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Accounting Quiz

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This week's quiz brought to you by:
Susan S. Hamlen, Department of Accounting & Law
University at Buffalo
Buffalo, New York

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1 - Financial derivatives:

"include forwards, futures, options and swaps."
can be used for hedging or speculation.
are often used to reduce financial uncertainty.
all of the above

2 - "Which of the following is a ""short"" position in financial derivatives?"

Agreement to buy euros at a particular price in 30 days.
"Call option in soybeans, exercisable within the next 60 days."
Forward sale of coffee in 45 days.
All of the above

3 - Which statement below best describes the process of hedging using financial derivatives?

"You have inside information that the price of soybeans is going to rise, so you invest in a financial derivative that allows you to gain if the price of soybeans rises."
"You have inside information that interest rates are going to fall, so you invest in a financial derivative that allows you to gain if interest rates fall."
"As part of your normal business transactions, you are exposed to financial risk. You invest in financial derivatives to increase potential gains from financial risk."
"As part of your normal business transactions, you are exposed to financial risk. You invest in financial derivatives to neutralize that risk."

4 - A U.S. manufacturing company imports parts from a supplier in Germany. The company is required to pay the supplier in euros. Which investment will hedge the manufacturing company's foreign exchange risk?

Call option in euros.
Short position in euros.
Forward sale of euros.
Borrowing from a German bank.

5 - Generally accepted accounting principles for reporting investments in financial derivatives can be found in:

FAS 52
FAS 123
FAS 131
FAS 133

6 - How are investments in financial derivatives valued on the balance sheet?

Market value
Cost
Lower of cost or market value
Not reported

7 - "On December 1, a U.S. company agrees to buy euros on February 1 at a contract price of $1.40. The company did not pay anything for this contract. The exchange rate for euros declines to $1.38 (U.S. dollar strengthens) between December 1 and December 31, when the company's reporting year ends. How is this contract reported on the company's year-end balance sheet?"

In the asset section.
In the liability section.
As a contra asset.
The contract is not reported on the balance sheet.

8 - "A company has an inventory of soybeans and invests in a financial derivative to lock in the future selling price of the soybeans. At the end of the year, the financial derivative has increased in value. How is this reported?"

"On the income statement, as a gain."
"On the balance sheet, as a part of other comprehensive income."
"On the balance sheet, as a reduction in the carrying value of the inventory."
The change in value is not reported.

9 - "A company forecasts that it will need to buy soybeans in six months. It contracts to buy soybeans at a fixed price in six months. If the value of the contract increases during the six-month period,"

a gain is reported on the company's income statement.
the soybean inventory value is reported at a higher amount.
a gain is reported in the company's other comprehensive income on the balance sheet.
the change in contract value is not reported.

10 - Fannie Mae and many other companies have gotten in a lot of trouble due to their reporting of financial derivatives. What did these companies do wrong?

They neglected to report declines in the value of their financial derivatives.
"They reported losses on financial derivatives in other comprehensive income on the balance sheet, when the losses should have been reported on the income statement."
They overstated reported losses on financial derivatives on the income statement.
They overstated reported gains on financial derivatives on the income statement.

E-mail required (for purposes of contacting winners only).

	"include forwards, futures, options and swaps."
	can be used for hedging or speculation.
	are often used to reduce financial uncertainty.
	all of the above

	Agreement to buy euros at a particular price in 30 days.
	"Call option in soybeans, exercisable within the next 60 days."
	Forward sale of coffee in 45 days.
	All of the above

	"You have inside information that the price of soybeans is going to rise, so you invest in a financial derivative that allows you to gain if the price of soybeans rises."
	"You have inside information that interest rates are going to fall, so you invest in a financial derivative that allows you to gain if interest rates fall."
	"As part of your normal business transactions, you are exposed to financial risk. You invest in financial derivatives to increase potential gains from financial risk."
	"As part of your normal business transactions, you are exposed to financial risk. You invest in financial derivatives to neutralize that risk."

	Call option in euros.
	Short position in euros.
	Forward sale of euros.
	Borrowing from a German bank.

	In the asset section.
	In the liability section.
	As a contra asset.
	The contract is not reported on the balance sheet.

	"On the income statement, as a gain."
	"On the balance sheet, as a part of other comprehensive income."
	"On the balance sheet, as a reduction in the carrying value of the inventory."
	The change in value is not reported.

	a gain is reported on the company's income statement.
	the soybean inventory value is reported at a higher amount.
	a gain is reported in the company's other comprehensive income on the balance sheet.
	the change in contract value is not reported.

	They neglected to report declines in the value of their financial derivatives.
	"They reported losses on financial derivatives in other comprehensive income on the balance sheet, when the losses should have been reported on the income statement."
	They overstated reported losses on financial derivatives on the income statement.
	They overstated reported gains on financial derivatives on the income statement.