Financial Instruments | Test Bank - 9th

View Product website:

https://selldocx.com/docx/financial-instruments-test-bank-9th-1072

Chapter 14 Testbank

1. For compound financial instruments, if the conversion of the securities to shares is the probable outcome, the securities would meet the criteria for recognition as liabilities in the AASB Conceptual Framework, and under AASB 132 the securities would not have an equity component.

True   False

2. Under the 'business model test', an entity is required to assess whether its business objective for an investment in a debt instrument (such as an investment in a government bond or a corporate bond) is to collect contractual cash flows of the instrument, rather than realising its fair value change from the sale of the instrument prior to its contractual maturity.

True   False

3. When a financial liability is initially recognised, it is measured at its fair value in accordance with paragraph 5.1.1 of AASB 9. If the financial liability is not to be subsequently measured at fair value through profit or loss, any transaction costs directly attributable to the issue of the financial liability are deducted from the amount of the financial liability.

True   False

4. The requirements pertaining to the initial measurement of a financial liability are consistent with the requirements in respect of the initial measurement of financial assets, except that directly attributable transaction costs shall reduce rather than increase the carrying amount on initial recognition. (AASB 9)

True   False

5. Most financial liabilities tend to be measured at amortised cost subsequent to initial recognition. However, some liabilities such as those used as part of a hedging arrangement, or those that are traded, will be measured at fair value.

True   False

6. According to AASB 7, An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period.

True   False

7. The principles in AASB 7 complement the principles for recognising, measuring and presenting financial assets and financial liabilities in AASB 132 Financial Instruments: Presentation and AASB 9 Financial Instruments.

True   False

8. For what purposes are the financial instruments held within an organisation?

A. Managing cashflows

B. Making speculative gains

C. Reducing risks

D. All of the given answers are correct.

9. What is hedging?

A. It is a method of increasing returns when a company has foreign currency receivables or payables or has outstanding commitments that will be affected by changes in market prices.

B. It is a system for investing in financial instruments such that the entity is guaranteed increased returns and lower risks.

C. It is any activity that is intended to keep a track of the daily movements in the value of entity's assets.

D. It is an action taken with the object of avoiding or minimising possible adverse effects of movements in things such as exchange rates or market prices.

10. If Company A has a portfolio of shares as investment and it expects a downturn in the share market, then it can hedge the possible loss by:

A. taking a buy position on futures contracts at a predetermined price

B. taking a sell position on futures contracts at a predetermined price

C. entering into a buy position in a futures contract and simultaneously taking a sell position in another futures contract

D. None of the given answers are correct.

11. The characteristics of a swap agreement may be best described as:

A. an agreement in which companies agree to exchange their shares as part of a merger or company acquisition arrangement

B. an agreement in which borrowers exchange their debt covenants

C. an agreement in which borrowers exchange aspects of their respective loan obligations

D. an agreement in which investors agree to swap entitlements to dividends but retain ownership of the underlying share

12. A convertible note may be accurately described as a:

A. debt instrument which can be converted into another debt instrument

B. debt instrument which can be converted into a derivative instrument C. debt instrument which can be redeemed for inventory of the issuer company

C. debt instrument which can be redeemed for inventory of the issuer company

D. debt that gives the holder the right to convert the securities into ordinary shares of the issuer

13. Financial assets do not include:

A. cash

B. notes receivable

C. an equity instrument of another entity

D. inventories

14. The classification of a preference share as an equity instrument or financial liability is:

A. affected by a history of making dividend distributions

B. affected by an intention to make dividend distributions in the future

C. not affected by a history of making dividend distributions

D. not affected by the other rights that attach to them if they are non-redeemable

15. Which of the following items is not a financial instrument?

A. Debt instrument

B. Fixed deposit in a bank

C. Goodwill

D. Trade receivable

16. Which of the following ratios is used as an indicator of the corporate risk in investing in an entity?

A. Quick

B. Current

C. Leverage

D. Gross profit

17. The requirements relating to the set-off of assets and liabilities are incorporated in which of these standards?

A. AASB 132

B. AASB 13

C. AASB 116

D. AASB 9

18. The existence of an enforceable right to set-off a financial asset and a financial liability affects the rights and obligations associated with a financial asset and a financial liability and may affect an entity's exposure to which of the following?

