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Finance
Q:
If a company receives $20,000 cash from its customers on account and uses the cash to pay $20,000 to its suppliers on accounts, the net result is that:
A) assets would increase by $20,000 while liabilities would decrease by $20,000.
B) liabilities would decrease by $20,000 while stockholders' equity would increase by $20,000.
C) assets would decrease by $20,000 and liabilities would decrease by $20,000.
D) liabilities would decrease by $20,000 and stockholders' equity would decrease by $20,000.
Q:
The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.
a. True
b. False
Q:
The Buddy Burger Corporation owes $1.5 million to the Texas Wholesale Meat Company from whom Buddy Burger buys its burger meat. Which account would Buddy Burger use to report the amount owed?
A) Cash
B) Accounts Payable
C) Notes Payable
D) Accounts Receivable
Q:
Direct intervention is always extremely effective.
a. True
b. False
Q:
Every transaction:
A) increases one account and decreases another account.
B) has at least two effects on the basic accounting equation.
C) affects only balance sheet accounts or only income statement accounts.
D) is analyzed from the standpoint of the business owners.
Q:
The indirect exchange rate specifies the value of the currency in U.S. dollars.
a. True
b. False
Q:
Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.
a. True
b. False
Q:
Account titles in the chart of accounts are:
A) general purpose and do not indicate the nature of the account.
B) consistent with those used by other companies.
C) linked to account numbers.
D) the names mandated for use by the FASB.
Q:
In reality, exchange rates do not always change as suggested by purchasing power parity.
a. True
b. False
Q:
Which of the following is not an accounting transaction?
A) Issued shares of stock to investors in exchange for cash contributions of $4,000.
B) Ordered inventory from suppliers for $3,000.
C) Sold equipment to another company for $3,000 and accepted a note from the company promising payment in 6 months.
D) Borrowed money from the bank by signing a promissory note for $2,000.
Q:
Financial institutions rarely use the forward market.
a. True
b. False
Q:
The requirement that transactions be recorded at their exchange price at the transaction date is called the:
A) conservatism exception.
B) separate entity assumption.
C) cost principle.
D) monetary unit assumption.
Q:
The forward rate premium is dictated by the national income differential of the two currencies.
a. True
b. False
Q:
Typical cash flows from investing activities include:
A) payments to purchase property and equipment.
B) repayment of loans.
C) proceeds from issuing notes payable.
D) receipts from cash sales.
Q:
The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.
a. True
b. False
Q:
The following information refers to Fresno Bank and Champaign Bank.Bid Rate on EurosAsk Rate on EurosFresno Bank$1.002$1.009Champaign Bank$0.997$1.000Based on this information, locational arbitrage would be profitable.a. Trueb. False
Q:
Stockholders equity in a corporation consists of:
A) Amounts invested and reinvested by a companys owners.
B) Resources presently owned by a business that generate future economic benefits.
C) Amounts invested in assets that will be used for one or more years.
D) Amounts presently owed by a business.
Q:
The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone.
a. True
b. False
Q:
A company has $26,000 in its Land account, $10,000 in its Inventory account, and $6,000 in its Notes Payable (short-term) account. If its only other account is Common Stock, what is the balance of that account?
A) $10,000.
B) $42,000.
C) $30,000.
D) $22,000.
Q:
The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.
a. True
b. False
Q:
_________________ are of special importance because they are the only activities that enter the financial accounting system.
A) External exchanges
B) Internal events
C) Documents
D) Transactions
Q:
The indirect exchange rate is always the reciprocal of the direct exchange rate.
a. True
b. False
Q:
Which of the following would be treated as an accounting transaction for a gardening supply store?
A) The company signed an agreement to rent store space at $200 month.
B) The vice president of the company spoke at a luncheon that contributed to enhancing the companys reputation as a responsible company.
C) The company ordered supplies for $500.
D) The company loaned $500 to an employee.
Q:
Which of the following is not an asset?
A) Cash
B) Notes Receivable
C) Common Stock
D) Land
Q:
When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.
a. True
b. False
Q:
The Flynn Company started business by obtaining financing through debt financing and equity financing. Which of the following statements is not correct?
