Chapter 16 Flashcards
Define Hedge
No possibility of future gain or loss.
Define Call Option
is the right to purchase an asset at a fixed price
Define put option
is the right to sell an asset at a fixed price
Define derivative
A derivative has at least one underlying (interest rate, currency exchange rate, price of a specific financial instrument, etc.) and at least one notional amoun
How do you benefit from a call option?
allows the purchaser to benefit from an increase in the price of the underlying.
How do you benefit from a put option?
allows the purchaser to benefit from a decrease in the price of the underlying.
When do you recognize a gain or loss on a fair value hedge?
immediately in earnings.
When do you recognize a gain or loss on a cash flow hedge?
immediately in OCI, then reclassified when the hedge affects earnings at a later date.
Derivatives are measured at what?
fair value
Define Firm Commitment
n agreement with an unrelated party, binding on both parties and usually legally enforceable, that specifies all significant terms and includes a disincentive for nonperformance.
intrinsic value of an option
is calculated as the market value of the underlying minus the exercise price of the option
Define functional currency
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.
Items remeasured at historical rate on translation
non monetary itmes(a) marketable securities carried at cost; (b) inventories carried at cost; (c) cost of goods sold; (d) prepaid expenses; (e) property, plant, and equipment; (f) depreciation; (g) intangible assets; (h) amortization of intangible assets; (i) deferred income; (j) common stock; (k) preferred stock carried at its issuance price; and (l) any non controlling interest.
When do you use the weighted average for translation?
year end income statement.
What items are translated at the current rate.
Examples of monetary items are (a) receivables, (b) payable, (c) inventories carried at market, and (d) marketable securities carried at fair value.
