Financial Accounting and Reporting-CPA Practice Exam

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Prepare for the Financial Accounting and Reporting-CPA Exam. Boost your skills with multiple choice questions and gain insights with detailed explanations and hints to succeed in your CPA journey!

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When functional currency equals local currency, which of the following is true regarding foreign entity accounting?

  1. It uses the local country's currency

  2. It must conduct banking in a different currency

  3. It cannot apply historical rates

  4. It is generally hyperinflationary

The correct answer is: It uses the local country's currency

When the functional currency equals the local currency, it indicates that the foreign entity primarily operates in the currency of the country where it is located. This situation means that the accounting records of the entity will be maintained in the local currency, effectively reflecting the economic environment and transactions in which the entity participates. Using the local country's currency for accounting aligns with the principles of functional currency as defined by accounting standards such as IFRS and GAAP. This allows for effective measurement and communication of the entity's financial performance and position, as the financial statements will be consistent with the local economic conditions and currency fluctuations. The other options do not accurately reflect the scenario. Conducting banking in a different currency is not a necessity and can vary by entity, while the application of historical rates can still be appropriate in certain contexts—such as when dealing with non-monetary items. The notion that the entity is generally hyperinflationary would only apply under specific economic conditions and is not a general rule when the functional currency aligns with the local currency.