International Accounting 3rd Ed By Doupnik – Test Bank A+

$35.00
International Accounting 3rd Ed By Doupnik – Test Bank A+

International Accounting 3rd Ed By Doupnik – Test Bank A+

$35.00
International Accounting 3rd Ed By Doupnik – Test Bank A+
  1. What term should be used to describe the current economic system in the People’s Republic of China?
  2. A) Communist
  3. B) Socialist market
  4. C) Totalitarian
  5. D) Free enterprise

Answer: B Level: Easy LO: 1

  1. What is the basis for the People’s Republic of China’s current economic system?
  2. A) Government ownership of all businesses and economic resources
  3. B) Private ownership of all business enterprises
  4. C) Competition between state-owned enterprises and private business
  5. D) Congressional planning of industrial output and consumption

Answer: C Level: Medium LO: 1

  1. Among the world’s nations, where does the People’s Republic of China rank in terms of receiving foreign direct investment?
  2. A) First
  3. B) Fourth
  4. C) Tenth
  5. D) Fifth

Answer: A Level: Easy LO: 1

  1. What is China’s policy regarding revaluation of intangible assets?
  2. A) It is encouraged.
  3. B) It is prohibited.
  4. C) It is permitted only if the asset trades in an active market.
  5. D) It has offered no guidance on the issue.

Answer: B Level: Medium LO: 4

  1. Which term refers to an affiliate relationship between an accounting/auditing firm and its sponsoring organization?
  2. A) parent/subsidiary
  3. B) hooked up
  4. C) guanxi
  5. D) brother/sister

Answer: B Level: Medium LO: 2

  1. What body regulates trading of corporate securities in the People’s Republic of China?
  2. A) National People’s Congress
  3. B) State Council
  4. C) Securities and Exchange Commission
  5. D) Chinese Security Regulatory Commission

Answer: D Level: Easy LO: 3

  1. Why is the validity and reliability of financial disclosures of limited importance in the People’s Republic of China (PRC)?
  2. A) China has no corporations with publicly traded stock.
  3. B) The government owns all of the corporate stock traded in the PRC.
  4. C) Most of the stock purchased in the PRC is held for only a short period of time.
  5. D) Most of the stock is rated by the government of the PRC in terms of its quality.

Answer: C Level: Medium LO: 2

  1. Which of the following statements is true about accounting in China?
  2. A) Accounting has a long history, dating back thousands of years.
  3. B) The first professional accounting body in the People’s Republic of China was established in 1988.
  4. C) The philosopher Confucius taught about accounting.
  5. D) All of the statements above are true.

Answer: D Level: Medium LO: 2

  1. What was the difference between the CICPA and CACPA in the People’s Republic of China (PRC)?
  2. A) These are two translations of a single Chinese professional association from Mandarin to English.
  3. B) The CICPA was the professional association for accountants and the CACPA is the professional association for auditors.
  4. C) The CICPA was the professional association for CPAs in private practice and the CACPA is the professional association for accountants in public practice in the PRC.
  5. D) None of the statements above is true.

Answer: B Level: Medium LO: 2

  1. What reason is given for the stagnation of accounting development during the “Cultural Revolution” in China (1966-1976)?
  2. A) Over-simplification of accounting was pursued to make it accessible to a broad populace.
  3. B) There was very little business being transacted in China during the Cultural Revolution.
  4. C) Businesses in China were converting to international accounting standards during this period of time so they stopped developing new standards.
  5. D) Auditors took over the development of accounting practice.

Answer: A Level: Medium LO: 2

  1. The People’s Republic of China made economic reforms in the 1980s to encourage international trade. What impact have these reforms made on accounting?
  2. A) Increased the demand for accounting information from investors.
  3. B) Increased the supply of publicly available accounting information from Chinese companies.
  4. C) Changed the nature of auditing in the PRC.
  5. D) All of the above are true.

Answer: D Level: Medium LO: 1, 2

  1. Which of the following statements is true about joint ventures between Chinese companies and international companies?
  2. A) Tax returns of joint ventures must be audited by Chinese CPAs.
  3. B) Annual financial reports of joint ventures must be audited by Chinese CPAs.
  4. C) Capital contributions by investors must be verified by Chinese CPAs.
  5. D) All of the above statements are true about Chinese joint ventures.

Answer: D Level: Medium LO: 1

  1. What agency is responsible for setting accounting standards and regulations in the People’s Republic of China?
  2. A) Chinese Institute of CPAs
  3. B) Ministry of Finance
  4. C) Chinese Security Regulatory Commission
  5. D) State Council

Answer: B Level: Medium LO: 3

  1. In addition to the 16 Chinese Accounting Standards, what else forms the structure of financial reporting in modern China?
  2. A) IFRS
  3. B) S. GAAP
  4. C) ASBE
  5. D) CICPA

Answer: C Level: Medium LO: 4

  1. Who is the main user of accounting information in China?
  2. A) listed companies
  3. B) banks
  4. C) investors
  5. D) the government

Answer: D Level: Medium LO: 4

  1. What recent event has given the People’s Republic of China an incentive to harmonize its accounting standards?
  2. A) Collapse of Arthur Andersen
  3. B) Membership in the NATO
  4. C) Admission to the WTO
  5. D) Establishment of the CSRC

Answer: C Level: Medium LO: 1

  1. Why is accounting conservatism NOT a basic principle underlying accounting standards in the People’s Republic of China?
  2. A) It is perceived to manipulate accounting numbers for the benefit of owners by exploiting workers.
  3. B) It too closely reflects the views of the masses, which are not considered in establishing accounting standards.
  4. C) Conservatism has been shown to cause economic hardship for companies operating in China.
  5. D) Conservatism overstates assets, which is perceived to distort financial results.

