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FAR CPA Custom > Financial Instruments > Flashcards

Financial Instruments Flashcards

1
Q

Fair Value is usually the general way in which financial instruments are valued. TF

A

True

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2
Q

Financial instruments impose on one entity a contractual obligation and grant another entity a contractual right. TF

A

True

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3
Q

FI’s result in the exchange of cash or ownership interest in equity. TF

A

True

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4
Q

Investment in another entity IS NOT a type of financial instrument. TF

A

False

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5
Q

All contracts are forms of FI’s. TF

A

False

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6
Q

IFRS: defines financial assets and liabilities separately, unlike GAAP.

A

True

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7
Q

IFRS Difference: Identifies loans and receivables specifically whereas GAAP doesn’t.

A

True

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8
Q

IFRS Difference: Impairment is completed relative to the recoverable about whereas GAAP impairment is tested relative to fair value.

A

True

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9
Q

What information must be disclosed for each financial instrument for which it is practicable to estimate fair value?

A

Fair Value, Related carrying value, whether it is an asset or a liability

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10
Q

If not using fair value, the reason must be disclosed as into why. TF

A

True

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11
Q

Credit Risk and concentration of credit risk are optional disclosures pertaining to FIs. TF

A

False, mandatory

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12
Q

Market Risk disclosures are required for FI’s. TF

A

False, not required but encouraged

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13
Q

Fair value disclosures can be made in the body of the FSs as well as the footnotes. TF

A

True

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14
Q

A derivative is a financial instrument that has one or more underlings and one or more notional amounts (or a payment provision), requires not initial investment, and its terms require or permit a net settlement. TF

A

True, it must possess those three characteristics to meet the definition of a derivative.

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15
Q

What is a futures contract?

A

A price set now for an exchange of goods in the future, coordinated through a clearinghouse (Chicago Board of Trade etc.)

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16
Q

What is a forward contract?

A

Similar to a futures contract but coordinated directly through contracting parties, instead of a clearinghouse

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17
Q

What is a swap contract?

A

To swap fixed rate debt for variable rate debt or vice versa

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18
Q

Gains and losses in derivatives are recognized in OCI. TF

A

False, earnings

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19
Q

Futures and forwards are mandatory obligations to buy at a specified future date. TF

A

True

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20
Q

Embedded derivatives that are not closely and clearly related to the host contract need to be bifurcated (seperated) and accounted for independently. TF

A

True

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21
Q

Derivatives held for speculation are designated to hedge risk. TF

A

False, these derivatives are to obtain a profit only, not to mitigate any other risk through hedges.

22
Q

The underlying of a derivative is a specified price, rate, or other monetary variable.

A

True (for stock option this would be the strike price)

23
Q

A characteristic of a perfect hedge would be not possibility of future loss only. TF

A

False, no possibility of future gain or loss

24
Q

The notional amount of a derivative is a specified unit of measure.

A

True (for stock option would be the total amount of shares)

25
Q

Difference between the strike price and the market price = intrinsic value.

A

True. Intrinsic value x notional amount = total intrinsic value

26
Q

What is the objective of “hedging”?

A

To increase certainty, and to decrease volatility.

27
Q

All risk is available for hedge accounting. TF

A

False, only commodity price risk, foreign exchange risk, interest rate risk, and credit risk.

28
Q

FV Risk in reference to hedging is the risk of loss due to the change in the FV of the hedged item and converts fixed risk into floating risk. TF

A

True

29
Q

Cash Flow Risk in reference to hedging is the risk of loss due to a change in cash flows of the hedged item and converts fixed risk into floating risk. TF

A

False, converts floating risk into fixed risk.

30
Q

What are some examples of hedging items?

A

Recognized assets or liabilities on the B/S, firm commitments (purchase commitments), foreign currency, and forecasted transactions.

31
Q

Gains or losses in FV hedges are included in net income. TF

A

True

32
Q

Gains or losses in CF hedges are included in net income.

A

False, ineffective portions are in net income, effective portions are included in OCI

33
Q

What is a hedging instrument?

A

The hedging instrument is a contract or other arrangement that is entered into to mitigate or eliminate the risk of loss associated with the hedged item.

34
Q

Hedge accounting is all about the delta (change value of contract). TF

A

True

35
Q

A derivative can be used for an unrecognized firm commitment. TF

A

False

36
Q

A cash flow hedge converts variable cash flows into fixed cash flows. TF

A

True

37
Q

To qualify for cash flow hedging formal documentation may or may not be required. TF

A

True

38
Q

Cash flows related to which types of forecasted transactions CANNOT be hedged?

A

Business combinations, P’s equity in S, entity’s own equity instruments

39
Q

Under cash flow hedging, when inventory is sold CGS is adjusted by the balance in OCI. TF

A

True

40
Q

The effective portion of the change in the fair value of a derivative is recorded in current income. The ineffective portion is recorded in OCI. TF

A

False, effective OCI, ineffective CI

41
Q

Normal gains from FV hedges are recorded in current income. Normal gains from CF hedges are recorded in OCI. TF

A

True

42
Q

Change in the value of the hedged item / Change in the value of the derivative = Ineffectiveness. TF

A

False, Ineffectiveness = Change in the value of the derivative / Change in the value of the hedged item

43
Q

Correlation between the hedging instrument must be between 50% and 150% to qualify for hedge accounting TF.

A

False, 80% and 125%

44
Q

Deferred gains/losses are required disclosures in regards to hedges. TF

A

False.

45
Q

A listing of derivatives used for cash flow hedges and the amount of each must be disclosed. TF

A

False

46
Q

An underlying is the specified price of a commodity trading

A

True

47
Q

A notional amount is a specified unit of measure regarding the derivative

A

True

48
Q

Cash flow hedge accounting is allowed for firm commitments? TF

A

False

49
Q

FV hedge accounting is allowed for forecasted transactions? TF

A

False

50
Q

Both cash flow hedges and fair value hedges can be used to hedge foreign currencies and firm commitments. TF

A

True

51
Q

FV on forward contracts is determined using the spot rates. TF

A

False, forward rate

FAR CPA Custom (46 decks)

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