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Flashcards: Consolidated Financial Statements

On December 1, Year 1, the Fairfax Company signs a contract to receive 1 million Euros on January 31, Year 2 at a price of $1.1 million in a two month forward contract. On December 1, the spot rate for Euros is $1.1 in US dollars. Why would Fairfax enter into this contract?

Fairfax believes that the value of Euros will decrease in relation to the US dollar

Fairfax believes that the value of Euros will increase at the same rate as the US dollars

Fairfax believes that the European economy will grow at a rate faster than that of the US economy

Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value

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Flashcards: Consolidated Financial Statements

Your answer:

Fairfax believes that the value of Euros will decrease in relation to the US dollar

Your answer:

Fairfax believes that the value of Euros will increase at the same rate as the US dollars

Your answer:

Fairfax believes that the European economy will grow at a rate faster than that of the US economy

Correct answer:

Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value

Explanation:

If a company enters into a forward contract to pay a fixed price for a currency on a future date, they are hoping that the market price on that date is higher than the price they are agreeing to pay. They may also be looking to lock in a fixed price to reduce the risk of exchange rate fluctuation on an existing obligation.

Flashcards: Consolidated Financial Statements

A US company is in the process of consolidating a subsidiary operating in China. The two companies have different functional currencies, so the Chinese accounts are being translated into US dollars. Some accounts are translated at historical rates while others are translated at the current rate as of the balance sheet date. Which of the following is true about the subsidiary's accounts?

Accounts receivable is translated at the current rate and inventory is translated at historical rates

Inventory and accounts receivable are translated at the current rate

Inventory is translated at the current rate and accounts receivable is translated at historical rates

Inventory and accounts receivable are translated at historical rates

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Flashcards: Consolidated Financial Statements

Your answer:

Accounts receivable is translated at the current rate and inventory is translated at historical rates

Your answer:

Inventory is translated at the current rate and accounts receivable is translated at historical rates

Your answer:

Inventory and accounts receivable are translated at historical rates

Correct answer:

Inventory and accounts receivable are translated at the current rate

Explanation:

When translating financial statements of companies with different functional currencies, inventory and accounts receivable are translated at the current rate as of the balance sheet date.

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Consolidated Financial Statements

Flashcards: Consolidated Financial Statements

Flashcards: Consolidated Financial Statements

Flashcards: Consolidated Financial Statements

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