Answer: A Level: Hard LO: 5

  1. Which of the following is the purpose of China’s “Accounting System for Business Enterprises” issued in 2001 to supersede its “Basic Standard of Accounting for Business Enterprises?”
  2. A) Increase harmonization of accounting standards.
  3. B) Improve comparability of accounting statements.
  4. C) Make financial reporting distinct from taxation.
  5. D) All of the above

Answer: D Level: Medium LO: 5

  1. What is the primary source of capital in Germany?
  2. A) Issuance of stock
  3. B) Corporate bonds
  4. C) Bank loans
  5. D) Government grants

Answer: C Level: Easy LO: 1

  1. Which of the following countries has NOT had its accounting systems significantly influenced by Germany?
  2. A) Switzerland
  3. B) Denmark
  4. C) Japan
  5. D) France

Answer: D Level: Medium LO: 1

  1. What functional area dominates the accounting profession in Germany?
  2. A) Taxation
  3. B) Auditing
  4. C) Financial reporting
  5. D) Managerial Accounting

Answer: B Level: Medium LO: 2

  1. In Germany, prudence is an accounting principle established in commercial law. What does “prudence” mean in an accounting context?
  2. A) Reliability
  3. B) Comparability
  4. C) Conservatism
  5. D) Relevance

Answer: C Level: Easy LO: 4

  1. What was the primary influence on Germany’s accounting regulations from the mid-1980’s until very recently?
  2. A) The Stock Corporation Law
  3. B) The directives of the European Union
  4. C) The Companies Act
  5. D) The S. Financial Accounting Standards Board

Answer: B Level: Medium LO: 1

  1. What body currently develops accounting standards in Germany?
  2. A) German Accounting Standards Committee
  3. B) German Ministry of Justice
  4. C) Bundestag
  5. D) Chamber of Auditors

Answer: A Level: Medium LO: 3

  1. What body currently enforces financial accounting requirements in Germany?
  2. A) German Accounting Standards Committee
  3. B) Bundestag
  4. C) Financial Reporting Enforcement Panel
  5. D) Financial Accounting Standards Board

Answer: C Level: Medium LO: 3

  1. What is Germany’s position with respect to accounting standards harmonization?
  2. A) IFRS should be used as long as they conform to directives set by the European Union.
  3. B) German GAAP is not influenced by IFRS.
  4. C) Accounting standard harmonization is of little interest to German accounting regulators.
  5. D) Germany has no mechanism for ensuring that accounting standards are consistent with IFRS.

Answer: A Level: Medium LO: 4

  1. German accounting standards have a “reverse authoritative principle.” What does this mean?
  2. A) Reversing entries must be made before financial reports can be issued to the public.
  3. B) Only tax deductible expenses may be used for determining accounting income.
  4. C) Financial statements are the basis for taxation.
  5. D) None of the above.

Answer: B Level: Medium LO: 4

  1. What is meant by Germany’s “authoritative principle?”
  2. A) The GASB is the final authority for accounting standards.
  3. B) The International Accounting Standards Board is the authority for making German GAAP.
  4. C) Financial accounting is the basis for determining tax.
  5. D) Accounting standards are derived from tax law.

Answer: C Level: Medium LO: 4

  1. Why is corporate income tax in Germany based on financial accounting income?
  2. A) Germany had rules for financial accounting before it had a corporate income tax.
  3. B) The German Accounting Standards Board has more authority than the Bundestag.
  4. C) German financial accounting standards reflect true economic income.
  5. D) Germany was following the practice set by the United Kingdom.

Answer: A Level: Medium LO: 4

  1. While German tax computations are based on financial accounting standards, this is not true in the United Kingdom. Why doesn’t the U.K. base its tax code on financial accounting standards?
  2. A) The United Kingdom tries to avoid being like Germany whenever it can.
  3. B) The United Kingdom had a tax code long before it had financial accounting standards.
  4. C) Financial accounting standards in the United Kingdom are too conservative to be practical for tax purposes.
  5. D) Germany follows the directives of the European Union, whereas the United Kingdom has not adopted the directives of the EU.

Answer: B Level: Medium LO: 4

  1. Why do German companies willingly take a conservative position in calculating income?
  2. A) To minimize tax
  3. B) To keep employees from asking for higher wages.
  4. C) To stabilize income from year to year for dividend purposes.
  5. D) All of the above

Answer: D Level: Medium LO: 1

  1. Under what circumstance should a German company prepare its financial statements under German GAAP rather than international financial reporting standards?
  2. A) Reporting to banks
  3. B) Reporting consolidated financial statements
  4. C) Calculating tax
  5. D) German GAAP should always be used instead of IRFS.

Answer: C Level: Medium LO: 5

  1. Why does German accounting practice differ from IFRS?
  2. A) German accounting rules are much more specific in most areas than IFRS.
  3. B) German accounting law is less specific in some respects than IFRS.
  4. C) Germany has not adopted a policy on accounting standard harmonization.
  5. D) Germany is not interested in foreign direct investment.

