Important Questions on Financial Accounting 
1. Which of the following statements is true about hedge accounting under U.S. GAAP?
a. If a derivative qualifies as a cash flow hedge, a company may choose to account for it as a fair value hedge.
2. When a currency is allowed to increase or decrease in value relative to other currencies, the currency is said to:
a. Float
3. 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?
a. the company has acquired a call option.
4. Under U.S. GAAP, what method is required to account for foreign currency transactions?
a. The two-transaction perspective must be used.
5. When accounting for forward contracts, what is meant by the term “executory contract”?
a. No cash changes hands
6. What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?
a. They must be shown on the balance sheet at fair value
7. Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?
a. Countries linked their currency to the U.S. dollar, which was backed by gold reserves.
8. 4. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?
a. The two-transaction perspective must be used. 1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
a. the primary currency used by the subsidiary
2. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted?
a. The U.S. parent would have to pay $16,300,000 to acquire the building today
b. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.
c. The building is worth $13,200,000 to the U.S. parent
a. If a derivative qualifies as a cash flow hedge, a company may choose to account for it as a fair value hedge.
2. When a currency is allowed to increase or decrease in value relative to other currencies, the currency is said to:
a. Float
3. 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?
a. the company has acquired a call option.
4. Under U.S. GAAP, what method is required to account for foreign currency transactions?
a. The two-transaction perspective must be used.
5. When accounting for forward contracts, what is meant by the term “executory contract”?
a. No cash changes hands
6. What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?
a. They must be shown on the balance sheet at fair value
7. Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?
a. Countries linked their currency to the U.S. dollar, which was backed by gold reserves.
8. 4. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?
a. The two-transaction perspective must be used. 1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
a. the primary currency used by the subsidiary
2. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted?
a. The U.S. parent would have to pay $16,300,000 to acquire the building today
b. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.
c. The building is worth $13,200,000 to the U.S. parent