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Question 1
Which of the following is the best description of a financial instrument?
Answer
Any monetary contract denominated in a foreign currency.
Cash, an investment in equities, and any contract to receive or pay
cash.
Any form of a companys own capital stock.
Any transaction with a bank or other financial institution.
Question 2
On December 1, Year One, a company acquires two three-month financial instruments
that qualify as derivatives. Financial instrument A was bought to serve as a fair value
hedge. Financial instrument B was bought to serve as a cash flow hedge. By the end of
Year One, both of these financial instruments have increased in value by $1,000. How
should these gains in value be reported by the company on the Year One financial
statements?
Answer
Both gains are reported within net income.
Both gains are reported within accumulated other comprehensive income.
The gain on the fair value hedge is reported within net income whereas the gain on
the cash flow hedge is reported within accumulated other comprehensive income.
The gain on the fair value hedge is reported within accumulated other
comprehensive income whereas the gain on the cash flow hedge is reported within
net income.
Question 3
When an investor classifies an investment in common stock as securities available for sale, cash
dividends are classified by the investor as:
Answer
A return of capital
A loss.
A deduction from the investment account.
Dividend income.
Question 4
On November 1, Year One, the Haynie Company signs a contract to receive one million
Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward
exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000).
This contract is a derivative because its value is derived from the future value of the

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Japanese yen in relation to the US dollar. On December 31, Year One, the Haynie
Company is producing financial statements. How is this forward exchange contract
reported?
Answer
It is shown as an asset or a liability at its fair value.
It is shown only as an asset at its fair value.
It is shown only as a liability at its fair value.
It is only disclosed in the notes to the financial statements because it is a future
transaction.
Question 5
Cash paid to suppliers under the direct method is computed as:
Answer
Cost of goods sold plus a decrease in inventory and minus an increase in accounts payable.
Cost of goods sold plus an increase in inventory and minus an increase in accounts payable.
Cost of goods sold minus a decrease in inventory and plus an increase in accounts payable.
Cost of goods sold minus an increase in inventory and plus an increase in accounts payable
Question 6
On December 31, Year One, Giant Company acquired 100 percent of the outstanding
stock of Tiny Company. On that date, Tiny was reporting inventory with a cost of
$30,000 (but a fair value of $45,000) and sales for the year of $400,000. Upon
acquisition, Giant produces consolidated financial statements to combine the two
companies. Which of the following statements is correct about these consolidated
statements?
Answer
Tiny’s inventory is included at $30,000 but none of its revenues are
included.
Tiny’s inventory is included at $30,000 as well as its revenue of
$400,000.
Tiny’s inventory is included at $45,000 but none of its revenues are included.
Tiny’s inventory is included at $45,000 as well as its revenue of
$400,000.
Question 7
On October 1, 2008, a U.S. company acquired goods from a Japanese company for 840,000 yen,
payable in yen on April 1, 2009. Spot rates on various dates follow:
Transaction date 100 yen to $1
Balance Sheet date (12/31/08) 87.5 yen to $1

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