Answer: B Level: Medium LO: 5

  1. The Japanese economy is dominated by “keiretsu.” What are these?
  2. A) warlords that control Japanese wealth
  3. B) local governmental entities
  4. C) corporate conglomerates
  5. D) joint ventures with foreign investors

Answer: C Level: Easy LO: 1

  1. What links the components of a Japanese keiretsu?
  2. A) a governmental agency
  3. B) a common industry affiliation
  4. C) a common market
  5. D) a bank

Answer: D Level: Medium LO: 1

  1. Keiretsu control about one-fourth (1/4) of the assets in Japan. What cultural value is reflected in this business structure?
  2. A) professionalism
  3. B) optimism
  4. C) collectivism
  5. D) conservatism

Answer: C Level: Medium LO: 1

  1. What is the reason given for a relatively low emphasis on public disclosure of financial information in Japan?
  2. A) Significant reliance on bank credit for financing
  3. B) Long-term cross-corporate ownership of stock
  4. C) Income is not viewed as a measure of corporate performance.
  5. D) All of the above

Answer: D Level: Medium LO: 1

  1. Why is public disclosure of financial information less important in Japan than in other industrialized countries?
  2. A) Very few corporations
  3. B) Undeveloped stock exchange
  4. C) Heavy reliance on bank financing.
  5. D) Strong government control of corporations

Answer: C Level: Medium LO: 1

  1. Which body has the primary responsibility for establishing accounting standards in Japan?
  2. A) Japanese Institute of Certified Public Accountants (JICPA)
  3. B) Japanese Accounting Association (JAA)
  4. C) Japan’s Ministry of Finance (MoF)
  5. D) International Accounting Standards Board (IASB)

Answer: C Level: Easy LO: 3

  1. How does the cultural value of collectivism explain the status of auditors in Japanese society?
  2. A) Collectivism places great importance on individual responsibility, giving auditors a high status in Japanese society.
  3. B) Since outsiders are not trusted in the Japanese culture, independent auditors in Japan do not enjoy the status of American auditors.
  4. C) Because individual achievement is a hallmark of collectivism, auditors are commonly found at the top of Japanese corporations.
  5. D) Collectivism values the ability of individuals to collect resources for themselves, so auditors who achieve distinction in their profession are highly regarded.

Answer: B Level: Medium LO: 2

  1. The population of Japan is about 1/3 the population of the United States. There are approximately 250,000 CPAs in the U.S. What is the approximate number of CPAs in Japan?
  2. A) 250,000
  3. B) 100,000
  4. C) 85,000
  5. D) 15,000

Answer: D Level: Medium LO: 2

  1. Accounting and financial reporting in Japan is regulated by its Commercial Code, which is patterned after the commercial code of what country?
  2. A) United States of America
  3. B) United Kingdom
  4. C) Germany
  5. D) France

Answer: C Level: Medium LO: 3

  1. What must large Japanese corporations report for years ending after 2004 due to recent amendments to the Japanese commercial code?
  2. A) Statement of Changes in Financial Position
  3. B) Consolidated Financial Statements
  4. C) Retained Earnings Statement
  5. D) Cash Flow Statement

Answer: B Level: Medium LO: 4

  1. The Securities and Exchange Law (SEL) is one of the regulators of accounting and financial reporting in Japan. The SEL is modeled on the regulations of what U.S. entity?
  2. A) Securities and Exchange Commission
  3. B) Financial Accounting Standards Board
  4. C) American Institute of Certified Public Accountants
  5. D) American Accounting Association

Answer: A Level: Easy LO: 3

  1. What was the “Big Bang” in Japan?
  2. A) The stock market crash of 1929.
  3. B) The unprecedented decline in exports and stock prices in the late 1980’s.
  4. C) The changes in accounting regulation that occurred in the late 1990’s
  5. D) The growth of the Japanese economy from the 1950’s to the 1980’s.

Answer: C Level: Medium LO: 1

  1. In Japan, what is the most commonly used ending date for accounting periods?
  2. A) December 31
  3. B) March 31
  4. C) June 30
  5. D) September 30

Answer: B Level: Medium LO: 4

  1. Unlike IFRS, under Japanese GAAP, inventories may be valued at:
  2. A) cost
  3. B) market
  4. C) lower of cost or net realizable value
  5. D) lower of cost or market

Answer: A Level: Medium LO: 5

  1. How does Japanese GAAP differ from IFRS with respect to costs of testing a fixed asset prior to use?
  2. A) Japanese GAAP requires expensing of pre-operating costs, whereas IFRS allows capitalization.
  3. B) Japanese GAAP requires expensing of pre-operating costs, where IFRS requires capitalization.
  4. C) Japanese GAAP requires capitalizing pre-operating costs, whereas IFRS requires expensing.
  5. D) Japanese GAAP allows capitalizing pre-operating costs, whereas IFRS requires expensing.

Answer: D Level: Hard LO: 5

  1. Privatization of Mexican businesses has been encouraged by:
  2. A) North American Free Trade Agreement (NAFTA).
  3. B) Governmental attempts to improve long-term economic growth.
  4. C) Loosening restrictions on foreign investment.
  5. D) All of the above.

