FOCUS some MoRe II

Question 1

HOW are derivatives such as Forward Exchange Contracts that are Cash Flow Hedges accounted for?

Answer 1

ADJUSTED to Fair Value on each Balance Sheet date

NOTE: The amount is reversed out of Other Comprehensive Income when the effect is recognized on the hedged transaction

Question 2

WHAT method of Conversion of the Financial Statements is used when the functional currency is the local currency?

Answer 2

The Translation Method

This entry is reported on the Balance Sheet (B/S) under “Other Comprehensive Income”

Question 3

WHAT method of Conversion of the Financial Statements is used when the functional currency is the U.S. Dollar?

Answer 3

The Remeasurement Method

This entry is reported on the Income Statement

Question 4

WHAT is the “Transactional Currency?”

Answer 4

THE Local or “Recording Currency”

i.e. The Currency in a particular country

Question 5

WHAT is the “Functional Currency?”

Answer 5

THE Currency with the “Greatest Economic Impact” on the Company

Question 6

WHAT is the “Reporting Currency?”

Answer 6

The Currency the Company uses to prepare its Financial Statements (F/S)

Question 7

HOW is a Translation Adjustment recognized?

Answer 7

IN “Other Comprehensive Income” (OCI)

On the Balance Sheet (B/S)

Question 8

WHAT happens when the Functional Currency is the Reporting Currency?

Answer 8

THE Parent company will remeasure the Financial Statements (F/S) of the subsidiary in U.S. dollars

Question 9

WHAT happens if the Functional Currency is in a “Highly Inflationary Economy?”

Answer 9

THE Reporting Currency is considered the “Functional Currency” and

• the Financial Statements will be “remeasured”

This is reported on the Income Statement (I/S)

Question 10

HOW are Trading Securities normally classified?

Answer 10

AS a “Current Asset”

NOTE: Their purpose is to generate profits from resale

Question 11

WHAT section of the Cash Flow Statement do Trading Securities fall under?

Answer 11

THE “Operating” Section

i.e. Companies usually consider Trading Securities as part of their Inventory

Question 12

HOW are Available-for-Sale Securities normally classified?

Answer 12

AS a “Current” or “Noncurrent” Asset

Question 13

WHERE are Available-for-Sale Securities recorded/ reported?

Answer 13

ON the Balance Sheet directly in Stockholders’ Equity immediately below Retained Earnings

Question 14

HOW are Trading Securities and Available-for-Sale Securities normally recorded?

Answer 14

AT Cost, but BOTH are carried at Fair Market Value (FMV)

Question 15

HOW is the Statement of Comprehensive Income required to be reported when presented with the Income Statement?

Answer 15

Immediately following the Income Statement (I/S) WHEN both Statements are presented

Question 16

WHAT happens when an Available-for-Sale Security (AFS) is sold?

Answer 16

THE Difference between the cost and the proceeds are treated as a realized gain/loss

i.e. This is reported on the Income Statement (I/S)

Question 17

WHICH Investments in Marketable Securities are subject to Impairment losses?

Answer 17

(1) Held-To-Maturity (HTM)

2) Available-for-Sale (AFS

Question 18

WHEN would an investment in a Held-To-Maturity (HTM) Security be subject to an Impairment Loss?

Answer 18

WHEN the investor has reason to believe that the issuer of the debt security would NOT make all Principal and Interest payments as scheduled

Question 19

WHEN would an investment in an Available-for-Sale (AFS) Security be subject to an Impairment Loss?

Answer 19

WHEN there is a decline in value that is considered “Other than Temporary”

Question 20

WHAT is one way to determine whether there is an Impairment Loss?

Answer 20

WHEN the Fair Market Value is Less than the Cost

• The Investment is considered Impaired