Advanced Accounting 12th Edition Fischer Test Bank
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Multiple Choice
1. A U.S. company purchases medical lab equipment from a Japanese company. The Japanese company requires payment in Japanese yen. In this transaction, the yen would be referred to as the currency.
a. measurement
b. denominated
c. purchasing
d. selling
ANSWER: b
RATIONALE: The denominated currency is the currency used to settle the transaction, in this case, the yen.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-2
2. A U.S. company purchases medical lab equipment from a Japanese company. The Japanese company requires payment in Japanese yen. In this transaction, the dollar would be referred to as the currency.
a. measurement
b. denominated
c. purchasing
d. selling
ANSWER: a
RATIONALE: The measurement currency, in this case the dollar, is the currency used to record and measure the transaction.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-2
3. RWB Corporation, a U. S. based company, sold inventory to a German company on June 5 for 12,000 euros, when $1 was equal to 1.20 euros. The company received 12,000 euros in payment on August 4 when $1 was equal to 1.25 euros. RWB’s measurement currency is the U. S. dollar. RWB Corporation:
a. should record the sale for $9,600.
b. is exposed to an economic loss on the transaction.
c. has an economic gain on the transaction.
d. should record the sale for 12,000 euros.
ANSWER: b
RATIONALE: RWB is exposed to an economic loss as follows:
Sale on June 5: 12,000 euros / 1.20 = $10,000
Collected August 4: 12,000 euros / 1.25 = $ 9,600
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-2
4. RWB Corporation, a U. S. based company, bought inventory from a German company on June 5 for 12,000 euros, when $1 was equal to 1.20 euros. The company settled its payable with 12,000 euros on August 4 when $1 was equal to 1.25 euros. RWB’s measurement currency is the U. S. dollar. RWB Corporation:
a. should record the inventory for $9,600.
b. is exposed to an economic loss on the transaction.
c. has an economic gain on the transaction.
d. should record the inventory for 12,000 euros.
ANSWER: c
RATIONALE: RWB has an economic gain as follows:
Purchase on June 5: 12,000 euros / 1.20 = $10,000
Settlement on August 4: 12,000 euros / 1.25 = $ 9,600
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-2
5. The process of expressing a subsidiary’s financial statement amounts denominated in a foreign currency into amounts measured in the reporting currency of its parent company is referred to as:
a. redenomination of financial statements.
b. foreign currency translation.
c. currency consolidation.
d. foreign currency transaction.
ANSWER: b
RATIONALE: The process of expressing a subsidiary’s financial statement amounts denominated in a foreign currency into amounts measured in the reporting currency of its parent company is referred to as foreign currency translation.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-3
6. Translation of a foreign entity’s financial statements into the reporting currency of a domestic entity is typically done
a. to determine if the foreign entity is properly applying IFRS.
b. because the domestic entity has economic losses due to transactions denominated in the foreign entity’s currency.
c. to enable a parent company to include its foreign subsidiary’s financial statements in its consolidation.
d. to determine if the foreign entity is more profitable than the domestic entity.
ANSWER: c
RATIONALE: A foreign subsidiary’s financial statements must be translated into the parent company’s currency in order to be included in the parent’s consolidation.
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-3
7. Which of the following factors has not influenced the development of accounting practices in various nations?
a. the political environment
b. economic development
c. cultural background
d. all of these factors have influenced the development of accounting practices
ANSWER: d
RATIONALE: Items which have influenced the development of accounting practices in various nations include: social and cultural values, political and legal systems, business activities and economic conditions, standard-setting processes, forms of ownership and capital markets and cooperative efforts between nations.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-4
8. Which of the following is not a responsibility of the International Accounting Standards Board (IASB)?
a. To advise political bodies to enact legislation regulating international business.
b. To establish a single set of international financial reporting standards.
c. To achieve convergence of national accounting standards and IFRS.
d. All are objectives of the IASB.
ANSWER: a
RATIONALE: The IASB is responsible for establishing a single set of international financial reporting standards and achieving convergence of national accounting standards and IFRS.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-4
9. One of the challenges facing U. S. companies adopting IFRS is:
a. the costs incurred to do so.
b. the subjectivity introduced into financial reporting.
c. certain areas exist where convergence may not be achieved.
d. All of the above.
ANSWER: d
RATIONALE: It is expected that some U. S. companies will incur significant costs to adopt IFRS. In addition, since IFRS is more principles-based than U. S. GAAP, which is more rules-based, some subjectivity will be introduced into financial reporting. Finally, some areas, such as the LIFO method of accounting for inventory, exist where it is not known whether convergence will be achieved.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-5
10. Which of the following is true regarding the Securities and Exchange Commission requirements from foreign companies seeking to sell securities on U.S. stock markets?
a. The companies must reconcile their financial statements to U.S. GAAP.
b. The companies must reconcile their financial statements to U.S. tax regulations.
c. The companies must provide financial statements prepared according to U.S. GAAP.
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d. The companies may file financial statements prepared in accordance with IFRS without reconciliations to U.S. GAAP.
ANSWER: d
RATIONALE: In 2007, the SEC agreed to accept financial statements from foreign registrants prepared in accordance with IFRS without reconciliation to U.S. GAAP.
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-5
11. If a U. S. Company purchases inventory on account for $32,000 euros from a British Company when the exchange rate is $1 to $1.28 euros, how would the U.S. Company recognize the inventory and the accounts payable?
a. inventory of $32,000 and accounts payable of $32,000
b. inventory of $25,000 and accounts payable of $32,000 with a $7,000 foreign currency loss
c. inventory of $25,000 and accounts payable of $25,000
d. inventory of $32,000 and accounts payable of $25,000 with a $7,000 foreign currency gain
ANSWER: c
DIFFICULTY: EA
LEARNING OBJECTIVES: ADAC.FISC.9-2
12. If a U. S. Company purchases inventory on account for $32,000 euros from a British Company when the exchange rate is $1 to $1.28 euros, how would the British Company recognize the sales revenue and the accounts receivable?
a. sales revenue of $32,000 and accounts receivable of $32,000
b. sales revenue of $25,000 and accounts receivable of $25,000
c. sales revenue of $32,000 and accounts receivable of $25,000 with a $7,000 foreign currency translation loss
d. sales revenue of $25,000 and accounts receivable of $32,000 with a $7,000 foreign currency translation gain
ANSWER: a
DIFFICULTY: EA
LEARNING OBJECTIVES: ADAC.FISC.9-2
Subjective Short Answer
13. Forward Contracts:
a. Calculate the gain or loss to the holder and to the writer of the forward contract who agrees to buy foreign currencies at a specific price. Assume that on May 1, the writer of the forward contract agrees to sell 3,000,000 foreign currencies at a specific price of $0.22 per foreign currency (FC) with delivery in 30 days (May 31). Assume the spot rate at the end of the forward period is $0.20.
b. What is the entry to the holder on May 1.
c. Explain how the value of the forward contract changes over time.
ANSWER: a. 3,000,000 FC at a forward rate (May 1) of $0.22 (3,000,000 x $0.22) $660,000 3,000,000 FC at a forward rate (May 31) of $0.20 (3,000,000 x $0.20)………. $600,000
$ 60,000
The holder has a loss of $60,000 and the writer has loss in value.
b. No entry is required. Only a memo entry is necessary to record the acquisition of the contract which has a zero value at the beginning of the contract.
c. At the time of the contract, the value of a forward contract is zero and does not require cash up front. Over time, the price or rate moves which changes the value of the forward contract. The change in value is measured as the difference between the forward rate and the spot rate at the forward date. Since the forward prices or rates represent values in the future, the current value is represented by the present value of the future rates.
DIFFICULTY: MED
LEARNING OBJECTIV
ES: ADAC.FISC.9-3
Essay
14. Describe the complexities stemming from U. S.-based companies operating in an international environment.
ANSWER:
1. Risk associated with settling accounts in currency other than U. S. dollars.
2. Translation to financial statements prepared in a foreign currency.
3. Differences in national accounting standards.
4. Social, language, legal, taxation and cultural differences.
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-1
ADAC.FISC.9-2
15. Explain the factors which have led to the differences in accounting standards among nations.
ANSWER:
1. Social and cultural values
2. Political and legal systems
3. Business activities and economic conditions
4. Standard-setting processes
5. Forms of ownership and capital markets
6. Cooperative efforts between nations
DIFFICULTY: E
LEARNING OBJECTIVES: ADAC.FISC.9-4
16. Explain the goal of harmonization of accounting standards. Why is this so important to multinational companies?
ANSWER: Comparability of financial information is the overall goal. Various parties want comparability for individual reasons. International capital markets need to evaluate the adequacy of financial statements and disclosures made by companies seeking to raise capital. Comparable financial information is critical to the functioning of such markets. Other users, such as suppliers and customers, are exposed to international opportunities and need comparable information on which to base their decisions.
Multinational firms need to measure the efficiency and effectiveness of their international subsidiaries, branches, and investment. Likewise, comparable financial information is needed to evaluate competing investment opportunities.
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-4
17. Describe the concept of convergence as it pertains to the FASB and IASB and describe the ways in which this may be accomplished.
ANSWER: Convergence means that the FASB and IASB will work together to develop standards rather than the FASB merely agreeing to adopt IFRS. In essence, this will be a collaborative effort whereby IFRS may converge with U.S. GAAP, U.S. GAAP may converge with IFRS, or an
entirely new standard may be generated. The parties have agreed to move toward common standards in areas that are not in need of significant improvement. If a standard is in need of significant change or improvement, the Boards will work together to develop a new common standard.
DIFFICULTY: M
LEARNING OBJECTIVES: ADAC.FISC.9-5