Answer: D Level: Medium LO: 1

  1. What type of economic system presently exists in Mexico?
  2. A) socialist market
  3. B) Communist
  4. C) free market
  5. D) planned economy

Answer: C Level: Medium LO: 1

  1. Mexican corporations may issue three types of stock. Series A stock can only be owned by Mexican nationals. These shares must constitute at least what percentage of corporate voting rights?
  2. A) 51%
  3. B) 49%
  4. C) 25%
  5. D) 10%

Answer: A Level: Medium LO: 1

  1. Mexico has had a professional association of public accountants since what year?
  2. A) 1821
  3. B) 1917
  4. C) 1929
  5. D) 1964

Answer: B Level: Medium LO: 2

  1. By what title are professional accountants in Mexico known?
  2. A) Certified Public Accountant (CPA)
  3. B) Chartered Accountant (CA)
  4. C) Contador Publico Certificado (CPC)
  5. D) Mexican Certified Public Accountant (MCPA)

Answer: C Level: Easy LO: 2

  1. Companies listed on the stock exchange in Mexico City must provide annual audited financial statements to:
  2. A) The public through the national media.
  3. B) Shareholders only.
  4. C) Government only.
  5. D) Shareholders and the Government.

Answer: A Level: Medium LO: 4

  1. What is the most important federal agency regulating disclosure by publicly traded companies in Mexico?
  2. A) Mexican Institute of Public Accountants (MIPA)
  3. B) National Banking and Securities Commission (NBSC)
  4. C) Bolsa Mexicana de Valores (BMV)
  5. D) National Executive Committee (NEC)

Answer: B Level: Medium LO: 3

  1. What entity is primarily responsible for setting accounting and financial reporting standards in Mexico?
  2. A) Mexican Institute of Public Accountants (MIPA)
  3. B) National Banking and Securities Commission (NBSC)
  4. C) Bolsa Mexicana de Valores (BMV)
  5. D) International Accounting Standards Board

Answer: A Level: Medium LO: 3

  1. Which of the following is NOT considered GAAP in Mexico?
  2. A) MIPA Bulletins
  3. B) MIPA Interpretations
  4. C) International Financial Reporting Standards
  5. D) NBSC Statements on Accounting Practice

Answer: D Level: Medium LO: 3

  1. Which of the following statements is NOT required in Mexico?
  2. A) Statement of Financial Position
  3. B) Statement of Cash Flows
  4. C) Statement of Changes in Financial Position
  5. D) Income Statement

Answer: B Level: Medium LO: 5

  1. What is the greatest difference between Mexican accounting practice and American accounting practice?
  2. A) The method of calculating earnings per share
  3. B) The lack of conservatism in Mexican accounting standards
  4. C) The treatment of inflation effects on financial statements
  5. D) The accounting for exchange rate gains and losses

Answer: C Level: Medium LO: 4

  1. What currency is used in Mexico?
  2. A) Peseta
  3. B) Peso
  4. C) Mexican dollar
  5. D) Bolivar

Answer: B Level: Easy LO: 1

  1. Why do Mexican accounting standards require all nonmonetary assets and liabilities to be restated in terms of purchasing power of the Mexican currency?
  2. A) So that exchange rate gains and losses are properly reflected in the financial statement
  3. B) In order to reflect the historical cost of the assets and financing associated with these assets
  4. C) To reflect the high rates of inflation that Mexico has experienced
  5. D) Because historical costs overstate the value of the assets and corresponding claims on resources.

Answer: C Level: Medium LO: 4

  1. What is the main source of corporate financing in the United Kingdom?
  2. A) banks
  3. B) capital markets
  4. C) government grants
  5. D) royal family

Answer: B Level: Easy LO: 1

  1. The first professional accounting association in the United Kingdom was established in 1853 in what city?
  2. A) London
  3. B) Belfast
  4. C) Edinburgh
  5. D) Canterbury

Answer: C Level: Medium LO: 2

  1. Of the following British professional accounting associations, whose members MAY NOT sign an audit report?
  2. A) ICAEW
  3. B) ACCA
  4. C) CIPFA
  5. D) ICAS

Answer: C Level: Hard LO: 2

  1. In what way does the public accounting profession in the United Kingdom differ from the profession in the United States?
  2. A) Public accountants in the K. may not sign audit reports.
  3. B) Auditors in the K. do not need to be independent from their audit clients.
  4. C) Public accountants in the K. are paid by the government for their audit services.
  5. D) Public accountants in the K. are not required to have a university education.

Answer: D Level: Medium LO: 2

  1. What reasons have been given by the Institute of Chartered Accountants in England and Wales (ICAEW) for following a principles-based approach to setting accounting standards?
  2. A) Lawmakers and standard-setters cannot anticipate every situation.
  3. B) Professions should be about exercising judgment and integrity.
  4. C) The profession needs to attract people of high intellect.
  5. D) All of the above.

Answer: D Level: Medium LO: 2

  1. Until recently, regulation of accounting practice in the United Kingdom had traditionally been left to:
  2. A)
  3. B) the accounting profession.
  4. C) the securities exchange commission.
  5. D) None of the above.

