchange rate will decrease.
C) U.S. dollar will weaken.
D) Indirect exchange rate will decrease.
E) None of the above.

Question 73

_____ A domestic importer whose transactions are in foreign currency has risk exposure that the

A) Foreign currency will strengthen.
B) Direct exchange rate will decrease.
C) U.S. dollar will strengthen.
D) Indirect exchange rate will increase.
E) None of the above.

Question 74

_____ In a bank wire transfer, which of the following occurs?

A) Currency physically changes hands between the banks involved when the wire transfer occurs.
B) Currency is physically moved between countries by the banks involved at the wire transfer date.
C) The result is that the two banks involved create a payable and receivable between each other.
D) Both b and c.
E) Both a and b.

Question 75

_____ Concerning importing and exporting transactions, which of the following statements is false?

A) Gains and losses on adjustments to foreign currency receivables and payables may be reported net in the income statement.
B) Gains and losses on adjustments to foreign currency receivables and payables are unrealized in nature.
C) When a domestic company has a gain or loss as a result of adjusting a foreign currency receivable or payable, the foreign company will have the opposite result.
D) FX transaction gains are taxable when realized.
E) None of the above.

Question 76

_____ On 11/4/06, a domestic exporter sold inventory to a Spanish firm for 100,000 euros. On that date, the direct exchange rate was $.70. At 12/31/06, the direct exchange rate was $.67. On 1/7/07, when the direct exchange rate was $.71, the domestic exporter received full payment of 100,000 euros. In the exporter's 2006 financial statements, what should be reported as an FX gain or loss?

A) A $1,000 gain.
B) A $1,000 loss.
C) A $3,000 gain.
D) A $3,000 loss.
E) A deferred FX gain or loss.

Question 77

_____ On 12/12/06, a domestic exporter sold inventory to a Swiss company for 100,000 francs. On that date, the direct spot rate was $.20. At 12/31/06, the direct spot rate was $.24. On l/22/07, when the direct spot rate was $.21, the domestic exporter received full payment of 100,000 francs. In the importer's 2006 financial statements, what should be reported as an FX gain or loss?

A) A $1,000 gain.
B) A $1,000 loss.
C) A $4,000 gain.
D) A $4,000 loss.
E) A deferred FX gain or loss.

Question 78

_____ On 10/5/06, a domestic importer acquired inventory from a German firm for 100,000 euros. On that date, the direct exchange rate was $.80. At 12/31/06, the direct exchange rate was $.84. On 1/10/07, when the direct exchange rate was $.85, the domestic importer made full payment of 100,000 euros. In the importer's 2006 financial statements, what should be reported as an FX gain or loss?

A) A $4,000 gain.
B) A $4,000 loss.
C) A $5,000 gain.
D) A $5,000 loss.
E) A deferred FX gain or loss.

Question 79

_____ On 9/30/06, a domestic importer acquired inventory from an Italian firm for 100,000 euros. On that date, the direct spot rate was $.90. At l2/31/06, the direct spot rate was $.85. On l/7/07, when the direct spot rate was $.93, the domestic importer made full payment of 100,000 euros. In the importer's 2006 financial statements, what should be reported as an FX gain or loss?

A) A $3,000 gain.
B) A $3,000 loss.
C) a $5,000 gain.
D) A $5,000 loss.
E) A deferred FX gain or loss.

Question 80

_____ On 10/19/06, Dell, Inc., ordered inventory from a French firm. The terms specified FOB shipping point and payment of 1,000,000 euros. On 12/20/06, the foreign vendor shipped the inventory and invoiced Dell. Dell paid the invoice on 1/7/07. The direct spot exchange rates for the euro on the respective dates follow: