Question 1

Indicators pointing towards the reporting entity's currency as the functional currency include that which of the following?
A)There are active local markets,although there may be significant amounts of exports.
B)Sales are mostly in the country of the reporting entity.
C)Prices are not primarily responsive in the short term to exchange rate changes.
D)Production costs and operating expenses are determined primarily by local conditions.

Accepted Answer

B

Question 2

According to AASB 121 The Effects of Changes in Foreign Exchange Rates,the key economic factor to consider in determining an entity's functional currency is:
A)which economic environment has the higher exchange rate.
B)in which economic environment does the company incur the highest proportion of its production costs.
C)which economic environment an entity primarily generates and spends cash.
D)none of the above.

Accepted Answer

AASB 121 states that an entity's functional currency is the currency of the primary economic environment in which it operates. This is determined by identifying the currency in which the entity primarily generates and spends cash. This is the most relevant factor in determining an entity's functional currency. Choices A and B are not relevant economic factors in determining the functional currency.

Question 3

When translating into the functional currency,monetary liabilities are translated using the:
A)exchange rate current at the date the item was first recorded.
B)exchange rate prevailing at the end of the last reporting period.
C)average exchange rate for the reporting period.
D)current exchange rate at the end of the reporting period.

Accepted Answer

Monetary liabilities are translated using the current exchange rate at the end of the reporting period as per IAS 21 The Effects of Changes in Foreign Exchange Rates. This ensures consistency in the translation of all monetary items at a given reporting date.

Question 4

When translating foreign currency denominated financial statements into the functional currency,the exchange differences are recognised:
A)in profit or loss in the period in which they arise.
B)directly in the retained earnings account.
C)as a deferred asset or liability and amortised over a period of 10 years.
D)as a separate component of equity.

Accepted Answer

Exchange differences are recognised in profit or loss in the period in which they arise when translating foreign currency denominated financial statements into the functional currency.

Question 5

The exchange rate at a point of time for immediate delivery of the currency in an exchange is known as the:
A)spot rate.
B)point rate.
C)immediate rate.
D)temporal rate.

Accepted Answer

The spot rate is the exchange rate at which currencies are traded for immediate delivery in an exchange. It is the current market price for a currency.

Question 6

According to the temporal method,monetary assets are translated at the:
A)average exchange rate for the reporting period.
B)current rate existing at the end of the reporting period.
C)exchange rate at the date the monetary assets were first recognised.
D)exchange rate existing at the start of the reporting period.

Accepted Answer

The temporal method requires that monetary assets are translated at the current rate, which is the exchange rate existing at the end of the reporting period. This is because monetary assets could be converted to cash at any time, so their value needs to be reported in the currency that they can be readily converted into.

Question 7

Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing)on 1 July 20X0.The balance sheet of Sing Sing as at 30 June 20X1 was as follows.
Balance Sheet as at 30 June 20X1

$\bullet$Relevant exchange rates are as follows.

If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars,the total assets of S$1 800,000 would translate into Australian dollars as:
A)$1 565 217.
B)$1 488 696.
C)$1 440 000.
D)$1 475 410.

Accepted Answer

The answer of Aussie Ltd acquired 100% of Sing Sing...

Question 8

Post acquisition date retained earnings that are denominated in a foreign currency are:
A)translated into the functional currency using the rate current at the latest end of reporting period.
B)translated into the functional currency using the average rate since acquisition date.
C)translated into the functional currency using the rates at the end of each year since acquisition date.
D)balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

Accepted Answer

The answer of Post acquisition date retained earnings that are...

Question 9

When translating into the functional currency,foreign currency denominated non-monetary assets measured at historical cost must be translated using the:
A)spot rate at end of reporting period.
B)average rate for the reporting period.
C)exchange rate when the historical cost was determined.
D)exchange rate when the historical cost was revalued to fair value.

Accepted Answer

According to the current rate method, non-monetary assets measured at historical cost should be translated using the exchange rate when the historical cost was determined. This is because historical cost represents the amount of currency paid or received at the time of the transaction.

Question 10

Assets and liabilities to be received or paid in a fixed or determinable number of units of money are referred to as:
A)monetary items.
B)fixed items.
C)non-monetary items.
D)fixed units.

Accepted Answer

Assets and liabilities that are to be received or paid in a fixed or determinable number of units of money are referred to as monetary items. This includes cash, accounts receivable and payable, and loans payable. The value of these items may be directly impacted by changes in inflation or interest rates.

Question 11

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:
A)translate all liabilities using the current rate existing at the end of the reporting period.
B)first classify the liabilities into current or non-current.
C)first classify the liabilities as monetary or non-monetary.
D)translate all liabilities using the rate applicable when the original transaction was recorded.

Accepted Answer

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to first classify the liabilities as monetary or non-monetary, and then translate monetary liabilities using the current rate existing at the end of the reporting period, while non-monetary liabilities are translated using the rate applicable when the original transaction was recorded. Therefore, option C correctly identifies the initial step in the translation process.

Question 12

Which exchange rate should be used when translating revenue and expense items in the statement of profit or loss and other comprehensive income into the functional currency?
A)Current as at the end of the financial year.
B)Calculated as the average between the rates at the start and end of the year.
C)Current at the dates the applicable transaction occurred.
D)None of the above.

Accepted Answer

The most appropriate exchange rate to use when translating revenue and expense items in the statement of profit or loss and other comprehensive income into the functional currency is the current rate at the dates the applicable transaction occurred. This ensures that the transaction is being recorded at its actual value at the time it occurred. Using the end-of-year rate or an average rate may not accurately reflect the value of transactions that occurred at different times throughout the year.

