M5 - Foreign Currency Accounting Flashcards
In preparing consolidated financial statements of a US parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:
Of the environment in which the subsidiary primarily generates and expends cash.
The functional currency of a company may be:
- A foreign entity’s local currency, which is typically the one in which the entity keeps its books;
- The currency in which the F/S will be presented, which is the currency of the parent company; or
- A foreign currency other than the one in which the foreign entity maintains it books.
True or False: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a requirement by law to use another currency), which may be any of the above three. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e., approximately 100% over three years)
True
Cumulative foreign exchange translation loss should be reported as a component of accumulated other comprehensive income. A cumulative foreign exchange translation loss would be a debit to AOCI; therefore, contra to shareholders’ equity. (true or false)
True
“Translation” adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of OCI in consolidated equity until sale or until liquidation of the investment takes place.
Foreign exchange transactions gains and losses are generally included in determining net income for the period in which exchange rates change. (true or false)
True
Balance sheet accounts are generally included at the current exchange rate, except for:
- a self contained subsidiary with a 3 year inflation rate of 100% or more (hyperinflationary economy)
- a foreign entity which does not maintain its accounts in a foreign functional currency
In these circumstances, the re-measurement method is used and the historical rates should be used only for those balance sheet accounts carried at “cost” (most non-monetary items). Otherwise follow the general rule and use the “current” rate.
When contracting to purchase foreign goods, the transaction would first be journalized when title transfers to the buyer. (true or false)
True
Conversion adjustments associated with
- Translation of F/S are displayed where?
- Remeasurement of F/S are displayed where?
- AOCI
- in Income
True or False: When the translation method is used, all assets and liabilities are translated to the reporting currency using the current (year-end) exchange rate, while common stock and additional paid-in capital are translated using historical exchange rates.
True
A transaction denominated in a foreign currency is recorded at the spot rate on the date of the transaction.
True
This is when they will ask what amount should the person record on the date sold and delivered as an accounts receivable for its sale.
You will use the spot rate instead of the forward rate.
Capital accounts are translated into the functional currency using the HISTORICAL exchange rates. (true or false)
True
The weighted average rate is used for all income statement items.
The current exchange rate at the balance sheet is used to translate assets and liabilities.
True or False: The functional currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency. The foreign subsidiary itself should measure its assets, liabilities, and operations using the currency of its primary economic environment.
True