Answer: B Level: Medium LO: 3

  1. Since the 1980s accounting regulation in the United Kingdom has been legislated more than it had been previously. What is the primary cause for this change from professional self-regulation to government regulation?
  2. A) High profile scandals in the British business community.
  3. B) Influence of the United States on the ICAEW
  4. C) Directives from the European Union
  5. D) All of the above.

Answer: C Level: Medium LO: 3

  1. What is the primary role of the Financial Reporting Council in the United Kingdom?
  2. A) Compliance oversight
  3. B) Setting standards for accounting practice
  4. C) Policy over the accounting standard setting process
  5. D) All of the above

Answer: D Level: Hard LO: 3

  1. What is the policy for accounting harmonization in the United Kingdom?
  2. A) Eventual adoption of standards promulgated by the IASB
  3. B) Alignment of U.K. GAAP with IFRS where practical
  4. C) Rejection of IASB pronouncements
  5. D) Alignment of K. GAAP with U.S. GAAP

Answer: B Level: Medium LO: 5

  1. Financial statements in the United Kingdom are supposed to provide a “true and fair view” of the firm’s financial position and results of operations. How does U.K. GAAP define “true and fair view?”
  2. A) Objective, free from bias
  3. B) Statements must comply with accounting standards.
  4. C) Relevant
  5. D) K. GAAP does not define “true and fair view.”

Answer: D Level: Medium LO: 4

  1. What set of standards must companies listed on the stock exchange in the United Kingdom use for consolidated financial statements?
  2. A) K. GAAP
  3. B) K. GAAP or U.S. GAAP
  4. C) IFRS standards adopted by the European Union
  5. D) There is no specific requirement.

Answer: C Level: Hard LO: 4

  1. How is goodwill handled for U.K. GAAP purposes?
  2. A) Expensed right away
  3. B) Capitalized and never amortized
  4. C) Amortized at the firm’s choice
  5. D) There is no specific requirement.

Answer: C Level: Medium LO: 4

  1. IAS 38 requires the capitalization of development expenses. How does U.K. GAAP handle development expenses?
  2. A) Expensed right away
  3. B) Permits capitalization
  4. C) Amortized at the firm’s choice
  5. D) There is no specific requirement.

Answer: B Level: Medium LO: 4, 5

  1. What is a key component of the U.K.’s true and fair view?
  2. A) Professional judgment
  3. B) Prudence
  4. C) Historical cost
  5. D) Loss bias

Answer: A Level: Medium LO: 4

  1. Accounting in Mexico is oriented towards fairness, not:
  2. A) Professional judgment
  3. B) Legal compliance
  4. C)
  5. D) Taxable income.

Answer: B Level: Medium LO: 4

Chapter 07

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Multiple Choice Questions

  1. According to the World Trade Organization, what was the size of international trade in 2008?
  2. A) $7,000,000,000 (7 billion dollars)
  3. B) $70,000,000,000 (70 billion dollars)
  4. C) $37,000,000,000 (37 billion dollars)
  5. D) $16,000,000,000,000 (16 trillion dollars)

Answer: D Level: Easy LO: 1

  1. In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports?
  2. A) 25%
  3. B) 75%
  4. C) 35%
  5. D) 50%

Answer: B Level: Medium LO: 1

  1. What is a “foreign exchange rate?”
  2. A) the price to buy a foreign currency
  3. B) the price to buy foreign goods
  4. C) the difference between the price of goods in a foreign currency and the price in a domestic currency
  5. D) the cost to hold all monetary assets in a single currency

Answer: A Level: Easy LO: 1

  1. Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?
  2. A) This was a period when the world economy was very stable.
  3. B) There was very little growth in the world economy between 1945 and 1973.
  4. C) Countries linked their currency to the U.S. dollar, which was backed by gold reserves.
  5. D) Most currencies were pegged to the British pound, which could be converted to sterling silver.

Answer: C Level: Medium LO: 2

  1. The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?
  2. A) Country X is using the Euro.
  3. B) Country X has pegged its currency to the currency of Country Y.
  4. C) Country X has an undesirable currency.
  5. D) Country X allows its currency to float relative to the currency of Country Y.

Answer: B Level: Medium LO: 2

  1. When a currency is allowed to increase or decrease in value relative to other currencies, the currency is said to:
  2. A) be pegged to another currency.
  3. B) be less valuable.
  4. C)
  5. D)

Answer: C Level: Easy LO: 2

  1. For an upcoming trip, Pat wants to buy Euros at the local bank when the current exchange rate quoted on http://www.OANDA.com was $1.563 per €1. What should Pat plan to pay for €1,000?
  2. A) exactly $1,563
  3. B) more than $1,563
  4. C) about $640
  5. D) less than $640

Answer: B Level: Medium LO: 2

  1. Which of the following statements is true about the Euro?
  2. A) It is the currency used by all countries in the European Union.
  3. B) It is pegged to the U.S. dollar.
  4. C) It is the currency required to be used in financial reporting under international accounting standards.
  5. D) None of the statements above is true.

Answer: D Level: Medium LO: 1

  1. The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:
  2. A) the spot rate.
  3. B) the exact rate.
  4. C) the forward rate.
  5. D) the retail rate.