Question 13

The currency of the country in which the foreign operation is based is referred to as the:
A)local currency.
B)presentation currency.
C)operational currency.
D)functional currency.

Accepted Answer

The answer of The currency of the country in which...

Question 14

Where profits generated by the foreign operation are retained in the foreign entity and used for its expansion:
A)the foreign operation's currency is likely to be the presentation currency.
B)the foreign operation's currency is likely to be the functional currency.
C)the reporting entity's currency is likely to be the functional currency.
D)the reporting entity's currency is likely to be the presentation currency.

Accepted Answer

When profits generated by the foreign operation are retained in the foreign entity and used for its expansion, it indicates that the foreign operation's activities are relatively stable and integrated within the local economy. Therefore, the foreign operation's currency is likely to be the functional currency.

Question 15

Which of the following is an additional question to be asked in determining whether a foreign entity's functional currency is the same as that of the reporting entity?
A)Are the transactions with the reporting entity a high or low proportion of the foreign operation's activities?
B)Are the foreign operation's activities carried out as an extension of the reporting entity,rather than being carried out with a significant degree of autonomy?
C)Do the cash flows from the foreign operation's activities directly affect the reporting entity's cash flows?
D)All of the above.

Accepted Answer

All of the above questions are relevant in determining whether a foreign entity's functional currency is the same as that of the reporting entity. A high proportion of transactions with the reporting entity, lack of autonomy in the foreign operation's activities, and direct impact on the reporting entity's cash flows are all factors that may indicate a need to reconsider the functional currency determination.

Question 16

If foreign currency denominated non-monetary assets are measured using the fair value method,they must be translated into the functional currency using the:
A)exchange rate at the date when the assets were revalued.
B)exchange rate current at the end of the reporting period.
C)average exchange rate for the financial year.
D)exchange rate at the original purchase date of the asset.

Accepted Answer

Non-monetary assets measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. This ensures the value reflects current market conditions.

Question 17

The method used to translate financial statements prepared in the functional currency into the presentation currency is known as the:
A)temporal method.
B)functional method.
C)current rate method.
D)presentation method.

Accepted Answer

The current rate method is used to translate financial statements prepared in the functional currency into the presentation currency. This method uses the current exchange rate at the balance sheet date for assets and liabilities, and the average exchange rate for the period for revenues and expenses. The temporal method is used when the functional currency is different from the presentation currency and the assets and liabilities being translated are monetary in nature. The functional method is used to record transactions in the functional currency of the entity. The presentation method is not a recognized method for translating financial statements.

Question 18

By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates,which of the following items will be regarded as a monetary item?
A)Motor vehicles
B)Inventory
C)Machinery
D)Cash

Accepted Answer

A monetary item is defined as an asset or liability that is either money itself or has a fixed monetary amount. Cash is a monetary item as it is money itself. Motor vehicles, inventory, and machinery are non-monetary items as they do not have a fixed monetary amount.

Question 19

Which of the following statements is incorrect?
A)The relevant accounting standard applied in translating financial statements into another currency is AASB 121 The Effects of Changes in Foreign Exchange Rates.
B)The financial statements of an entity may be recorded in a foreign currency and translated into Australian dollars for the purpose of combining those statements with the financial statements of a related Australian company.
C)Not many companies in Australia have operations in both Australia and overseas locations.
D)The financial statements of an Australian company may be prepared in Australian dollars and translated into a foreign currency for presentation purposes.

Accepted Answer

This statement is incorrect. Many companies in Australia have operations in both Australian and overseas locations.

Question 20

The presentation currency is:
A)the currency of the primary economic environment in which the foreign entity operates.
B)a currency other than the entity's functional currency .
C)the currency of the country in which the foreign operation is based.
D)the currency in which the financial statements are presented by the reporting entity.

Accepted Answer

The presentation currency is the currency in which the financial statements are presented by the reporting entity. This is the currency that readers of the financial statements will see and use to evaluate the financial performance and position of the entity.

Quiz 17: Disclosure: Translation of Financial Statements Into a Presentation Currency

Indicators pointing towards the reporting entity's currency as the functional currency include that which of the following?

According to AASB 121 The Effects of Changes in Foreign Exchange Rates,the key economic factor to consider in determining an entity's functional currency is:

When translating into the functional currency,monetary liabilities are translated using the:

When translating foreign currency denominated financial statements into the functional currency,the exchange differences are recognised:

The exchange rate at a point of time for immediate delivery of the currency in an exchange is known as the:

According to the temporal method,monetary assets are translated at the:

Post acquisition date retained earnings that are denominated in a foreign currency are:

When translating into the functional currency,foreign currency denominated non-monetary assets measured at historical cost must be translated using the:

Assets and liabilities to be received or paid in a fixed or determinable number of units of money are referred to as:

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

Which exchange rate should be used when translating revenue and expense items in the statement of profit or loss and other comprehensive income into the functional currency?

The currency of the country in which the foreign operation is based is referred to as the:

Where profits generated by the foreign operation are retained in the foreign entity and used for its expansion:

Which of the following is an additional question to be asked in determining whether a foreign entity's functional currency is the same as that of the reporting entity?

If foreign currency denominated non-monetary assets are measured using the fair value method,they must be translated into the functional currency using the:

The method used to translate financial statements prepared in the functional currency into the presentation currency is known as the:

By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates,which of the following items will be regarded as a monetary item?

Which of the following statements is incorrect?

The presentation currency is: