Chapter 2 Section 6: Foreign Currency Accounting

Question 1

Define foreign currency transactions

Answer 1

Transactions with a foreign entity, in a foreign currency

Question 2

Define foreign currency translations

Answer 2

Converting financial statements of a foreign entity into financial statements expressed in dollars

Question 3

Define reporting currency

Answer 3

The currency of the entity ultimately reporting financial results of the foreign entity

Question 4

Define functional currency

Answer 4

Currency of the primary economic environment in which the entity operates

Question 5

Define foreign currency translation

Answer 5

“Functional”

Restatement of financial statements denominated in the functional currency to the reporting currency

Question 6

Define foreign currency remeasurement

Answer 6

“Dysfunctional”

Restating financial statements from the currency they’re in to the functional currency.

Question 7

How do you remeasure financial statements?

Answer 7

1. B/S: monetary items = current/year end rate; non-monetary items = historical rate
2. I/S: non-B/S related = weighted average; B/S related: historical
3. Plug “currency gain/loss” on the income statement to get net income where it needs to be for retained earnings to balance on the B/S. It’s part of income from continuing operations

Question 8

How do you translate financial statements?

Answer 8

1. I/S: weighted average rate
2. B/S: A and L = current rate; C/S and APIC = historic
3. Plug “translation adjustment” to OCI

Question 9

What do you do with a foreign currency transaction not settled at the balance sheet date?

Answer 9

Mark it to market and record an unrealized gain or lossforeign exchange transaction gain or loss in income from continuing operations