Answer: A Level: Easy LO: 2

  1. The number of U.S. dollars ($) today to buy one U.K. pound (£) six months from now is called:
  2. A) the spot rate
  3. B) the exact rate
  4. C) the forward rate
  5. D) the prime rate

Answer: C Level: Medium LO: 2

  1. What has occurred when one company arranges to buy a foreign currency some time in the future, at an exchange rate quoted today?
  2. A) The company has purchased a foreign currency option.
  3. B) The company has entered a forward contract.
  4. C) The currency has been devalued.
  5. D) None of the above

Answer: B Level: Medium LO: 4

  1. What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today?
  2. A) The company has acquired a call option.
  3. B) The company has entered a forward contract.
  4. C) The currency has appreciated relative to the dollar.
  5. D) The company has acquired a put option.

Answer: A Level: Medium LO: 4

  1. What is a “strike price?”
  2. A) the exchange rate that is used to buy a foreign currency today
  3. B) the price that will be paid for goods in a forward contract
  4. C) the exchange rate that will be used if a foreign currency option is executed
  5. D) the difference between the wholesale rate and the retail rate for foreign currency exchange

Answer: C Level: Medium LO: 4

  1. What term is used for an option with a positive intrinsic value?
  2. A) put option
  3. B) over the counter
  4. C) in the money
  5. D) call option

Answer: C Level: Medium LO: 4

  1. What is the intrinsic value of a foreign currency option?
  2. A) the difference between the spot rate and the strike price
  3. B) the gain on the option if it was exercised immediately
  4. C) the chance that a currency will rise over time to make the option in the money
  5. D) the difference between a call option and a put option

Answer: B Level: Hard LO: 4

  1. What is a foreign currency transaction?
  2. A) It is another name for an international transaction.
  3. B) It is a transaction that involves payment at a date sometime in the future.
  4. C) It is a business deal denominated in a currency other than a company’s domestic currency.
  5. D) It is an economic event measured in a currency other than U.S. dollars.

Answer: C Level: Hard LO: 3

  1. What is foreign exchange risk exposure?
  2. A) the possibility of a loss because of changes in the value of a foreign currency
  3. B) losses caused by paying for purchased goods in a foreign currency
  4. C) losses caused by receiving payment in a foreign currency for goods sold
  5. D) All of the above

Answer: A Level: Hard LO: 2

  1. Under U.S. GAAP, what method is required to account for foreign currency transactions?
  2. A) A one-transaction perspective must be used.
  3. B) The two-transaction perspective must be used.
  4. C) A sale is not recorded until payment is received and converted to U.S. dollars.
  5. D) A sale is not recorded until payment is received in the foreign currency.

Answer: B Level: Medium LO: 3

  1. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?
  2. A) A one-transaction perspective must be used.
  3. B) The two-transaction perspective must be used.
  4. C) A sale is not recorded until payment is received and converted to U.S. dollars.
  5. D) A sale is not recorded until payment is received in the foreign currency.

Answer: B Level: Medium LO: 3

  1. Why must the two-transaction approach be used for recording foreign currency transactions under U.S. GAAP?
  2. A) The two-transaction approach is required under IFRS.
  3. B) S. GAAP requires conservatism in financial reporting.
  4. C) All other methods are excessively complicated to use and therefore obscure the essence of the transaction.
  5. D) Management made two decisions: one to sell and another to extend credit in a foreign currency.

Answer: D Level: Medium LO: 3

  1. Under U.S. GAAP, foreign exchange losses should be recorded by:
  2. A) debiting “Foreign Exchange Loss”.
  3. B) crediting “Foreign Exchange Loss”.
  4. C) debiting “Retained Earnings”.
  5. D) debiting “Sales Revenue”.

Answer: A Level: Medium LO: 3

  1. What is “asset exposure” to foreign exchange risk?
  2. A) the possibility that an asset denominated in U.S. dollars will decline in value because of changes in the foreign exchange rate
  3. B) the possibility that an asset denominated in a foreign currency will change in value because of a change in the foreign exchange rate
  4. C) the loss resulting from an import purchase when a foreign currency appreciates
  5. D) the loss resulting from an import purchase when a foreign currency depreciates

Answer: B Level: Hard LO: 2

  1. Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?
  2. A) They should be deferred on the Balance Sheet until the cash is paid.
  3. B) They should not be recognized until cash is received to complete the transaction.
  4. C) They should be recorded on the Income Statement in the period the exchange rate changes.
  5. D) They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized.

Answer: C Level: Medium LO: 3

  1. Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains?
  2. A) They should be deferred on the Balance Sheet until cash is received.
  3. B) The principle of conservatism requires that they should never be recognized.
  4. C) They should not be recorded until cash is received and the exchange transaction is completed.
  5. D) They should be recognized in income on the date the exchange rate changes.

Answer: D Level: Medium LO: 3

  1. Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?
  2. A) Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it.
  3. B) It violates the principle of conservatism.
  4. C) It is not objective.
  5. D) There is no reliable method for measuring unrealized foreign exchange gains.

Answer: B Level: Medium LO: 3

  1. A non-cancelable order of a product that specifies the foreign currency price and date of delivery is called a:
  2. A)
  3. B)
  4. C) foreign currency firm commitment.
  5. D) international transaction.

Answer: C Level: Easy LO: 4

  1. What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?
  2. A) They may be shown on the balance sheet or they may be treated as off-balance sheet investments.
  3. B) They must be shown on the balance sheet at fair value.
  4. C) They must be shown on the balance sheet at historical cost.
  5. D) They may be shown on the balance sheet at historical cost or at net realizable value.

