8.5 Effects of Foreign Exchange Fluctuations Flashcards
Which one of the following best defines the term functional currency?
A. The currency in which an entity prepares its financial statement.
B. The currency of the primary economic environment in which the entity operates.
C. A currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves, and that is commonly used in international transactions.
D. A currency that is globally traded and that is expected to serve as a reliable and stable store of value.
B. The currency of the primary economic environment in which the entity operates.
The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which the company primarily generates and expends cash.
A U.S.-based company has transaction exposure if it has an account
A. Payable due in 6 months with a German company denominated in euros.
B. Payable due in 6 months with a German company denominated in U.S. dollars.
C. Payable and account receivable with two German companies both due in 6 months, of equal amounts, and denominated in euros.
D. Receivable due in 6 months with a German company denominated in U.S. dollars.
A. Payable due in 6 months with a German company denominated in euros.
A domestic company has transaction exposure if its payable or receivable is denominated in a foreign currency.
