Why Is the Accrual Method of Accounting for Unrealized Foreign

question 14

Multiple Choice

Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?

• A) Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it.
• B) It violates the principle of conservatism.
• C) It is not objective.
• D) There is no reliable method for measuring unrealized foreign exchange gains.

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Definitions:

Variable Expenses

Costs that vary directly with the level of production or sales volume.

Operating Income

Earnings before interest and taxes (EBIT), representing the profit from a company’s ordinary, core business operations.

Contribution Format

An income statement layout that separates fixed and variable costs, allowing for the calculation of contribution margin and easier analysis of profitability.

Operating Income

A financial metric that shows how much of a company's revenue is left over after paying for variable costs of production like wages and raw materials.