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McKeith and Collins, Financial Accounting & Reporting, 2ndeditionEssay Questions Chapter 121. Discuss the implication of international trade for a business. 2. Explain the functional currency concept.3. Explain the different rates used for monetary and non-monetary items.4. Discuss the three ‘types’ of currency.5. Identify the basic principles of translation for statement of financial position items.6. Identify the basic principles of translation for statement of comprehensive income items.7. Discuss the criteria applied by IAS 21 to determining the functional currency. 8. Compare the temporal method with regard to the closing rate method. 9. Explain the how hedging can reduce the risk of exposure for a company. 10. Discuss the impact of IAS 39 for an international company.Key:
1. Discuss the implication of international trade for a business. Businesses are becoming increasingly international. It is not unusual for firms to import or export goods and services to firms in other countries. These transactions may involve the purchase of, for example, raw materials from a foreign supplier. In order to pay for such materials, the purchaser will have to acquire some foreign currency. A similar situation would arise if a company sold to an overseas buyer and received payment in a foreign currency. Most exchange rates are not fixed but vary from day to day. This fluctuation can pose problems for a company dealing with overseas suppliers or customers. When a foreign currency transaction is completed within an accounting period then currency conversion will be required. This currency conversion can be regarded as comprising two separate aspects: the purchase or sale of an asset, and the receipt or payment of cash for these assets Difficulty: Level IMcKeith - Chapter 12 #36McKeith Chapter 122. Explain the functional currency concept.In terms of foreign currency translation requirements, the functional currency concept is central. IAS 21 defines the functional currency as ‘the currency of the primary economic environment in which the entity operates’. In general terms, the primary economic environment in which an entity operates is normally the one in which it mainly generates and spends cash. Although the functional currency is not