Simulation 1 Flashcards
The Australian dollar is this type of currency in relation to Jay A.
Local currency.
The functional currency is the currency of the primary economic environment in which the entity operates. The U.S. dollar is the functional currency of the Australian subsidiary. The Australian dollar is its local currency.
A current exchange rate is used for this adjustment to the U.S. dollar from the euro.
Translation.
Translation is the process of expressing amounts stated in the functional currency as amounts stated in the reporting currency. The euro is Jay F’s functional currency. Thus, restating euro-based amounts in U.S. dollars is foreign currency translation.
If an enterprise consists of separate entities operating in different currency environments, their financial statements must be presented in this manner.
Consolidated.
If an enterprise consists of separate entities operating in different currency environments, their financial statements must be consolidated. A consolidated entity may consist of separate entities operating in different economic and currency environments.
Items stated in different currencies must be restated into this currency.
Reporting currency.
Consolidated financial statements must be stated in the reporting currency of the parent
If Jay F’s books are not kept in euros, amounts must be remeasured using this method.
Temporal.
If the books of a foreign entity are maintained in a currency not the functional currency (euro), these foreign currency amounts must be remeasured into the functional currency using the temporal method.
If Jay F’s books are not kept in euros, amounts must be remeasured using this method.
The process described above can result in this effect.
Transaction gain or loss.
Remeasurement expresses amounts stated in another currency as amounts stated in the functional currency. This process results in gains and losses included in earnings.
Describes the environment in which the reporting entity operates.
Economic indicators.
The functional currency is the currency of the primary economic environment in which the entity operates. The economic indicators are characteristic of that environment.
Current ratio
Liquidity ratio.
The current ratio equals current assets divided by current liabilities. Liquidity (solvency) ratios measure the short-term viability of the business, i.e., the firm’s ability to continue in the short term by paying its obligations.
Inventory Turnover Ratio
Activity ratio.
Inventory turnover equals cost of sales divided by average inventory. Activity ratios measure the entity’s ability to generate revenue and income.
Asset Turnover
Activity ratio.
Asset turnover equals net revenue divided by average total assets. Activity ratios measure the entity’s ability to generate revenue and income.
Quick Ratio
Liquidity ratio.
The acid test or quick ratio equals the quick assets (cash + net receivables + marketable securities) divided by current liabilities. Liquidity (solvency) ratios measure an entity’s ability to continue in the short term by paying its obligations.
Times-interest-earned Ratio
Leverage ratio.
The times-interest-earned ratio equals the sum of net income, interest expense, and income tax expense, divided by interest expense. Leverage ratios measure an entity’s use of debt to finance assets and operations.
Accounts Receivable Turnover
Activity ratio.
Accounts receivable turnover equals net credit sales divided by average accounts receivable. Activity ratios measure an entity’s ability to generate revenue and income.
Profit Margin on Sales
Profitability ratio.
The profit margin on sales equals net income divided by sales. Profitability ratios measure income on a relative basis.
