slide 16-1 16 chapter 16 translating foreign currency transactions
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Slide 16-1
16CHAPTER 16
TRANSLATING FOREIGN CURRENCY TRANSACTIONS
Slide 16-2
16FOCUS OF CHAPTER 16
Currency Exchange Rates Causes of Exchange Rate
Fluctuations Translating Foreign Currency
Transactions (importing and exporting) into U.S. Dollars
Slide 16-3
16 Currency Exchange Rates:Terminology
Conversion: Actually going to the bank and physically exchanging currencies.
for
Slide 16-4
16 Currency Exchange Rates:Terminology
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
Slide 16-5
16 Currency Exchange Rates:Terminology
Expressing Directly:
100,000 x $1.25 = $125,000
Expressing Indirectly:
100,000 ÷ .80 = $125,000
Slide 16-6
16 Currency Exchange Rates:Terminology
It is CUSTOM to always express certain
currencies directly (British pound):
It is CUSTOM to always express certain
currencies indirectly (Japanese yen):
1
1$ = 110
= $1.60
Slide 16-7
16 Currency Exchange Rates:Terminology
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
Slide 16-8
16 Currency Exchange Rates:Terminology
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.
Slide 16-9
16 Currency Exchange Rates:Why 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.
Slide 16-10
16 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.
Slide 16-11
16 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
Slide 16-12
16 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
Slide 16-13
16 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.
Slide 16-14
16 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?
Slide 16-15
16 Recognizing Currently FX Gains & FX Losses At Intervening F/R Dates
NO! Because an economic gain or loss has occurred.
Slide 16-16
16 Dear Ann: I Just Don’t Know!
Dear Ann: My Intel stock has gone up invalue $400,000. My accountant says the gain is unrealized. Should I feel good or not? Perplexed Peter Cruising in TahitiDear Peter: Feel good. If you have any doubts about feeling good, sell the stock and buy it back the same day. Then the gain will be realized--but you will still be “IN THE SAME BOAT.” Ann Anders
Slide 16-17
16Review Question #1
On 11/9/04, Selco recorded a sale denominated in 100,000 euros. The customer paid on 1/5/05. Direct exchange rates were: 11/9/04--$.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 $85,000 and no FX gain or loss.
Slide 16-18
16Review Question #1
On 11/9/04, Selco recorded a sale denominated in 100,000 euros. The customer paid on 1/5/05. Direct exchange rates were: 11/9/04--$.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.
Slide 16-19
16Review 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.
Slide 16-20
16Review 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.
Slide 16-21
16End of Chapter 16
Time to Clear Things Up--Any Questions?
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