Answer: B Level: Medium LO: 6

  1. What information is needed to determine the fair value of a foreign currency forward contract?
  2. A) The forward rate at the date the contract was entered
  3. B) The current forward rate for a contract that matures on the same dates as the forward contract that was entered into
  4. C) A discount rate to determine the present value of the contract
  5. D) All of the above information is needed

Answer: D Level: Medium LO: 6

  1. How is the fair value of a foreign currency option calculated?
  2. A) by using the Box-Jenkins technique
  3. B) using the principles of the Black-Scholes pricing model
  4. C) through an arms-length transaction
  5. D) using quotes given daily in the Wall Street Journal

Answer: B Level: Medium LO: 6

  1. Under U.S. GAAP, where are changes in the fair value of derivatives reported?
  2. A) as part of “Accumulated Other Comprehensive Income” on the Balance Sheet
  3. B) They are not recognized until the options are exercised.
  4. C) Retained Earnings
  5. D) None of the above

Answer: A Level: Hard LO: 6

  1. What is “hedge accounting?”
  2. A) any record keeping related to purchase, sale, or valuation of derivatives
  3. B) recording options and other derivatives on the Balance Sheet
  4. C) matching gains or losses from hedging with losses or gains from the risk being hedged
  5. D) using multiple accounting methods to offset the effect of foreign currency exchange

Answer: C Level: Medium LO: 5

  1. What kind of exposure exists for recognized foreign currency assets and liabilities?
  2. A) fair value exposure
  3. B) cash flow exposure
  4. C) both fair value exposure and cash flow exposure
  5. D) neither fair value exposure nor cash flow exposure

Answer: B Level: Hard LO: 5

  1. What kind of exposure exists for foreign currency firm commitments?
  2. A) fair value exposure
  3. B) cash flow exposure
  4. C) both fair value exposure and cash flow exposure
  5. D) neither fair value exposure nor cash flow exposure

Answer: C Level: Hard LO: 5

  1. Under U.S. GAAP, to qualify for hedge accounting which of the following conditions must be met?
  2. A) There must be formal documentation of the hedging relationship.
  3. B) A derivative must be used specifically to hedge fair value exposure or cash flow exposure.
  4. C) The hedge must be effective.
  5. D) All of the above must be met in order to qualify for hedge accounting.

Answer: D Level: Medium LO: 5

  1. Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge?
  2. A) The hedged asset or liability is adjusted to fair value.
  3. B) Foreign exchange gains or losses on the hedged asset or liability are recorded in net income.
  4. C) Increases or decreases in a derivative’s fair value are recorded in accumulated other comprehensive income.
  5. D) Gains or losses resulting from adjusting the fair value of a derivative are recorded in net income.

Answer: C Level: Hard LO: 6

  1. Which of the following statements is true about hedge accounting under U.S. GAAP?
  2. A) Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges.
  3. B) If a derivative qualifies as a cash flow hedge, a company may choose to account for it as a fair value hedge.
  4. C) If a derivative is considered a cash flow hedge, it must be accounted for as such.
  5. D) Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date.

Answer: B Level: Hard LO: 5

  1. How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?
  2. A) They should be carried on the balance sheet until the contract is completed.
  3. B) They should be included in income in the period the derivative is acquired.
  4. C) They should be amortized over the life of the forward contract.
  5. D) None of the above.

Answer: C Level: Hard LO: 6

  1. Under U.S. GAAP, what method of amortizing discounts or premiums on forward contracts must be used?
  2. A) effective interest rate method
  3. B) straight line method
  4. C) Companies may choose effective interest rate method or straight line method.
  5. D) Some other method must be used.

Answer: C Level: Medium LO: 6

  1. How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies?
  2. A) All assets and liabilities of S. companies must be recorded in U.S. dollars.
  3. B) Conservatism would dictate that liabilities should be recorded in the currency in which they are payable, but assets should be recorded in U.S. dollars, regardless of what currency will be received.
  4. C) There should be separate receivable and payable accounts for each currency that is used by the company.
  5. D) The company should choose any one currency to use for recording receivable and payables so that there is consistency in the accounts.

Answer: C Level: Medium LO: 3

  1. On May 1, 20×1, Usstar purchased a put option to sell £50,000 on April 30, 20×2 at a strike price equal to $2, which was the spot rate on May 1, 20×1. Usstar paid a premium of $0.01 per pound. How should the option be recorded on May 1, 20×1?
  2. A) Debit FOREIGN CURRENCY OPTION for $100,500.
  3. B) Credit FOREIGN CURRENCY OPTION for $100,500.
  4. C) Debit FOREIGN CURRENCY OPTION for $500.
  5. D) Debit HEDGE EXPENSE for $500.

