Chapter 15: Derivatives, Hedging, and Other Topics Flashcards
What is a derivative?
A financial instrument that has at least one notional amount or payment provision, or both
What are typical derivatives?
- Call option
- Put option
- Forward contract
- Future contract
What is a call option?
The right to purchase an asset at a fixed price (strike price) on or before a future date (expiration date).
What is a put option?
The right to sell an asset at a fixed price (strike price) on or before the future date (expiration date).
What is the spot price?
The rate for immediate settlement rate. “On the spot!”
How are derivatives accounted for?
As an asset or liability at fair value. Gains/losses are recognized directly through earnings.
When is a derivative a hedge?
When the purchase or sale of derivative or other instruments is expected to neutralize risk
What happens when a hedge is fully effective?
No net gain or loss.
Where are gains or losses on a hedging instrument reported?
Other comprehensive income.
What is the current ratio?
Current assets ÷ Current Liabilities
What is the quick ratio?
(Cash and equivalents + Marketable securities + Net Receivables) ÷ Current liabilities
What is the accounts receivable turnover?
Net Credit Sales ÷ Average Balance in AR
What is days sales in receivables?
Day in Year ÷ AR Turnover Ratio
What is inventory turnover?
COGS ÷ Average balance in inventory
What is the operating cycle?
Days’ sales in receivable + Days’ sales in inventory
If the current ratio is greater than 1.0 equal decreases in the numerator and denominator
Increase the ratio
If the quick ratio is less than 1.0, equal decreases in the numerator and denominator
Decrease the ratio.
How should a U.S. publicly traded company report a change in fair value of a hedged available-for-sale security attributable to foreign exchange risk if the hedge is a fair value hedge?
Gains or losses from changes in fair value of a hedged item attributable to the hedged risk are recognized immediately in earnings.
