Part 2: Ch 9-16: Page 2-565 Part 1: Ch 1-8: Page 566-1170
Part 2 TEST BANK
CHAPTER 9 All Chapters Reverse
MULTIPLE CHOICE Futures, Options and Interest Rate Swaps
1. Topic: Accounting for derivatives and hedging
LO 1
Which situation below accurately describes an instance of “hedge accounting”?
a. 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.
b. A company hedges its inventory, normally carried at cost. Because of the hedge, changes
in the value of the inventory are reported in income.
c. A company hedging a forecasted purchase of inventory recognizes changes in the value
of the inventory in other comprehensive income.
d. 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 inventory
purchase?
a. Changes in the value of the hedge are reported in other comprehensive income until the
inventory is sold.
b. Changes in the value of the hedge are reported in other comprehensive income until the
inventory is purchased.
c. Changes in the value of the hedge are reported in income, along with changes in the
forecasted purchase obligation.
d. Changes in the value of the hedge are reported in other comprehensive income, along
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):
a. Is marked to market each period along with the hedged purchase or sale commitment,
even though the sale or purchase has not occurred.
b. Remains off-balance-sheet until the sale or purchase takes place.
c. 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.
d. Is marked to market each period, with the resulting gain or loss deferred in OCI until the
sale or purchase takes place.
©Cambridge Business Publishers, 2023
Test Bank, Chapter 9 9-1
, ANS: a
4. Topic: Accounting for derivatives
LO 1
If a derivative does not qualify for hedge accounting:
a. Changes in its fair value are reported in other comprehensive income.
b. Changes in its fair value are reported in income.
c. Gains and losses are reported only when realized.
d. 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
a. spot prices differ from futures prices.
b. the company sells the inventory.
c. interest rates increase.
d. 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
a. the difference between the change in value of the futures and the change in value of the
investments.
b. the difference between the terms of the futures and the investments position.
c. the effect on OCI if the hedge is terminated early.
d. 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
a. reported directly in income.
b. reported in OCI and systematically recategorized to income.
c. reported directly in income or reported in OCI and systematically recategorized to
income.
d. reported as an adjustment to beginning retained earnings.
ANS: c
©Cambridge Business Publishers, 2023
9-2 Advanced Accounting, 5th Edition
,8. Topic: Hedging with futures
LO 1
A company uses futures to hedge its inventory. Which statement is true concerning the hedge?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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:
a. futures have a basis difference but forwards do not.
b. futures are more likely to be used to sell the inventory held by the company.
c. futures are used to hedge the inventory price risk over a longer period of time.
d. futures are more likely to be closed out by taking an opposite position.
ANS: d
©Cambridge Business Publishers, 2023
Test Bank, Chapter 9 9-3
, 12. Topic: Hedging interest rate risk with futures
LO 1
A company invests in short-term notes yielding a 3% return, and plans to reinvest the principal in
90 days. The company wants to hedge against the possibility that interest rates will be lower at
that time. If the interest rate on U.S. Treasury bills is highly correlated with the yield on the notes,
which investment is an effective hedge?
a. Invest in futures locking in the selling price of U.S. treasury bills.
b. Take a long position in U.S. Treasury bill futures
c. Swap the fixed interest on the note for a floating interest rate tied to the U.S. Treasury
bill rate
d. Take a short position in U.S. Treasury bill futures
ANS: b
13. Topic: Hedging interest rate risk with futures
LO 1
A company has a firm commitment to roll over a variable rate loan every 90 days. It hedges its
interest rate risk by selling 90-day Treasury bills at a fixed price, for delivery in 90 days. The hedge
is determined to be effective. Which statement is true?
a. If the Treasury bill rate increases, the company gains on the hedge.
b. If the variable rate on the loan increases, the company gains on its firm commitment to
roll over the loan.
c. Changes in the value of the short position in Treasury bills accumulate in other
comprehensive income until interest expense is recognized on the loan.
d. If the Treasury bill rate declines, interest expense on the loan after it is rolled over will be
lower than if no hedging had occurred.
