Chapter 11

Question 1

foreign currency transaactions

Answer 1

sales purchases and other transactions giving rise to a transfer of foreign currency or the recording of receivables or payables that are denominated

Question 2

translation

Answer 2

restating foreign currency transactions to their US dollar equivalent

Question 3

foreign currency exchange rates

Answer 3

established daily by foreign exchange brokers, things that affect these rates are
balance of payments
changes in a country’s interest rate and investment levels,
stability of government

Question 4

direct exchange rate

Answer 4

number of local currency units needed to acquire one foreign currency unit
US Dollar - equivalent value/ 1 FCU

Question 5

indirect exchange rate

Answer 5

the inverse of the DER

1 FCU/US dollar - equivalent value

Question 6

change in exchange rates

Answer 6

referred to a strengthening or weakening of one currency to another

Question 7

spot rate

Answer 7

exchange rate for immediate delivery of currencies

Question 8

current rate

Answer 8

the spot rate on the entity’s balance sheet

Question 9

forward exchange contracts

Answer 9

predicted future rate

Question 10

spread

Answer 10

difference between the forward rate and the spot rate on a given date

Question 11

foreign currency transaction gain or loss

Answer 11

adjustment of equivalent US dollar values 
Foreign currency units
   Cash
depending on if there is a gain or loss 
Foreign currency transaction loss
   Foreign currency units

Question 12

functional currency

Answer 12

primary currency for performing its major financial and operating functions

Question 13

reporting currency

Answer 13

currency in financial statements

Question 14

local currency

Answer 14

currency in the location

Question 15

relevant date for transaction

Answer 15

the spot exchange rate on the day of the settlement

Question 16

accounting for import or export transactions

Answer 16

1. Transaction date: Record the purchase or sale transaction at the US dollar equivalent value using the spot direct exchange rate on this date
2. Balance sheet date: adjust the payable or receivable to its current end of period US dollar value using the current direct exchange rate. Recognize any exchange gain or loss for the change in rates between the transaction and balance sheet dates.
3. Settlement date: first adjust the foreign currency payable or receivable for any changes in the exchange rate between the balance sheet date and the settlement date, recording any exchange gain or loss as required. Then record the settlement of the foreign currency payable or receivable.

Question 17

if the main currency is US currency

Answer 17

there is no special accounting for it, we treat it like any other transaction, if it isn’t we adjust for currency rates

Question 18

financial instrument

Answer 18

cash, evidence of ownership, or a contract that both

1. imposes on one entity a contractual obligation to deliver cash or another instrument and
2. conveys to the second entity that contractual right to receive cash or another financial instrument

Question 19

derivative

Answer 19

financial instrument or other contract whose value is derived from some other item that has a variable value over time
characteristics include
1. contains an underlying and notional amount
2.Requires no initial net investment
3. Contract terms require or permit net settlement, provides the recipient with an asset that puts them in a situation similar to that of net settlement, allow for the contract to be readily settled net by a market or other mechanism outside the contract

Question 20

underlying

Answer 20

any financial or physical variable that has observable or objectively verifiable changes

Question 21

notional amount

Answer 21

the number of currency units, shares, bushels, pounds, or other units specified in the financial instrument

Question 22

hedge qualifications

Answer 22

1. sufficient documentation must be provided at the beginning of the hedge term to identify the objective and strategy of the hedge, the hedging instrument, and the hedged item, and how the hedge’s effectiveness will be assessed on an ongoing basis
2. The hedge must be highly effective throughout its term. Effectiveness is measured by if it offsets the changes in Fair Value within a range of 80-125 percent.

Question 23

FV hedges

Answer 23

designated to hedge the exposure to potential changes in the fair value of

a. recognized asst or liability such as available for sale instruments
b. an unrecognized firm commitment for which a binding agreement exists, such as to buy or to sell

Question 24

Cash flow hedges

Answer 24

designated to hedge the exposure to potential change sin the anticipated cash flows, either into or out of the company for

a. a recognized asset or liability such as future interest payments on variable interest debt or
b. a forecasted cash transaction such as a forecasted purchase or sale

Question 25

foreign currency hedges

Answer 25

hedges in which the hedged item is denominated in a foreign currency; the following types of hedges can be designated

1. fair value hedge
2. cash flow hedge
3. hedge of net investment in a foreign operation

Question 26

forward exchange contracts

Answer 26

a contract to have currency at a future date and to take the forward rate for it.

Question 27

forward exchange contract not specified as a hedge

Answer 27

the payables and receivables are valued every period, the payable for our transaction uses the forward rate the receivable from the broker uses the spot rate at every period

Question 28

we are on

Answer 28

pg 560