The functional currency of a foreign operation is:

Question

Quizplus · Accepted Answer

The functional currency of a foreign operation is the currency in which cash flows, pricing, expenses, and financing are denominated. This currency reflects the primary economic environment in which the foreign operation operates. It is determined by analyzing the economic substance of the underlying transactions and activities of the foreign operation, rather than simply declaring a currency. Therefore, option D, which specifies this definition, is the best choice. Options A and B are incorrect, as the functional currency is not necessarily the currency of the parent company, and it is not always the currency of the host country. Option C is incorrect because the company cannot simply choose to declare any currency as the functional currency; it must be determined based on economic analysis.

The Functional Currency of a Foreign Operation Is