A Firm Enters into a One-Year Forward Contract to Buy

question 17

Multiple Choice

A firm enters into a one-year forward contract to buy refined oil. To hedge itself, the firm simultaneously sells one-year futures contracts on crude oil. In which of the following scenarios might the firm come under cash flows pressure related to these contracts?

• A) Oil prices plummet a day before the maturity of the contracts
• B) Oil prices skyrocket a day before the maturity of the contracts
• C) Oil prices plummet a day after the firm enters the contracts
• D) Oil prices skyrocket a day after the firm enters the contracts

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Definitions:

Indirect Materials

Materials used in the production process that cannot be directly traced to a specific product, such as lubricants and cleaning supplies for machinery.

Job-Order Costing

A costing method used to calculate the cost of producing each specific order or job, making it suited for custom, one-off products.

Work In Process

Inventory that includes goods that are in the production process but are not yet completed.

Schedule Of Cost Of Goods Manufactured

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods.