Firms Must Designate Each Derivative as a Hedging Instrument, or Else

question 4

Multiple Choice

Firms must designate each derivative as a hedging instrument, or else accounting views the derivative as a nonhedging instrument.Furthermore, firms must designate each hedging instrument as either a fair value hedge or a cash flow hedge.The accounting for cash flow hedges

• A)remeasures both the hedged item and the derivative to fair value each period and recognize any unrealized gains and losses in net income.
• B)remeasures the derivative to fair value each period and include the unrealized gain or loss in other comprehensive income to the extent that the derivative instrument is effective in neutralizing risk.When the firm settles the hedged item, transfer the previously unrealized gain or loss from other comprehensive income to net income.
• C)remeasures the derivative to fair value each period and include the unrealized gain or loss in net income.
• D)all of the above
• E)none of the above

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Definitions:

DuPont Formula

A formula that breaks down Return on Equity into three components: operating efficiency, asset use efficiency, and financial leverage.

Profit Margin

A financial ratio indicating the percentage of revenue that exceeds the costs of goods sold, reflecting the efficiency of a company in generating profit.

Invested Assets

Resources such as securities and properties that an individual or company has allocated funds towards with the expectation of generating income or profit.

Minimum Return

Minimum return refers to the lowest acceptable profit or benefit that an investor expects to achieve from an investment, considering the associated risks and opportunity costs.