Question

Functional currency of a firm is

• A. The currency in which most of the assets and liabilities are held
• B. The currency in which most of the receivables and payables are held
• C. The currency in which financial reports are reported
• D. The currency in which the external commercial borrowings are denominted
• E. Both (A) and (C) above

Answer 1

Answer: (B)

The currency in which most of the receivables and payables are held

A functional currency is the main currency that a company conducts its business. As companies transact in many currencies but report their financial statements in one currency, the foreign currencies have to be translated into the functional currency. International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”. The same Standard defines presentation currency as “the currency in which the financial statements are presented”. In short we can state that functional currency is the currency in which most of receivables and payables are held.