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Test Bank for International Accounting 5140 (6th Edition by Timothy Doupnik)
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Test Bank for International Accounting 5140 (6th Edition by Timothy Doupnik)
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Test Bank for International Accounting5140 (6th Edition by Timothy Doupnik)
Cash Flow Exposure - ANSExists if changes in exchange rates can affect the amount of cash
flow to be realized from a transaction, with changes in cash flow reflected in net income. A cash
flow exposure exists for 1) recognized foreign currency assets and liabilities, 2) Foreign
currency firm commitments, 3) Forecasted foreign currency transations.
Independent float - ANSCurrency value allowed to move freely with little government
intervention.
Pegged to another currency - ANScurrency value fixed (pegged) in terms of a particular foreign
currency (e.g., U.S. Dollar), and central bank intervenes to maintain the exchange rate.
European Monetary System (Euro) - ANStwelve countries use a single currency, which floats
against other currencies such as the U.S. Dollar.
Spot Rate - ANStoday's price for purchasing or selling (bid or ask) a foreign currency.
Forward Rate - ANStoday's price for purchasing or selling a foreign currency for some future
date.
Premium - ANSwhen the forward rate is greater than the spot rate for a particular day.
Discount - ANSwhen the forward rate is less than the spot rate for a particular day.
Hedging - ANSProtecting against losses from exchange rate fluctuating.
Foreign currency forward contract - ANSan agreement to buy or sell foreign currency at a future
date.
Foreign currency Option - ANSthe Right to buy or sell foreign currency for a period of time.
Gives you the right, but not the obligation, to trade foreign currency for some period.
Strike Price - ANSthe exchange rate at which currency will be exchanged when option is
exercised.
Option Premium - ANScost of purchasing the option, which is a function of the option's intrinsic
value and time value.
, Intrinsic value - ANSis the gain that could be made by immediate exercise of the option.
Time value - ANSthe value that derives from the fact that the currency value could increase
during the remainder of the option period.
Export Sale - ANSa company sells to a foreign customer and later receives payment in the
Customer's Currency.
Import Purchase - ANSA company purchases from a foreign supplier and later pays in the
suppliers currency.
Two Transaction Perspective - ANSTreats sale and collection as two transactions.
Sale is one transaction and collection is a 2nd transaction.
Sale is based on Current Exchange Rate.
If exchange rate changes, collection if for different amount.
Difference is considered foreign exchange gain or loss.
Concepts are identical for purchase transaction
Export Sale -> Asset Exposure - ANSif foreign currency appreciates -> foreign exchange gain
if foreign currency depreciates -> foreign exchange loss
Import Purchase -> liability exposure - ANSif foreign currency appreciates -> foreign exchange
loss
if foreign currency depreciates -> foreign exchange gain
Hedge Accounting - ANSan offsetting gain or loss from the hedge is recognized in net income
during the same period as the gain or loss from the hedged item.
Cash Flow Hedge - ANSan 'accounting designation' for hedges that offset variability in cash
flows of hedged items. this type of hedge would be used to offset the risk associated with a
recognized asset or liability such as future interest payments on variable rate debt. Cash flow
hedges try to protect against this risk
Fair Value Hedgw - ANSan accounting designation for hedges that offset the variability in fair
value of hedged assets and liabilities. This specific hedge is used for an asset that has fixed
value but its value fluctuates due to supply and demand.
Current Exchange Rate - ANSis the rate of the balance sheet date.
Historical exchange rate - ANSis the rate of the date of transactions.
Current Exchange Rate - Balance Sheet Exposure - ANSwhen foreign currency appreciates, a
net asset exposure results in a positive translation adjustment.
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