CAF-6 · Chapter 4
IAS 21 Foreign Currency Transactions MCQs with Answers
15 multiple-choice questions on IAS 21 Foreign Currency Transactions for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to IAS 21, what is 'Functional Currency'?
- A) The currency in which the financial statements are presented.
- B) The currency of the primary economic environment in which the entity operates.
- C) The currency of the country where the entity is legally registered.
- D) Any currency other than the local currency.
Show answer & explanation
Answer: B) The currency of the primary economic environment in which the entity operates.
IAS 21 defines functional currency as the currency of the primary economic environment in which an entity operates.
Question 2
A Pakistani company (functional currency PKR) purchases goods from a US supplier for USD 10,000 on credit. At what rate should the transaction be initially recorded?
- A) The closing rate at the year-end.
- B) The average rate for the month.
- C) The spot exchange rate at the date of the transaction.
- D) The forward rate for the settlement date.
Show answer & explanation
Answer: C) The spot exchange rate at the date of the transaction.
Foreign currency transactions must be recorded at initial recognition by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
Question 3
Which of the following is classified as a 'Monetary Item' under IAS 21?
- A) Inventory
- B) Goodwill
- C) Trade Receivables
- D) Property, Plant, and Equipment
Show answer & explanation
Answer: C) Trade Receivables
Monetary items are units of currency held and assets/liabilities to be received/paid in a fixed or determinable number of units of currency. Trade receivables and lease liabilities are monetary, while PPE and inventory are non-monetary.
Question 4
At the end of the reporting period, how should foreign currency monetary items be re-translated?
- A) Using the historical spot rate.
- B) Using the average rate for the period.
- C) Using the closing rate at the reporting date.
- D) They should not be re-translated.
Show answer & explanation
Answer: C) Using the closing rate at the reporting date.
IAS 21 requires that at each reporting date, monetary items in foreign currency must be re-translated using the closing rate.
Question 5
A company holds an investment in land in a foreign country, measured at historical cost in the foreign currency. At the reporting date, the company should:
- A) Re-translate the land using the closing rate.
- B) Re-translate the land using the average rate.
- C) Report the land using the exchange rate at the date of the transaction.
- D) Recognize an exchange gain in OCI.
Show answer & explanation
Answer: C) Report the land using the exchange rate at the date of the transaction.
Non-monetary items measured at historical cost in a foreign currency are not re-translated at the reporting date; they continue to be reported using the exchange rate at the date of the transaction.
Question 6
Exchange differences arising on the settlement of monetary items should be recognized in:
- A) Other Comprehensive Income (OCI)
- B) Profit or Loss
- C) A separate reserve in Equity
- D) Retained Earnings directly
Show answer & explanation
Answer: B) Profit or Loss
Exchange differences arising on the settlement or translation of monetary items at rates different from those at which they were initially recorded are recognized in profit or loss in the period in which they arise.
Question 7
Which of the following is a primary indicator for determining an entity's functional currency?
- A) The currency in which funds from financing activities are generated.
- B) The currency that mainly influences sales prices for goods and services.
- C) The currency in which receipts from operating activities are retained.
- D) The currency of the country where the head office is located.
Show answer & explanation
Answer: B) The currency that mainly influences sales prices for goods and services.
Primary indicators include the currency that mainly influences sales prices and the currency of the country whose competitive forces determine those prices.
Question 8
When an entity's functional currency changes, the entity shall:
- A) Apply the change retrospectively.
- B) Apply the translation procedures to the new functional currency prospectively.
- C) Restate all prior year figures.
- D) Recognize the cumulative effect in OCI.
Show answer & explanation
Answer: B) Apply the translation procedures to the new functional currency prospectively.
Under IAS 21, a change in functional currency is accounted for prospectively from the date of the change.
Question 9
Presentation currency is defined as:
- A) The currency of the primary economic environment.
- B) The currency in which the financial statements are presented.
- C) Always the local currency of the country.
- D) The currency used for internal management reporting.
Show answer & explanation
Answer: B) The currency in which the financial statements are presented.
Presentation currency is simply the currency in which an entity chooses to present its financial statements.
Question 10
If an entity translates its results into a presentation currency that is different from its functional currency, assets and liabilities are translated at:
- A) The average rate for the period.
- B) The closing rate at the date of the statement of financial position.
- C) The historical rate.
- D) The opening rate of the year.
Show answer & explanation
Answer: B) The closing rate at the date of the statement of financial position.
For translation into a presentation currency, assets and liabilities are translated at the closing rate at the reporting date.
Question 11
When translating into a presentation currency, income and expenses are generally translated at:
- A) The closing rate.
- B) The exchange rates at the dates of the transactions (or an average rate).
- C) The opening rate.
- D) The historical rate of the previous year.
Show answer & explanation
Answer: B) The exchange rates at the dates of the transactions (or an average rate).
Income and expenses are translated at the exchange rates at the dates of the transactions. For practical reasons, an average rate for the period is often used.
Question 12
A foreign exchange gain on a non-monetary item (like a revalued building) where the gain itself is recognized in OCI, should have its exchange component recognized in:
- A) Profit or Loss
- B) Other Comprehensive Income
- C) Finance Costs
- D) Retained Earnings
Show answer & explanation
Answer: B) Other Comprehensive Income
When a gain or loss on a non-monetary item is recognized in OCI, any exchange component of that gain or loss is also recognized in OCI.
Question 13
Which item is NOT a monetary item?
- A) Cash in hand
- B) Trade payables
- C) Advance payment for goods (Prepayment)
- D) Bank loan
Show answer & explanation
Answer: C) Advance payment for goods (Prepayment)
Prepayments are generally non-monetary items because they represent the right to receive goods or services rather than a fixed amount of currency.
Question 14
The currency that mainly influences labor, material, and other costs is considered a:
- A) Secondary indicator of functional currency.
- B) Primary indicator of functional currency.
- C) Presentation indicator.
- D) Consolidation indicator.
Show answer & explanation
Answer: B) Primary indicator of functional currency.
Primary indicators include the currency that mainly influences labor, material, and other costs of providing goods or services.
Question 15
An entity can have:
- A) Multiple functional currencies.
- B) Only one functional currency.
- C) Only one presentation currency.
- D) Multiple functional and only one presentation currency.
Show answer & explanation
Answer: B) Only one functional currency.
An entity has only one functional currency, which reflects the primary economic environment in which it operates. It can choose to have multiple presentation currencies.