Part III Chapter 8

Question 1

accrual accounting

Answer 1

The accounting approach under which expenses must
be reported when the revenues with which they are
associated are recognized. Long-lived or fixed assets
are capitalized and depreciated over time because
they produce revenues over many accounting periods.
This practice matches an asset’s cost to the revenues it
produces. Under the revenue recognition and matching
principles, sales are reported even though cash has not
been received. Similarly, expenses are reported even
though cash has not been paid out.

Question 2

accumulated depreciation

Answer 2

The total amount of wear and tear that reduces the
value of a company’s assets. It appears on the asset
side of the balance sheet, but it is a source of funds
when it increases.

Question 3

cash basis accounting

Answer 3

An accounting method that recognizes revenues
and expenses at the time physical cash is actually
received or disbursed

Question 4

cost of goods sold (COGS)

Answer 4

The expense associated with providing the goods or

services whose sale is recognized as revenues.

Question 5

derivative

Answer 5

A financial product that acquires its value by
inference through a formulaic connection to another
asset. The other asset is termed the underlying asset,
and can be a financial instrument (e.g., a stock or
bond), currency, or commodity.

Question 6

earnings before interest and taxes (EBIT)

Answer 6

A measure of operating income or profit that is
calculated as gross profit less operating expenses,
depreciation, and amortization.

Question 7

earnings before interest, taxes,
depreciation, and amortization
(EBITDA)

Answer 7

A measure of operating profitability that is calculated
as gross profit less operating expenses (but not
subtracting depreciation and amortization).

Question 8

Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database

Answer 8

A database that contains a searchable listing of
US Securities and Exchange Commission filings for
public companies.

Question 9

fair value

Answer 9

the value of an asset or liability that would be
received in an asset sale or the price paid to transfer
a liability

Question 10

fair value hedge

Answer 10

A type of hedge in which the risk being hedged is
a change in the marketable value of an asset or a
liability.

Question 11

Financial Accounting Standards Board (FASB)

Answer 11

An independent, self-regulating US organization,
made up of accounting professionals, that
establishes financial accounting and reporting
standards in the United States, collectively referred
to as Generally Accepted Accounting Principles
(GAAP).

Question 12

financial statements

Answer 12

Accounting reports that summarize a company’s
operating results and financial position at a point in
time.

Question 13

foreign currency translation

Answer 13

A process used to convert the financial results of a
parent company’s foreign subsidiaries to its reporting
currency.

Question 14

functional currency

Answer 14

For determining foreign exchange translation
exposure, this is the currency of the primary
economic environment in which the entity operates.

Question 15

Generally Accepted Accounting Principles (GAAP)

Answer 15

A detailed set of rules that govern US accounting

standards.

Question 16

goodwill

Answer 16

A balance sheet account recorded in a situation in
which the purchase price is higher than the sum
of the fair value of all identifiable tangible and
intangible assets purchased in the acquisition and
the liabilities assumed in the process.

Question 17

home currency

Answer 17

The currency of the country in which an entity’s

headquarters are located.

Question 18

income statement

Answer 18

A financial statement that summarizes revenues
earned, expenses incurred, and gains and losses
arising from conversions of assets and liabilities over
an accounting period.

Question 19

intangible assets

Answer 19

Assets that lack physical substance and for
which there is often a high degree of uncertainty
concerning their future value. Examples are goodwill,
trademarks, and patents.

Question 20

International Accounting Standards Board (IASB)

Answer 20

An international standards-setting body that
determines general accounting standards and is
made up of board members from around the world.

Question 21

International Financial Reporting Standards (IFRS)

Answer 21

A set of international accounting standards stating
how particular types of transactions and other events
should be reported in financial statements.

Question 22

net investment hedge

Answer 22

A type of hedge designed to hedge currency risk
associated with the translation of subsidiary (or
other foreign operations) financial statements into
the parent firm’s functional currency.

Question 23

private equity

Answer 23

An investment of either common or preferred stock
in an operating company that is not publicly traded
on an exchange. This investment sometimes involves
the acquisition of an entire company.

Question 24

realized gains/losses

Answer 24

Currency gains or losses that are realized when a

previously recorded transaction is completed.

Question 25

retained earnings

Answer 25

A balance sheet account that represents the
accumulated net earnings of a corporation since its
inception, less dividends paid to shareholders.

Question 26

statement of cash flows

Answer 26

A financial statement that provides a detailed picture
of the sources of a company’s cash flows and how
these sources are used.

Question 27

unrealized gains/losses

Answer 27

Currency gains or losses that are recorded in the

financial statements without an associated cash flow.