CPA FAR I-75 CH 15

Question 1

foreign currency accounting

Answer 1

US firms often buy and sell goods where the contract is denominated in a foreign currency

Question 2

Direct quote

Answer 2

how many USD to buy one unit of foreign currency

$1.12 USD/1 euro

Question 3

from $1.20 USD/1 euro to $1.32 USD/1 euro

USD strengthening or weakening against euro

Answer 3

from $1.20 USD/1 euro to $1.32 USD/1 euro = USD weakening

It takes more USD to purchase one euro = this creates a loss for the US firm (more expensive to purchase in euro)

Question 4

If USD weakens versus Euro: export and import

Answer 4

imports become more expensive to US customers

Falling USD favors US exporters as US exports become cheaper in other currency

Question 5

If the exchange rate $1.25 USD to 1 euro were to change to $1.60 USD to 1 Euro
1. USD has strengthened relative to the Euro
2. US company with a payable would experience a loss

Answer 5

2. is correct

Euro strengthened
USD weakens = payable became more expensive

Question 6

Falling US currency relative to foreign currency
1. it will take more USD to acquire one unit of foreign currency
2. Goods imported by US companies will be cheaper

Answer 6

1. is correct

Goods will be more expensive for US companies

Question 7

Indirect quote

Answer 7

one unit of USD/domestic currency purchases how much foreign currency

0.83 euro/$1.00 USD to 0.89 euro/$1.00 USD = USD strengthening (can purchase more of the foreign currency)

It would take less USD to meet a debt obligation

Question 8

Payables denominated in foreign currency

Answer 8

USD strengthens = exchange gain

USD weakens= exchange loss

Question 9

If the currency exchange rate between the dollar and the euro started $1.00 USD to 0.80 euro and changes to $1.00 USD to 0.63 euro. Which is correct?
1. The dollar has weakened relative to the euro
2. the exchange rate quoted is considered indirect rather than direct

Answer 9

Both are correct

indirect = one unit domestic currency can purchase what amount of the foreign currency

0.63 euro/1.00 USD

Question 10

If the currency exchange rate between the dollar and the euro started 0.80 euro to $1.00 USD and changed to 0.92 euro to $1.00 USD. Which of the following is correct?
1. The US dollar has strengthened against the euro.
2. a US Firm with a payable will experience a gain

Answer 10

Both are correct

$1.00 USD buys more euro

the payable is paid off with less USD

Question 11

If the exchange rate of $1.25 to 1 euro were to suddenly change to $1.06 to 1 euro. which would be correct?
1. A US company holding a receivable denominated in euro would experience a loss due to declining euro
2. The USD has strengthened relative to the euro

Answer 11

Both!

Question 12

If the exchange rate of $1.25 to 1 euro were to suddenly change to $1.60 to 1 euro. which would be correct?
1. dollar has strengthened relative to the price of the euro
2. US company holding a receivable would experience a gain

Answer 12

2 is correct!

USD has weakened vs euro (costs more to but one euro)

Question 13

If a foreign currency exchange gain results from the exchange rate on AR transaction, which is correct?

Answer 13

Gain is reported in earnings

(US currency weakens/foreign currency strengthens)

Question 14

Which of the following is a direct quotation for US entity when buying euro?
1. .87 euro per $1.00
2. $1.00 per .87 euro
3. 0.93 USD per $1 euro
4. none of the above

Answer 14

Correct:
3. 0.93 USD per $1 euro

how many units of domestic currency buys one unit of foreign currency

Question 15

Which of the following is an indirect quotation for US entity when buying euro?
1. $1.20 per 1 euro
2. $1.00USD per 0.93 euro
3. 1 euro per $0.96USD
4. $0.97USD per 1.07 euro

Answer 15

how many units of foreign currency for one unit of domestic currency

Correct: 2. $1.00USD per 0.93 euro

Question 16

Which of the following is an indirect quotation for a US entity when buying euros?
1. 1.17 euro per $1.00 USD
2. $1.00USD per 0.79 euro
3. $1.09USD per 1 euro

Answer 16

1 and 2

indirect quote: how many units of foreign currency for one unit of domestic currency

Question 17

Direct or indirect quote:
$1.09USD per 1 euro

Answer 17

direct quote

Question 18

Foreign currency exchange gains or losses reported in current income as:

Answer 18

an item of continuing operations

Question 19

Foreign currency import transactions: does not settle by year end

Answer 19

Accounting for a foreign currency import transaction involves a domestic entity buying from a foreign entity where the transaction is initiated and settled in the same fiscal year/period.

If the transaction is initiated in one period and does not settle by year end, changes in the exchange rate will result in gains and losses in the year of change.

Question 20

Which is correct re: foreign currency transactions entered into by US entity?
1. The transaction is denominated in a foreign currency and measured in foreign currency.
2. The transaction is denominated in a foreign currency and measured USD.
3. The transaction is denominated USD and measured USD.
4. the transaction is denominated USD and measured foreign currency.

Answer 20

CORRECT: 2. The transaction is denominated in a foreign currency and measured USD.

paid or received in foreign currency and recorded in US entity books USD

Question 21

Natural hedge

Answer 21

hedging is a risk management strategy with an intent to mitigate risk of loss from a receivable or a payable.

If a US firm has a payable denominated in a foreign currency, the risk is that the foreign currency will increase and the payable will increase as a result equaling a loss for the US firm.

With hedging, the US firm would use a derivative contract to offset risk of the increasing payable.

Question 22

Hedging- using derivatives:
forward contracts

Answer 22

establishes an obligation to buy or sell a foreign currency at a price determined today but to be performed in the future

requires performance

Question 23

Hedging- using derivatives:
option contracts

Answer 23

establishes the right, rather than obligation, to buy or sell a foreign currency at a price determined today, but performance is NOT required

Option does expire

Question 24

Forward hedge: AR

Answer 24

with accounts receivable: US exporter has agreed to accept euros for your goods and the fear is that the foreign currency will go down in value before settlement date

to mitigate risk of a drop in foreign currency and loss on receivables, the US exported will enter into a forward contract that allows the US exported to lock in the price of foreign currency now

The price of foreign currency will be determined now, even though the transaction will not occur until the end of a 30, 60, or day period

If the euro falls, the profit from the forward contract will offset the risk of the loss on receivable