Foreign Operations

Question 1

What is the Transactional Currency?

Answer 1

The local, “recording” currency which is usually where books and records are kept.

Question 2

What is the Functional Currency?

Answer 2

The currency that has the greatest economic impact on the company (the currency in which the entity generates and expends cash)

Question 3

What is the Reporting Currency?

Answer 3

The currency in which the enterprise prepares its financial statements

Question 4

What is the local, “recording” currency that is usually where books and records are kept?

Answer 4

Transactional currency

Question 5

What is the currency that has the greatest economic impact on the company?

Answer 5

Functional currency

Question 6

What is the currency in which the enterprise prepares its financial statements?

Answer 6

Reporting currency

Question 7

When a transaction occurs in some currency other than the functional currency, what is the process called to convert it into the functional currency?

Answer 7

Remeasurement (think “as transaction occurs”)

Question 8

What is the process called to convert from the functional currency to the reporting currency?

Answer 8

Translation (think “at year end”)

Question 9

What happens if the Transactional, Functional, and Reporting currencies are all different?

Answer 9

The transaction is first “Remeasured” and then “Translated”

Question 10

Where are unrealized gains and losses on foreign currency hedges recorded?

Answer 10

In Other Comprehensive Income (OCI) since foreign currency hedges are simply types of cash flow hedges

Question 11

How do transactions denominated in a currency other than a company’s functional currency affect the income statement?

Answer 11

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

Question 12

What causes a Foreign Currency Transaction gain or loss?

Answer 12

A change in exchange rates between the functional currency and the transaction currency

Question 13

Where are Foreign Currency Transaction gains or losses recorded?

Answer 13

Income Statement

Question 14

Where are Foreign Currency Translation gains or losses recorded?

Answer 14

OCI

Question 15

If the Functional Currency equals the Transactional (Local) Currency, what Exchange Rate is used for translating Assets and Liabilities?

Answer 15

Current Exchange Rate as of the Balance Sheet Date

Question 16

If the Functional Currency equals the Transactional (Local) Currency, what Exchange Rate is used for translating Revenues and Expenses?

Answer 16

Weighted Average Exchange Rate for the year

Question 17

What Exchange Rate is used for translating Gains and Losses?

Answer 17

Exchange Rate on the date the gain/loss was realized

Question 18

If the Functional Currency equals the Transactional Currency, what Exchange Rate is used for translating Contributed Capital?

Answer 18

Historical Exchange Rates

Question 19

When Translating items for Reporting, which come first: balance sheet items or income statement items?

Answer 19

Income Statement items

Question 20

When Remeasuring items, which comes first: balance sheet items or income statement items?

Answer 20

Balance Sheet items

Question 21

Following translation of all balance sheet and income statement items, what is the entry needed to balance the books called? Where is it recognized?

Answer 21

Translation Adjustment. Recognized in OCI

Question 22

If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Monetary Assets and Liabilities?

Answer 22

Current Exchange Rates as of the Balance Sheet Date

Question 23

If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Non-monetary Assets and Liabilities (Inventory, PP&E, also Prepayments)?

Answer 23

Historical Exchange Rates

Question 24

If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Revenues and Expenses?

Answer 24

Weighted Average Exchange Rate for the year

Question 25

Following remeasurement of all balance sheet and income statement items, what is the entry needed to balance the books called? Where is it recognized?

Answer 25

Remeasurement Adjustment. Recognized on the Income Statement

Question 26

How are gains and losses on available for sale securities due to fair value hedges recognized?

Answer 26

Instead of OCI (due to AFS), they are recognized as Income since there is an offsetting gain/loss already on the income statement stemming from the fair value hedge (thus, the net effect is zero on the income statement)

Question 27

How are gains or losses on available for sale securities that stem from both fair value hedges and from non-hedged factors recognized?

Answer 27

Only the portion related to the fair value hedge is reported using hedge accounting

Question 28

How are monetary and non-monetary assets and liabilities distinguished?

Answer 28

The values of monetary assets and liabilities are fixed in terms of dollar amounts

Question 29

If the functional currency is in a highly inflationary economy, what happens?

Answer 29

The reporting currency will be considered the functional currency and financial statements will be remeasured as opposed to translated.