A) Equity financing refers to the money obtained through owners contributions and reinvestments of profit.
B) Debt financing refers to the money obtained through loans.
C) The business is obligated to repay debt financing.
D) The business is obligated to repay equity financing.
Q:
The forward rate is the exchange rate for immediate delivery.
a. True
b. False
Q:
Which of the following would not be recorded as an accounting transaction?
A) Putting a deposit down on a new vehicle
B) Hiring a new employee
C) Receiving cash upon signing a note
D) Receiving a deposit from a customer
Q:
The potential benefits from using foreign exchange derivatives are independent of the expected exchange rate movements.
a. True
b. False
Q:
Which of the following is a financing activity?
A) The business receives land and gives a check for $1,000.
B) The business receives $1,000 cash and in exchange gives a promissory note.
C) The business promises to hire an employee on the 15th of the month.
D) The business orders supplies and promises to pay for them at the end of the month.
Q:
The Swiss franc is presently pegged to the euro.
a. True
b. False
Q:
The characteristic shared by all liabilities is that they:
A) provide a future economic benefit.
B) result in an inflow of resources to the company.
C) always end in the word payable.
D) obligate the company to do something in the future.
Q:
Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired.
a. True
b. False
Q:
Your company places an order with suppliers for inventory for delivery in two weeks.
A) This is an internal event and it does not affect the balance sheet.
B) This is an activity that does not affect the balance sheet.
C) This is an internal event that affects the balance sheet.
D) This is an external exchange and it affects the balance sheet.
Q:
A pegged exchange rate system is no longer used by any countries.
a. True
b. False
Q:
Transactions include which two types of events?
A) Direct events, indirect events
B) Monetary events, production events
C) External exchanges, internal events
D) Past events, future events
Q:
If a country in the eurozone suffers from a weak economy, it may devalue its currency to increase demand for its exports and thereby stimulate its economy.
a. True
b. False
Q:
A country that pegs its exchange rate to another exchange rate does not have complete control over its interest rates.
a. True
b. False
Q:
The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank to be paid back in five years and used all of the money to purchase land for a new store. Sweet Smell's balance sheet would show this as:
A) $60,000 under Land and $60,000 under Notes Payable (long-term).
B) $60,000 under Depreciation Expense and $60,000 under Notes Payable (long-term).
C) $60,000 under Land and $60,000 under Notes Receivable (long-term).
D) $60,000 under Other Assets and $60,000 under Other Liabilities.
Q:
Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern.
a. True
b. False
Q:
If a company borrows money from a bank and signs an agreement to repay the loan several years from now, in which account would the company report the amount borrowed?
A) Common Stock
B) Accounts Payable
C) Notes Payable (long-term)
D) Retained Earnings
Q:
If the quoted cross-exchange rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage.
a. True
b. False
Q:
Owners of a company:
A) hold promissory notes as evidence of their ownership claim.
B) are entitled to repayment of their investment.
C) have a claim that is secondary to creditors claims.
D) have a claim equal to the amount of liabilities a company owes.
Q:
A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when it is received, sell it in the spot market.
a. True
b. False
Q:
The current ratio can be used to evaluate a companys ability to pay liabilities in the short term, and in general, a lower ratio means better ability to pay.
Q:
Indicate whether the statement is true or false.Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.a. Trueb. False
Q:
The acquisition of equipment in an exchange for a companys stock would increase the current ratio of the company.
Q:
An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.
a. True
b. False
Q:
The trial balance is a financial statement that reports the assets, liabilities, and equity of a business at a point in time.
Q:
An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.
a. True
b. False
Q:
When a company prepares a classified balance sheet, stockholders equity accounts must be shown in subcategories of current and noncurrent.
Q:
A putable swap gives the party making the fixed-rate payments the right to terminate the swap.
a. True
b. False
Q:
A classified balance sheet shows a subtotal for current assets and current liabilities.
