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Unformatted text preview: GLEIMS CMA/CFM TEST PREP 4.0 PART 2CFM CORPORATE FINANCIAL MANAGEMENT RISK MANAGEMENT CHIANG KAI SHEK COLLEGE Page 1 of 16 SFAS 52, FOREIGN CURRENCY TRANSLATION Basic Concepts 1. Prior to SFAS 52, there was significant disagreement among informed observers regarding the basic nature, information content, and meaning of results produced by various methods of translating amounts from foreign currencies into the reporting currency. SFAS 52 directs that organizations A. Change the accounting model to recognize currently the effects of all changing prices in the primary statements. B. Defer any recognition of changing currency prices until they are realized by an actual exchange of foreign currency into the reporting currency. C. Recognize currently the effect of changing currency prices on the carrying amounts of designated foreign assets and liabilities. D. Recognize currently the effect of changing currency prices on the carrying amounts of all foreign assets, liabilities, revenues, expenses, gains, and losses. CMA 1291 2-6 Transaction Gains and Losses 2. FASB 52, Foreign Currency Translation, defines foreign currency transactions as those denominated in other than an entity's functional currency. Transaction gains and losses are reported as A. Extraordinary items. B. Adjustments to the beginning balance of retained earnings. C. A component of equity. D. A component of income from continuing operations. CMA 0687 3-6 3 . Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Foggs warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Foggs favor. The resulting gain should be included in Foggs financial statements as a(n) A. Component of income from continuing operations. B. Extraordinary item. C. Deferred credit. D. Item of other comprehensive income. AICPA, Adapted 4. SFAS 52 states that transaction gains and losses have direct cash flow effects when foreign- denominated monetary assets are settled in amounts greater or less than the functional currency equivalent of the original transactions. These transaction gains and losses should be reflected in income CMA 1291 2-5 A. At the date the transaction originated. C. In the period the exchange rate changes. B. On a retroactive basis. D. Only at the year-end balance sheet date. 5. According to SFAS 52, foreign currency transaction gains and losses should usually be included in income A. For the period in which the exchange rate changes. B. For the period in which the transaction originated. C. For foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity. CMA 1288 3-30 D. For intercompany foreign currency transactions that are of a long-term investment nature....
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