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TRANSLATING FOREIGN CURRENCY TRANSACTIONS

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Currency Exchange Rates: Terminology ... process of applying an exchange rate to a foreign currency amount so that an ... Currency Exchange Rates: Why Do They ... – PowerPoint PPT presentation

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Title: TRANSLATING FOREIGN CURRENCY TRANSACTIONS


1
CHAPTER 16
  • TRANSLATING FOREIGN CURRENCY TRANSACTIONS

2
FOCUS OF CHAPTER 16
  • Currency Exchange Rates
  • Causes of Exchange Rate Fluctuations
  • Translating Foreign Currency Transactions
    (importing and exporting) into U.S. Dollars

3
Currency Exchange RatesTerminology
  • Conversion Actually going to the bank and
    physically exchanging currencies.

for
4
Currency Exchange RatesTerminology
  • Translation The process of applying an exchange
    rate to a foreign currency amount so that an
    amount can be expressed in dollars.

100,000 x 1.25 125,000
5
Currency Exchange RatesTerminology
  • Expressing Directly 100,000 x 1.25
    125,000
  • Expressing Indirectly 100,000 .80
    125,000

6
Currency Exchange RatesTerminology
  • It is CUSTOM to always express certain
    currencies directly (British pound)
  • It is CUSTOM to always express certain currencies
    indirectly (Japanese yen)

1
1.60
1 110
7
Currency Exchange RatesTerminology
  • FOREIGN CURRENCY STRENGTHENS
  • Direct exchange rate goes UP.After 1
    1.64 Before 1 1.60
  • Indirect exchange rate goes DOWN.Before 1
    .625 After 1 .610

8
Currency Exchange RatesTerminology
  • Foreign currency strengthens
  • It becomes more expensive to buy.
  • Imports cost more.
  • Exports cost foreign customers less.
  • Foreign currency weakens
  • It becomes less expensive to buy.
  • Imports cost less.
  • Exports cost foreign customers more.

9
Currency Exchange RatesWhy Do They Change?
  • Inflationary Factors
  • Foreign inflation makes the DIRECT exchange rate
    decrease.
  • Domestic inflation makes the DIRECT exchange rate
    increase.
  • Noninflationary Factors
  • Anything and everything else.

10
The Foreign Exchange Market The Biggest Market
of All
  • An OTC market--not an organized exchange such as
    the NYSE.
  • Open 24 hours a day.
  • 1.5 trillion per day.
  • The market-makers Several hundred banks located
    throughout the world.

11
Translating Importing Exporting Transactions
Terminology
  • Denominated The currency in which an FX
    transaction is to be settled.
  • Measured The currency in which an FX
    transaction is recorded in the books and records.

British pounds
12
Translating Importing Exporting Transactions
The Relevant Dates
  • Order (or Commitment) Date The date the
    purchase or sales order is issued.
  • Transaction Date The date that title passes and
    the parties record the sale and purchase.
  • Intervening F/R (or B/S) Date Dates between the
    transaction date and the settlement date.
  • Settlement Date The date that the debtor pays
    the creditor.

bank wire transfer
13
Translating Importing Exporting Transactions
FX Gains FX Losses
  • The One-Transaction View (non-GAAP)
  • Treat as an adjustment to either
  • Cost of item acquired.
  • Sales price of item sold.
  • The Two-Transaction View (GAAP)
  • Recognize currently in earnings.

14
Recognizing Currently FX Gains FX Losses at
Intervening F/R Dates
  • Does it matter if FX gains losses at
    intervening balance sheet dates are unrealized?

15
Recognizing Currently FX Gains FX Losses At
Intervening F/R Dates
  • NO! Because an economic gain or loss has occurred.

16
Dear Ann I Just Dont Know!
Dear Ann My Intel stock has gone up invalue
400,000. My accountant says the gain is
unrealized. Should I feel good or not?
Perplexed Peter Cruising in
Tahiti Dear Peter Feel good. If you have
any doubts about feeling good, sell the stock
and buy it back the same day. Then the gain
will be realized--but you will still be IN THE
SAME BOAT.
Ann Anders
17
Review Question 1
  • On 11/9/04, Selco recorded a sale denominated in
    100,000 euros. The customer paid on 1/5/05.
    Direct exchange rates were 11/9/04--.90
    12/31/04--.95 and 1/5/05--.92. What does
    Selco report in earnings in 2004? A. Sales of
    90,000 and FX Gain of 5,000 .B. Sales of
    90,000 and FX Loss of 5,000. C. Sales of
    90,000 and no FX gain or loss.D. Sales of
    95,000 and no FX gain or loss. E. Sales of
    85,000 and no FX gain or loss.

18
Review Question 1
  • On 11/9/04, Selco recorded a sale denominated in
    100,000 euros. The customer paid on 1/5/05.
    Direct exchange rates were 11/9/04--.90
    12/31/04--.95 and 1/5/05--.92. What does
    Selco report in earnings in 2004? A. Sales of
    90,000 and FX Gain of 5,000 .B. Sales of
    90,000 and FX Loss of 5,000. C. Sales of
    90,000 and no FX gain or loss.D. Sales of
    85,000 and no FX gain or loss. E. Sales of
    95,000 and no FX gain or loss.

19
Review Question 2
  • On 12/28/04, Purco recorded an inventory purchase
    denominated in 100,000 euros. Purco paid the
    vendor on 1/12/05 Direct exchange rates were
    12/21/04--1.10 12/31/04--1.11 and
    1/12/05--1.15. What does Purco report at
    12/31/04? A. Inventory of 110,000 and FX Gain
    of 1,000.B. Inventory of 110,000 and FX Loss
    of 1,000. C. Inventory of 110,000 and no FX
    gain/loss.D. Inventory of 109,000 and no FX
    gain/loss.E. Inventory of 111,000 and no FX
    gain/loss.

20
Review Question 2--With Answer
  • On 12/28/04, Purco recorded an inventory purchase
    denominated in 100,000 euros. Purco paid the
    vendor on 1/12/05 Direct exchange rates were
    12/21/04--1.10 12/31/04--1.11 and
    1/12/05--1.15. What does Purco report at
    12/31/04? A. Inventory of 110,000 and FX Gain
    of 1,000.B. Inventory of 110,000 and FX Loss
    of 1,000. C. Inventory of 110,000 and no FX
    gain/loss.D. Inventory of 109,000 and no FX
    gain/loss.E. Inventory of 111,000 and no FX
    gain/loss.

21
End of Chapter 16
  • Time to Clear Things Up--Any Questions?
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