Foreign Currency Accounting and Other Financial Statement Presentations

Question 1

Foreign Currency Transactions

Answer 1

Transactions with a foreign entity (buying from and selling to) denominated in (to be settled in) a foreign currency.

Question 2

Foreign Currency Translation

Answer 2

The conversion of the FS of a foreign entity into FS expressed in the domestic currency.

Question 3

Exchange Rate

Answer 3

The price of one unit of a currency expressed in unites of another currency; the rate at which two currencies will be exchanged at equal value.

Question 4

Direct Method - Exchange Rate

Answer 4

The domestic price of one unit of another currency.

One euro costs $1.47

Question 5

Indirect Method - Exchange Rate

Answer 5

The foreign price of one unit of the domestic currency.

0.68 euro buys $1.00

Question 6

Current Exchange Rate

Answer 6

The exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate. Year end

Question 7

Forward Exchange Rate

Answer 7

The exchange rate existing now for exchanging two currencies at a specific future date. (bet)

Question 8

Historical Exchange Rate

Answer 8

The rate in effect at the date of issuance of stock or acquisition of assets. Used for equity.

Question 9

Weighted Average Rate

Answer 9

Used for Income Statement. Takes into account the exchange rate fluctuations for the period.

Question 10

Reporting Currency

Answer 10

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

Question 11

Functional Currency

Answer 11

The currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency.

Question 12

Foreign Currency Translation

Answer 12

The restatement of FS denominated in the functional currency to the reporting currency using appropriate rates of exchange. “Functional”

Question 13

Foreign Currency Remeasurement

Answer 13

The restatement of foreign FS from the foreign currency to the entity’s functional currency in the following situations:
- Reporting currency = functional currency
- FS must be restated in the entity’s functional currency prior to translating the FS from the functional currency to the reporting currency.
“Dysfunctional”

Question 14

Remeasurement Method (temporal method)
"Dysfunctional"

Answer 14

FS of foreign sub are not in the sub’s functional currency, the FS are remeasured to the functional currency starting with the balance sheet.

1. Balance Sheet
   - Monetary items = current/yr-end rate (fixed)
   - Nonmonetary items = historical rate (fluctuate)
2. Income Statement
   - Non-balance sheet related items = weighted avg rate
   - Balance Sheet related items = historical rates
3. Remeasurement Gain/Loss (income statement)
   - plug currency G/L to get NI to the required amt needed to adjust RE in order to make the balance sheet balance.

Question 15

Translation Method (current rate method)
"Functional"

Answer 15

FS of the foreign sub are in the sub’s functional currency, the FS are translated to the reporting currency starting with the income statement.

1. Income Statement
   - All income statement items = weighted avg rate
   - Transfer NI to RE
2. Balance Sheet
   - Assets & Liabilities = current/yr-end rate
   - Common stock/APIC = historical rate
   - Retained earnings = roll forward
3. Translation Gain/Loss (OCI)
   - plug translated adjustment to OCI…cumulative translation adjustment

Question 16

Foreign Currency Transactions

Answer 16

These G/L occur when a company buys from or sells to a foreign company with whom it has no ownership interest and agrees to pay or accept payment in a foreign currency.
Operating transactions or forward exchange contracts.

Question 17

Operating Transactions

Answer 17

import, export, borrowing, lending, and investing transactions

Question 18

Forward Exchange Contracts

Answer 18

agreements to exchange two different currencies at a specific future date and at a specific rate.

Question 19

Valuation of Assets & Liabilities

Answer 19

Historical Rate
Assets or liabilities resulting from foreign currency transactions should be recorded in the US company’s books using the exchange rate in effect at the date of the transaction.

Question 20

Other Comprehensive Bases of Accounting (OCBOA)

Answer 20

Non-GAAP presentations that have wide-spread understanding and support.

• Cash basis
• Tax basis
• Definite set of criteria have substantial support that is applied to all material FS elements
• Regulatory basis

Question 21

Cash Basis of Accounting

Answer 21

Revenues are recognized when cash is received and expenses are recognized when cash is paid.
Non-GAAP
- Statement of Cash and Equity
- Statement of Cash Receipts and Disbursements

Question 22

Income Tax Basis FS

Answer 22

Prepared based on the methods and principles used to prepare the entity’s tax return. Special accounting treatment must be given to nontaxable revenues and expenses not reported on the tax return.

• Statement of Assets, Liabilities, and Equity OR balance sheet
• Statement of Revenues, Expenses and Retained Earnings OR a Statement of Income

Question 23

Personal Financial Statements

Answer 23

FS of individuals or groups of related individuals (families) and are generally prepared to organize and plan financial affairs. Used to obtain credit and for tax, estate, and retirement planning purposes.

• Statement of Financial Condition (Balance Sheet)
• Statement of Changes in Net Worth (optional)
• Disclosure