Answer: C Level: Medium LO: 6

  1. What was the effect of introducing the Euro with respect to hedging?
  2. A) Euro-zone trading partners no longer need to hedge each other’s currencies.
  3. B) Accounts receivable from sales to a customer in one Euro-zone country acts as a natural hedge against accounts payable to a supplier in another Euro-zone country for companies outside the Euro-zone.
  4. C) There are fewer currencies to hedge.
  5. D) All of the above

Answer: D Level: Medium LO: 4

  1. Northland Corporation recorded £1,000,000 in Accounts Receivable for sales to customers in the United Kingdom and recorded Accounts Payable of 2,000,000 yuan for product purchased from China. If Northland recorded a foreign currency exchange loss on its receivables and a foreign currency gain on its payables, what must have happened to each currency?
  2. A) Yuan appreciated, Pound depreciated
  3. B) Yuan depreciated, Pound appreciated
  4. C) Yuan appreciated, Pound appreciated
  5. D) Yuan depreciated, Pound depreciated

Answer: D Level: Medium LO: 3

Use the following to answer questions 43-45:

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20×1 for £100,000 with payment required on April 1, 20×1. Relevant exchange rates are:

The discount factor corresponding to the company’s incremental borrowing rate for 6 months is 0.95.

  1. Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20×1 income statement?
  2. A) Loss $1,000
  3. B) Loss $2,000
  4. C) Gain $1,000
  5. D) Gain $1,900

Answer: B Level: Medium LO: 3

  1. Assume that Amazing Corporation enters a forward contract on October 1, 20×1 to sell £100,000 six months hence, on April 1, 20×2. How should Amazing Corporation report the forward contract on its December 31, 20×1 financial statements?
  2. A) Asset $1,950
  3. B) Liability $1,950
  4. C) Asset $1,000
  5. D) Asset $950

Answer: D Level: Medium LO: 6

  1. What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract?
  2. A) hedge of an unrecognized foreign currency firm commitment
  3. B) hedge of a recognized foreign-currency-denominated asset
  4. C) hedge of a forecast foreign-currency-denominated transaction
  5. D) hedge of net investment in foreign operations

Answer: B Level: Medium LO: 4

Use the following to answer questions 46-47:

On November 1, 20×1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:

The company’s incremental borrowing rate provides a discount rate of 0.975 for three months.

  1. If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company’s December 31, 20×1 financial statements?
  2. A) $22,000 loss
  3. B) $21,450 loss
  4. C) $8,000 gain
  5. D) $7,800 gain

Answer: A Level: Medium LO: 3

  1. Assume that on November 1, 20×1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20×2. How should Zamfir report the forward contract on December 31, 20×1?
  2. A) $8,000 asset
  3. B) $7,800 asset
  4. C) $22,000 asset
  5. D) $7,800 liability

Answer: B Level: Medium LO: 6

  1. What is the primary difference between a cash flow hedge and a fair value hedge?
  2. A) The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable.
  3. B) The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable.
  4. C) The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable.
  5. D) The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

Answer: C Level: Hard LO: 5

Use the following to answer questions 49-52:

On December 1, 20×1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20×2 to pay. On December 1, 20×1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20×2, which was the spot rate on December 1, 20×1. On December 31, 20×1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees.

  1. What is the fair value of the option on December 1, 20×1?
  2. A) $0
  3. B) $500
  4. C) $400
  5. D) $10,000

Answer: B Level: Medium LO: 6

  1. What is the fair value of the option on December 31, 20×1?
  2. A) $0
  3. B) $500
  4. C) $400
  5. D) $10,000

Answer: C Level: Medium LO: 6

  1. What is the foreign currency exchange gain or loss on December 31, 20×1?
  2. A) $50,000 loss
  3. B) $50,000 gain
  4. C) $10,000 gain
  5. D) $10,000 loss

Answer: B Level: Medium LO: 3

  1. If the spot rate on March 1, 20×2 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day?
  2. A) $15,000 gain
  3. B) $15,000 loss
  4. C) $35,000 gain
  5. D) $35,000 loss

Answer: D Level: Medium LO: 3

  1. A bank exchanging foreign currency makes its profit in what manner?
  2. A) on the difference between the spot rate and the foreign rate
  3. B) A bank is forbidden, by law, to charge a premium in foreign currency exchange.
  4. C) on the present value of the forward rate discounted to the date an option is purchased
  5. D) on the difference between the retail rate and the wholesale rate

Answer: D Level: Medium LO: 1

  1. King’s Bank, a British company, purchases market research services from Harris Interactive, a U.S. company, for a contract price to be paid in U.S. dollars when the report is delivered three months later. How would King’s Bank like to see the exchange rate move, assuming it isn’t hedging the transaction.
  2. A) It hopes that the U.S. dollar appreciates in value against the British pound.
  3. B) It hopes that the British pound appreciates in value against the U.S. dollar.
  4. C) It makes no difference, since they are the customer and the sale takes place in the K.
  5. D) It hopes that there is no change between the spot rate and the forward rate.

Answer: B Level: Medium LO: 1

  1. In hedge accounting, which of the following items is a bona fide exposure?
  2. A) temporal exposure
  3. B) fair value exposure
  4. C) derivative exposure
  5. D) forward contract exposure

Answer: B Level: Medium LO: 6

  1. When accounting for forward contracts, what is meant by the term “executory contract”?
  2. A) No cash changes hands.
  3. B) The CEO of the company is the only one authorized to engage in the contract.
  4. C) There must be a price paid for the option.
  5. D) The contract is not valid unless both parties sign it.

Answer: A Level: Medium LO: 6

  1. A noncancelable sales order that specifies foreign currency price and date of delivery is known as a:
  2. A)
  3. B) foreign currency firm commitment.
  4. C) forward contract.
  5. D) put option.

Answer: B Level: Medium LO: 3

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