Deck 18: Accounting for Foreign Currency

Question 1

The currency of the primary economic environment in which the entity operates is known as the:

A)functional currency
B)primary currency
C)environment currency
D)operational currency

Answer 1

A

Question 2

Which of the following statements is incorrect?

A)borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds
B)a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale
C)financial assets and inventories that are manufactured or otherwise produced over a short period of time,and assets that are ready for their intended use or sale when acquired,are not qualifying assets
D)financial assets and inventories that are manufactured or otherwise produced over a short period of time,and assets that are ready for their intended use or sale when acquired,are qualifying assets

Answer 2

D

Question 3

Explain the AASB 121 requirements for the translation of financial statements of foreign operations.

Answer 3

The second major way in which an entity can conduct foreign activities is by conducting foreign operations via a foreign division,branch,subsidiary,associate,joint venture or similar arrangement.In these situations,the foreign operation's functional currency will not be the Australian dollar.The problem is therefore how to incorporate the results and financial position of the foreign operation with those of the Australian reporting entity which,of course,will usually have the Australian dollar as its presentation currency.The financial statements of those foreign operations will therefore need to be translated from the foreign functional currency into the Australian presentation currency so they can then be consolidated for purposes of preparing the Australian economic entity's accounts.Determination is required of the exchange rates to be used in translating the individual income,expense,asset,liability and equity items from the foreign functional currency into the Australian presentation currency.In this regard,AASB 121 para.39 specifies the following: The results and financial position of an entity ...shall be translated into a different presentation currency using the following procedures: a()assets and liabilities for each statement of financial position presented shall be translated at the closing rate at the date of that statement of financial position; b()income and expenses for each statement of comprehensive income or separate income statement presented (i.e.including comparatives)shall be translated at exchange rates at the dates of the transactions; and c()all resulting exchange differences shall be recognised in other comprehensive income.

Question 4

Examples of monetary assets include:

A)cash
B)loans receivable
C)debtors
D)all of the above

Question 5

An asset that necessarily takes a substantial period of time to get ready for its intended use or sale is known as a/an:

A)non- current asset
B)qualifying asset
C)period asset
D)none of the above

Question 6

According to AASB 121,assets and liabilities for each statement of financial position presented shall be translated at:

A)exchange rates at the dates of the original transactions
B)the closing rate at the date of that statement of financial position
C)the spot rate at the start of the financial year
D)none of the above

Question 7

Which of the following statements is incorrect?

A)the presentation currency is the currency in which the financial statements are presented
B)the functional currency of the entity or foreign operation will normally be obvious to management of an entity or foreign operation.
C)individual entities and foreign operations must determine their functional currency
D)the functional currency is the currency in which the financial statements are presented

Question 8

Explain the requirements in AASB 121 for subsequent adjustments to the recording of foreign currency transactions.

Question 9

A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency,including transactions arising when an entity:

A)borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency
B)acquires or disposes of assets,or incurs or settles liabilities,denominated in a foreign currency
C)buys or sells goods or services whose price is denominated in a foreign currency
D)all of the above

Question 10

Foreign operations can be conducted via which of the following?

A)foreign division
B)foreign joint venture
C)foreign subsidiary
D)all of the above

Question 11

Discuss the concept of hedging and what is necessary for it to be effective.

Question 12

In determining an entity's functional currency,factors to be considered include which of the following?

A)the currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services
B)the currency that mainly influences sales prices for goods and services
C)the currency in which receipts from operating activities are usually retained
D)all of the above

Question 13

Which of the following statements is correct?

A)hedging transactions involve taking a position in a foreign currency with the aim of profiting from movements in exchange rates for that currency
B)hedging transactions can only relate to specific commitments
C)hedging transactions can relate to specific commitments or general commitments
D)hedging transactions can only relate to general commitments

Question 14

The ratio of exchange for immediate delivery of currencies to be exchanged is known as an:

A)exchange rate
B)interest rate
C)exchange ratio
D)none of the above

Question 15

Which of the following statements is incorrect?

A)income and expenses for each statement of comprehensive income presented must be translated at exchange rates at the dates of the transactions
B)assets and liabilities for each statement of financial position presented must be translated at the closing rate at the date of that statement of financial position
C)exchange differences resulting from translating assets,liabilities,income and expenses must be recognised in other comprehensive income
D)exchange differences resulting from translating assets,liabilities,income and expenses must be recognised directly in equity

Question 16

Engaging in activities that avoid or minimise possible adverse financial effects arising from exchange rate movements is known as:

A)consolidation
B)speculating
C)insurance
D)hedging

Question 17

Depending on the circumstances,AASB 123 considers which of the following are qualifying assets?

A)power generation facilities
B)investment properties
C)intangible assets
D)all of the above

Question 18

For translation of foreign currency transactions,AASB 121 requires use of the:

A)spot exchange rate at the date of the foreign currency transaction
B)spot exchange rate at the start of the financial year
C)spot exchange rate at the end of the financial year
D)none of the above

Question 19

The main difficulties in accounting for foreign currency transactions,investments and activities arise because:

A)transactions occur over a period,yet the need to report on those transactions occurs at a different time
B)some transactions occur over lengthy periods of time,during which there may be substantial exchange rate movements
C)foreign exchange transactions may often involve additional parties
D)all of the above

Question 20

A hedge is designed to cover overall net actual or anticipated currency exposures,such as might arise from the activities of a branch or subsidiary of the entity located in another country is referred to as a/an:

A)fixed hedge
B)general hedge
C)exposure hedge
D)specific hedge

Question 21

Explain the AASB 121 requirements for the initial recording of foreign currency transactions.

Question 22

Define qualifying assets and explain the accounting requirements relating to them.