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.
A U.S.-based publicly traded company has a Swedish subsidiary. For the Swedish subsidiary, the euro impacts the cost of goods sold and revenue. The primary source of long-term debt financing for the U.S. company is Canadian investors. The functional currency of the Swedish subsidiary is the
A. Canadian dollar.
B. Swedish Krona.
C. U.S. dollar.
D. Euro.
D. Euro.
The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash. Thus, the euro is the functional currency in this scenario because it is used in the primary economic environment, i.e,, Sweden.
Company A, a U.S. company, and Company B, a British company, both purchases shares in Company Z, a U.S. company on a U.S. stock exchange. Both A and B held the stock for 1 year. At the time the shares were purchased, the U.S> dollar to British pound exchange rate was 2:1. At the end of the holding period, the exchange rate fluctuated to 1.75:1. Assuming that Z pays returns in U.S. dollars, Company B’s return will be
A. The answer cannot be determined from the information provided.
B. Unchanged.
C. Lower.
D. Higher.
D. Higher.
The returns on Z’s stock are paid in U.S. dollars. Accordingly, the change in the value of the U.S. dollar relative to the British pound does not affect Company A’s return. However, the strengthening of the U.S. dollar increases the number of British pounds it can purchase; therefore, Company B’s return will increase.
Which one of the following statements best reflects the relationship between the results of financial ratios calculated in a local currency versus those where a functional currency is used?
A. Financial ratio results are different under translation and remeasurement, and ratios under translation are also often different from those in the local currency.
B. Financial ratio results are similar under translation and remeasurement, but ratios under translation are often different from those in the local currency.
C. Financial ratio results are different under translation and remeasurement, but ratios under translation are often similar from those in the local currency.
D. Financial ratio results are similar under translation and remeasurement, and ratios under translation are also often similar to those in the local currency.
A. Financial ratio results are different under translation and remeasurement, and ratios under translation are also often different from those in the local currency.
Financial ratio results are different under translation and remeasurement, and ratios under translation are also often different from those in the local currency.
