ADVANCED ACCOUNTING CHAPTERS 15-19
12th Edition
ISBN: 9781337046251
Author: FISCHER
Publisher: CENGAGE C
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Question
Chapter 11, Problem 1UTI
To determine
Concept Introduction:
The functional currency refers to the currency of that country in which entity generates cashflows and spend cash to make purchases.
To indicate:The factors that reflects that the domestic currency of the foreign company is not a functional currency.
Expert Solution & Answer
Explanation of Solution
The entity’s domestic currency is not always considered as functional currency. For instance, if the company in X country borrows funds from the bank of Y country than the currency of Y country is functional currency rather than the currency used in country X.
Some of the major factors which reflects that the currency is not a functional currency are as follows:
- Cashflows: If cashflows are generated in other country. For instance, the Country X operates in country Y, then the currency of Country Y will be considered as functional currency.
- Financing: Funds procured from other country in their currency.
- Sales market: If goods and services are sold in other country at their currency.
- Expenses: If goods and services are purchased from other country. For instance, if country X’s domestic currency is dollar and the goods and services bought from country Y is in Yen, then Yen will be the functional currency.
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Students have asked these similar questions
A foreign company maintains its books and records in its domestic currency. Identify several factors that might suggest that the domestic currency is not the entity’s functional currency.
Accounting for Foreign Currency Transactions:
Accounting for foreign currency transactions involves recording and reporting financial transactions denominated in a currency other than the entity's functional currency. Here are the key steps involved in handling such transactions:
**1. Identifying Foreign Currency Transactions:
Definition: Foreign currency transactions occur when a business entity conducts financial transactions, such as sales, purchases, or investments, in a currency different from its functional currency.
Examples: Buying goods from a foreign supplier, selling products to overseas customers, or borrowing funds in a foreign currency.
**2. Determining the Functional Currency:
Primary Currency: Each business entity designates a functional currency, which is the primary currency used in its day-to-day operations and financial reporting.
Factors Considered: Factors such as the location of the entity's primary economic activities, the currency in…
Choose the correct. In accounting for foreign currency transactions, which of the following approaches is used in the United States?a. One-transaction perspective; accrue foreign exchange gains and losses.b. One-transaction perspective; defer foreign exchange gains and losses.c. Two-transaction perspective; defer foreign exchange gains and losses.d. Two-transaction perspective; accrue foreign exchange gains and losses.
Chapter 11 Solutions
ADVANCED ACCOUNTING CHAPTERS 15-19
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Similar questions
- In accounting for foreign currency transactions, which of the following approaches is used in the United States?a. One-transaction perspective; accrue foreign exchange gains and losses.b. One-transaction perspective; defer foreign exchange gains and losses.c. Two-transaction perspective; defer foreign exchange gains and losses.d. Two-transaction perspective; accrue foreign exchange gains and losses.arrow_forwardwhat are implications for analysis of financial statements that result from the accounting for foreign currency translation?arrow_forwardIn presenting foreign currency denominated transactions to the functional currency of the entity, which of the following statements is correct? a. When nonmonetary items are translated from foreign currency to functional currency in the financial statements, foreign currency gain of loss will be recognized. b. Monetary items shall be initially recognized and measured at the exchange rate prevailing at the end of the reporting period. c. Foreign currency gain or loss arising from translation of the foreign currency denominated items to functional currency shall be presented in other comprehensive income with reclassification adjustment to profit or loss if realized. d. Foreign currency denominated income statement accounts shall be translated using the exchange rate at the date of transaction.arrow_forward
- What concept underlies the two-transaction perspective in accounting for foreign currency transactions?arrow_forwardIn accordance with U.S. generally accepted accounting principles, which translation combination is appropriate for a foreign operation whose functional currency is the U.S. dollar?arrow_forwardwhich shall be recognized for each item when foreign currency gain or loss that arises from translation of foreign currency denominated transaction to functional currency? a. inventiry b. interest expense c. accounts receivable d. unearned revenuearrow_forward
- Explain the rule for translating the Financial Statements of Foreign Operations from Local Currency to Functional Currency.arrow_forwardBriefly summarize the accounting issues arising from foreign currency denominated transactionsarrow_forwardCompanies such as Sime Darby, Maxis and Nestle carry out many transactions in foreign currencies and have foreign operations. The entities are required to apply MFRS 121 The Effects of Changes in Foreign Exchange Rates in translating the financial statements of foreign operations to include in the consolidated financial statements. Discuss the THREE (3) primary indicators/factors in determining the functional currency of a company in order to records its transactions and prepare the financial statements.arrow_forward
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