ANS: a
14. Topic: Reporting value changes in futures hedges
LO 1
A company holds significant inventories of diesel fuel. It uses diesel fuel futures to hedge
fluctuations in its inventory value. Hedge effectiveness includes all futures value changes. If the
company uses hedge accounting, the gain or loss on the futures investment is:
a. Shown on the income statement as incurred
b. Shown as a component of other comprehensive income until the inventory is sold
c. Used to adjust the carrying value of the inventory
d. Not reported
ANS: a
©Cambridge Business Publishers, 2023
9-4 Advanced Accounting, 5th Edition
Part 2 TEST BANK
CHAPTER 9 All Chapters Reverse
MULTIPLE CHOICE Futures, Options and Interest Rate Swaps
1. Topic: Accounting for derivatives and hedging
LO 1
Which situation below accurately describes an instance of “hedge accounting”?
a. 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.
b. A company hedges its inventory, normally carried at cost. Because of the hedge, changes
in the value of the inventory are reported in income.
c. A company hedging a forecasted purchase of inventory recognizes changes in the value
of the inventory in other comprehensive income.
d. 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 inventory
purchase?
a. Changes in the value of the hedge are reported in other comprehensive income until the
inventory is sold.
b. Changes in the value of the hedge are reported in other comprehensive income until the
inventory is purchased.
c. Changes in the value of the hedge are reported in income, along with changes in the
forecasted purchase obligation.
d. Changes in the value of the hedge are reported in other comprehensive income, along
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):
a. Is marked to market each period along with the hedged purchase or sale commitment,
even though the sale or purchase has not occurred.
b. Remains off-balance-sheet until the sale or purchase takes place.
c. 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.
d. Is marked to market each period, with the resulting gain or loss deferred in OCI until the
sale or purchase takes place.
©Cambridge Business Publishers, 2023
Test Bank, Chapter 9 9-1
, ANS: a
4. Topic: Accounting for derivatives
LO 1
If a derivative does not qualify for hedge accounting:
a. Changes in its fair value are reported in other comprehensive income.
b. Changes in its fair value are reported in income.
c. Gains and losses are reported only when realized.
d. 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
a. spot prices differ from futures prices.
b. the company sells the inventory.
c. interest rates increase.
d. 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
a. the difference between the change in value of the futures and the change in value of the
investments.
b. the difference between the terms of the futures and the investments position.
c. the effect on OCI if the hedge is terminated early.
d. 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
a. reported directly in income.
b. reported in OCI and systematically recategorized to income.
c. reported directly in income or reported in OCI and systematically recategorized to
income.
d. reported as an adjustment to beginning retained earnings.
ANS: c
©Cambridge Business Publishers, 2023
9-2 Advanced Accounting, 5th Edition
,8. Topic: Hedging with futures
LO 1
A company uses futures to hedge its inventory. Which statement is true concerning the hedge?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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?
a. The company takes a short position in futures and records changes in their value in OCI.
b. The company takes a long position in futures and records changes in their value in income.
c. The company takes a short position in futures and records changes in their value in
income.
d. 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:
a. futures have a basis difference but forwards do not.
b. futures are more likely to be used to sell the inventory held by the company.
c. futures are used to hedge the inventory price risk over a longer period of time.
d. futures are more likely to be closed out by taking an opposite position.
ANS: d
©Cambridge Business Publishers, 2023
Test Bank, Chapter 9 9-3
, 12. Topic: Hedging interest rate risk with futures
LO 1
A company invests in short-term notes yielding a 3% return, and plans to reinvest the principal in
90 days. The company wants to hedge against the possibility that interest rates will be lower at
that time. If the interest rate on U.S. Treasury bills is highly correlated with the yield on the notes,
which investment is an effective hedge?
a. Invest in futures locking in the selling price of U.S. treasury bills.
b. Take a long position in U.S. Treasury bill futures
c. Swap the fixed interest on the note for a floating interest rate tied to the U.S. Treasury
bill rate
d. Take a short position in U.S. Treasury bill futures
ANS: b
13. Topic: Hedging interest rate risk with futures
LO 1
A company has a firm commitment to roll over a variable rate loan every 90 days. It hedges its
interest rate risk by selling 90-day Treasury bills at a fixed price, for delivery in 90 days. The hedge
is determined to be effective. Which statement is true?
a. If the Treasury bill rate increases, the company gains on the hedge.
b. If the variable rate on the loan increases, the company gains on its firm commitment to
roll over the loan.
c. Changes in the value of the short position in Treasury bills accumulate in other
comprehensive income until interest expense is recognized on the loan.
d. If the Treasury bill rate declines, interest expense on the loan after it is rolled over will be
lower than if no hedging had occurred.
ANS: a
14. Topic: Reporting value changes in futures hedges
LO 1
A company holds significant inventories of diesel fuel. It uses diesel fuel futures to hedge
fluctuations in its inventory value. Hedge effectiveness includes all futures value changes. If the
company uses hedge accounting, the gain or loss on the futures investment is:
a. Shown on the income statement as incurred
b. Shown as a component of other comprehensive income until the inventory is sold
c. Used to adjust the carrying value of the inventory
d. Not reported
ANS: a
©Cambridge Business Publishers, 2023
9-4 Advanced Accounting, 5th Edition