Q:
The London Interbank Offer Rate (LIBOR) varies among currencies.
a. True
b. False
Q:
The general ledger is an internal report that lists all the accounts and their balances and is used to check that total debits equals total credits.
Q:
Journal entries show the effects of transactions on the elements of the accounting equation, as well as the account balances.
Q:
Interest rate floors are commonly used to hedge against lower interest rates.
a. True
b. False
Q:
Every transaction increases at least one account and decreases at least one account.
Answer: False
AICPA B: Resource Management
Feedback: A transaction may have any combination of increases and decreases. For example, a purchase of equipment on account increases both equipment and accounts payable. What is true is that every transaction is recorded with at least one debit and at least one credit.
15. Accounts increase on the same side as they appear in the accounting equation: A = L + SE.
Answer: True
Feedback: Accounts on the left side of the accounting equation (that is, assets) increase on the left side and accounts on the right side of the equation (that is, liabilities and stockholders equity) increase on the right side.
Q:
An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.
a. True
b. False
Q:
If the total dollar value of credits to an account exceeds the total dollar value of debits to that account, the ending balance of the account will be a debit balance.
Q:
A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately.
a. True
b. False
Q:
The normal balance of an account is on the same side that increases the account.
Q:
The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk.
a. True
b. False
Q:
A debit may increase or decrease an account, depending on the type of account.
Q:
Indicate whether the statement is true or false.The primary purpose of interest rate swaps is to reduce exchange rate risk.a. Trueb. False
Q:
The list of account names and reference numbers that the company will use when accounting for transactions is called the chart of accounts.
Q:
After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is NOT one of the requirements of these new rules and regulations?
a. Dealers and major participants in swaps must register with the Commodities Futures Trading Commission or the Securities and Exchange Commission.
b. To make the market more transparent, the majority of swaps are to be traded on electronic platforms called swap execution facilities.
c. Credit default swaps can no longer be created for mortgage-backed securities.
d. Information about all swaps must be reported to a swap data repository.
Q:
The analyze-record-summarize process is applied to daily transactions, to month-end adjustments, and as part of the year-end closing process.
Q:
A common maturity of a credit default swap contract is
a. one month.
b. three months.
c. five years.
d. 25 years.
Q:
Company X issues $40 million in new stock for cash. This does not affect stockholders' equity because as new shares are sold, the value of existing shares falls.
Q:
AIG's financial problems during the credit crisis were attributed to
a. its purchases of credit default swaps.
b. its position as a counterparty in numerous interest rate swaps.
c. its sales of mortgage-backed securities.
d. its sales of credit default swaps.
Q:
Swap transactions are only used to
a. hedge against upward interest rate movements.
b. hedge against downward interest rate movements.
c. speculate.
d. None of these are correct.
Q:
If a company uses $100 million of its cash to pay off debt, its stockholders' equity will increase $100 million.
Q:
An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor.
a. sale; sale
b. sale; purchase
c. purchase; purchase
d. purchase; sale
Q:
You are pleasantly surprised to discover that a popular actress appears on The Tonight Show wearing your company's jeans. Later, your company's sales increase by $500,000 as a result. When the actress appeared on TV, you would have recorded an asset because the TV appearance was expected to bring future economic benefits to your company.
Q:
A plain vanilla swap enables firms to exchange ____ for ____.
a. fixed-rate payments; floating-rate payments
b. a high interest rate foreign currency; a low interest rate foreign currency
c. a low interest rate foreign currency; a high interest rate foreign currency
d. bonds; stocks that pay dividends
Q:
A business is obliged to repay both debt and equity financing.
Q:
A firm is involved in an agreement whereby it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has
a. purchased an interest rate cap.
b. sold an interest rate cap.
c. purchased an interest rate floor.
d. sold an interest rate floor.
Q:
A company signed an agreement to rent store space from another company. This is an example of a transaction that should be recorded.
Q:
When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it
a. can match up two parties but cannot take a position in the swap.
b. can match up two parties or can take a position in the swap.
c. cannot match up two parties and cannot take a position in the swap.
d. cannot match up two parties but can take a position in the swap.