Question 1

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

Accepted Answer

Differential rates of inflation are a primary long-term determinant of exchange rates. Over time, a country with a lower inflation rate will see its currency appreciate in value compared to countries with higher inflation rates. This is because lower inflation rates increase a currency's purchasing power relative to other currencies.

Question 2

_____ 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?

Accepted Answer

If it takes more U.S. dollars to purchase Swiss francs, it means the U.S. dollar has weakened or the Swiss franc has strengthened, which is not explained by any of the given options.

Question 3

_____ 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?

Accepted Answer

The U.S. dollar strengthening means it takes more of another currency (in this case, Irish punts) to buy the same amount of dollars, explaining the observed change.

Question 4

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

Accepted Answer

Inflation is a primary cause of currency weakening as it reduces the currency's purchasing power, leading to a decrease in its value relative to other currencies.

Question 5

_____ 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?

Accepted Answer

Purchasing power parity theory is not a cause that affects the price of a currency in either the short run or the long run. It is a theory that states that the exchange rate between two currencies should be equal to the ratio of the purchasing power of those currencies in their respective countries.

Question 6

_____ 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?

Accepted Answer

$7.00/140% = $5.00; $5.00 x 130% = $6.50

Question 7

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

Accepted Answer

A domestic company having importing and exporting transactions involving credit and requiring settlement in foreign currency will hope that the direct exchange rate increases for exporting transactions and decreases for importing transactions. This is because when the exchange rate increases, the company will receive more foreign currency for its exports, increasing its revenue. Conversely, when the exchange rate decreases, the company will need to spend less of its own currency to pay for its imports, reducing its costs. Therefore, the correct answer is c. Increases for exporting transactions and decreases for importing transactions.

Question 8

_____ 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?

Accepted Answer

The commitment date does not have any accounting significance insofar as amounts reportable to stockholders in unhedged importing or exporting transactions. Accounting entries and reports typically focus on the transaction date (when the transaction is recognized), the intervening financial reporting dates (for reporting the status of the transaction), and the settlement date (when the transaction is settled). The commitment date, while important for contractual reasons, does not directly impact the financial statements until the transaction is actually executed.

Question 9

_____ 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?

Accepted Answer

The forward rate date is not a concern for unhedged transactions, as these transactions do not involve forward contracts or hedging strategies. The transaction date, settlement date, and financial reporting dates are all relevant for accounting and financial reporting purposes.

Question 10

_____ 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

Accepted Answer

Changes in exchange rates between the transaction date and the financial reporting date(s) result in unrealized gains or losses that are typically recognized in the current income statement. This reflects the increase or decrease in the value of the foreign currency transaction due to exchange rate movements.

Question 11

_____ 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

Accepted Answer

Recognizing FX transaction gains or losses at intervening financial reporting dates is consistent with the one-transaction perspective, which treats the transaction as a single event with adjustments for changes in exchange rates.

Question 12

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

Accepted Answer

A domestic exporter with foreign currency receivables is exposed to the risk that the direct exchange rate will decrease, meaning the foreign currency will weaken against the U.S. dollar, reducing the value of the receivables when converted to U.S. dollars.

Question 13

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

Accepted Answer

The correct answer is A because a domestic importer whose transactions are in foreign currency has risk exposure that the foreign currency will strengthen. This is because if the foreign currency strengthens, the importer will have to pay more U.S. dollars to purchase the same amount of foreign currency.

Question 14

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

Accepted Answer

In a bank wire transfer, there is no physical movement of currency. Instead, the transaction results in the creation of a payable and receivable between the two banks involved, reflecting the transfer of funds electronically.

Question 15

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

Accepted Answer

Statement C is false because the gain or loss resulting from adjusting a foreign currency receivable or payable for a domestic company does not necessarily mean the foreign company will have the opposite result. The outcome for the foreign company depends on its own accounting and reporting practices, which may not mirror those of the domestic company.

Question 16

_____ 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?

Accepted Answer

The answer of _____ On 11/4/06, a domestic exporter sold...

Question 17

_____ 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?

Accepted Answer

The FX gain is calculated based on the difference between the spot rate at the time of sale and the spot rate at the time of payment. The sale was made at a rate of $.20, and payment was received when the rate was $.21, resulting in a gain. The gain is (0.21 - 0.20) * 100,000 = $1,000 * 100 = $4,000.

Question 18

_____ 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?

Accepted Answer

The importer would report a $4,000 loss in their 2006 financial statements. This is because the value of the euro increased from $.80 (when the inventory was acquired) to $.84 (by the end of the year), meaning it would cost $4,000 more in USD to settle the liability of 100,000 euros at the year-end exchange rate.

Question 19

_____ 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?

Accepted Answer

The answer of _____ On 9/30/06, a domestic importer acquired...

Question 20

_____ 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:

Accepted Answer

The answer of _____ On 10/19/06, Dell, Inc., ordered inventory...

Quiz 13: International Accounting Standards & Translating Foreign Currency Transactions