Susan Hamlen Test Bank

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TEST BANK

CHAPTER 9

Futures, Options and Interest Rate Swaps

MULTIPLE CHOICE

1. Topic: Accounting for derivatives and hedging

LO 1 Which situation below accurately describes an instance of “hedge accounting”?

• A company hedges its investment in a debt security classified as trading. Because of the

hedge, changes in the value of the security are reported in other comprehensive income.

• A company hedges its inventory, normally carried at cost. Because of the hedge, changes

in the value of the inventory are reported in income.

• A company hedging a forecasted purchase of inventory recognizes changes in the valu

e of the inventory in other comprehensive income.

• A company hedges its inventory, normally carried

at cost. Because of the hedge, changes in the value of the inventory are reported in other comprehensive income and the inventory is carried at market value.

ANS: b

2. Topic: Accounting for derivatives and hedging

LO 1 Which statement below accurately describes reporting for a cash flow hedge of an inve ntory purchase?

• Changes in the value of the hedge are reported in other comprehensive income until the

inventory is sold .

• Changes in the value of the hedge are reported in other comprehensive income until the

inventory is purchased.

• Changes in the value of the hedge are reported in income, along with changes in the

forecasted purchase obligation.

• Changes in the value of the hedge are reported in other comprehensive income, al

ong with changes in the forecasted purchase obligation.

ANS: a

3. Topic: Accounting for derivatives and hedging

LO 1 A derivative designated as a hedge of a firm commitment (a documented forthcoming sale or purchase)

:

• Is marked to market each period along with the hedged purchase or sale commitment,

even though the sale or purchase has not occurred.

• Remains off-balance-sheet until the sale or purchase takes place.
• Offsets the hedged item that is marked to market each period, with the resulting gain or

loss deferred in OCI until the derivative is closed out.

• Is marked to market each period, with the resulting gain or loss deferred in OCI until the

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ANS: a

4

. Topic:

Accounting for derivatives LO 1

If a derivative does not qualify for hedge accounting:

• Changes in its fair value are reported in other comprehensive income.
• Changes in its fair value are reported in income .
• Gains and losses are reported only when realized.
• It is not reported on the balance sheet.

ANS: b

5. Topic: Hedging with futures

LO 1 When hedging an inventory balance with a futures contract, hedge gains may not perfectly offset inventory losses if

• spot prices differ from futures prices.
• the company sells the inventory.
• interest rates increase.
• the company invests in short futures.

ANS:

a

6. Topic: Hedging with futures

LO 1 When hedging financial investments with a futures contract, the basis difference is

• the difference between the change in value of the futures and the change in value of the

investments.

• the difference between the terms of the futures and the investments position.
• the effect on OCI if the hedge is terminated early.
• the difference between spot and futures prices for the investments.

ANS: d

7. Topic: Hedging with futures

LO 1 The basis difference in futures contracts used as fair value hedges is

• reported directly in income.
• reported in OCI and systematically recategorized to income.
• reported directly in income or reported in OCI and systematically recategorized

to income.

• reported as an adjustment to beginning retained earnings.

ANS:

c Stuvia.com - The Marketplace to Buy and Sell your Study Material

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8. Topic: Hedging with futures

LO 1 A company uses futures to hedge its inventory. Which statement is true concerning the hedge?

• The company takes a short position in futures and records changes in their value in OCI.
• The company takes a long position in futures and records changes in their value in income.
• The company takes a short position in futures and records changes in their value in

income.

• The company takes a long position in futures and records changes in their value in OCI.

ANS: c

9. Topic: Hedging with futures

LO 1 A company uses futures to hedge a firm commitment to buy inventory. Which statement is true concerning the hedge?

• The company takes a short position in futures and records changes in their value in OCI.
• The company takes a long position in futures and records changes in their value in income.
• The company takes a short position in futures and records changes in their value in

income.

• The company takes a long position in futures and records changes in their value in OCI.

ANS: b

10. Topic: Hedging with futures

LO 1 A company uses futures to hedge a forecasted purchase of inventory. Which statement is true concerning the hedge?

• The company takes a short position in futures and records changes in their value in OCI.
• The company takes a long position in futures and records changes in their value in income.
• The company takes a short position in futures and records changes in their value in

income.

• The company takes a long position in futures and records changes in their value in OCI.

ANS: d

11. Topic: Hedging with futures

LO 1 When a company hedges inventory price risk on its existing inventory balance, the difference

between using forwards and futures is:

• futures have a basis difference but forwards do not.
• futures are more likely to be used to sell the inventory held by the company.
• futures are used to hedge the inventory price risk over a longer period of time.
• futures are more likely to be closed out by taking an opposite position.

ANS: d

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