A. Credit risk only

B. Liquidity risk only

C. Both credit and liquidity risk

D. None of the given answers are correct.

19. Which among the following can be financial instruments?

A. Financial assets or financial liabilities

B. Financial liabilities or equity

C. Equity instruments only

D. Financial assets, financial liabilities or equity instruments

20. 'Market participants', as applied within the definition of fair value, are deemed to be:

A. independent of each other

B. knowledgeable

C. able to enter into a transaction for the asset or liability

D. All of the given answers are correct.

21. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating which of the following over the relevant period?

A. Interest income only

B. Interest expense only

C. Interest income or interest expense

D. None of the given answers are correct.

22. According to AASB 9, an entity's business model can be classified on the basis of which of the following?

A. Financial assets held for collecting cash flows or to set-off against liabilities

B. Financial assets held for conversion in securities or sale

C. Financial assets held for collecting cash flows or sale or both

D. All of the given answers are correct.

23. AASB 9 paragraphs 5.7.7 and 5.7.8 require that gains or losses on financial liabilities designated at fair value through profit or loss are to be split into the amount of the change in fair value that relates to changes in the credit risk of the liability, which shall be presented in _________, _and the remaining amount of the change in fair value of the liability shall be presented in _______?

A. other comprehensive income; profit or loss

B. profit or loss; other comprehensive income

C. liabilities; profit or loss

D. liabilities; other comprehensive income

24. If the derivative is a cash-flow hedge, the ineffective portion of the gain or loss on the hedging instruments is recognised in which of the following?

A. Liabilities

B. Other comprehensive income

C. Profit or loss

D. None of the given answers are correct.

25. Which of the following are derivative financial instruments?

A. Futures contracts

B. Interest rate swaps

C. Foreign currency swaps

D. All of the given answers are correct.

26. A derivative is a financial instrument or other contract within the scope of AASB 9 with which of these characteristics?

A. It is settled at a future date.

B. Its value is predetermined.

C. It requires huge investments.

D. All of the given answers are correct.

27. Which of the following is an example of a derivative financial instrument?

A. Future contracts

B. Options contracts

C. Forward rate contracts

D. All of the given answers are correct.

28. A hedged item can be which of the following?

A. A recognised asset or liability

B. A forecast transaction

C. A net investment in a foreign operation

D. All of the given answers are correct.

29. Agreement between borrowers to exchange aspects of their respective loan obligations is known as which of the following?

A. Swap agreement

B. Foreign currency swap

C. Call option

D. Forward contract

30. The principles in AASB 7 complement the principles for recognising, measuring and presenting financial assets and financial liabilities in which of the following?

A. AASB 132 Financial Instruments: Presentation and AASB 9 Financial Instruments

B. AASB 132 Financial Instruments: Presentation

C. AASB 9 Financial Instruments

D. AASB Presentation of Financial Statements

31. The exchange rate that is currently offered for the future acquisition or sale of a specific currency is known as the:

A. Market rate

B. Effective interest rate

C. Spot rate

D. Forward rate

32. What is meant by 'set-off'?

______________________________________________________________________________

33. Discuss briefly the term 'market participants' as applied within the definition of fair value. (AASB 13)

______________________________________________________________________________

34. Discuss briefly the standard AASB 9 Financial Instruments.

______________________________________________________________________________

35. Why is it important to know about hedging and how to account for different types of hedging arrangements?

______________________________________________________________________________

36. What is a put option?

______________________________________________________________________________

37. What is a call option?

______________________________________________________________________________

38. What is a strike price?

______________________________________________________________________________

39. What is a foreign currency swap?

______________________________________________________________________________

Chapter 14 Testbank