Structure and Functions of Commercial Bank
Chapter 15
Accounting in a Global Market
QUESTIONS
1. Foreign currency exchange rates are used to express transactions in local currency in terms of U.S. dollars and vice versa. For example, if the exchange rate is $1 = 1.65 DM (Deutsche mark), and if one wishes to change 100 U.S. dollars into Deutsche marks, one will receive $100 ( 1.65 = 165 DM, and if one wishes to change 100 DM to U.S. dollars, one will receive 100 DM/1.65 = $60.61.
2. A foreign currency transaction occurs when a transaction is denominated in a currency other than that of the firm. For example, a foreign currency transaction occurs when a U.S. firm purchases electronics components from a Japanese firm and must make payment in yen.
3. This easiest way for a U.S. company to avoid foreign exchange risk is to denominate all transactions in U.S. dollars. Alternatively, there are a variety of methods for hedging foreign currency risk. One method is to enter into a foreign exchange forward or futures contract. See Chapter 12 for more details about hedging.
4. If the purchase is denominated in British pounds, the purchase of the oil is recorded at $144,900, or 5,000 barrels at £18 per barrel equals £90,000 at $1.61 equals $144,900.
5. In this situation the British pound increased in value from $1.50 to $1.53. This means the currency received in payment of the account will amount to more money in U.S. dollars. The exchange gain is $1,500 (£50,000 ( [$1.53–$1.50]).
6. According to U.S. accounting standards, foreign currency transaction gains and losses are included in income in the period in which the exchange rate changes. Any gains or losses that result from these changing exchange rates are measured and recognized separately from the underlying sale or purchase and are recorded as separate income statement items.
7. U.S. firms must consolidate all their majority-owned subsidiaries when preparing financial statements. Foreign currency statements can be consolidated only after
Accounting in a Global Market
QUESTIONS
1. Foreign currency exchange rates are used to express transactions in local currency in terms of U.S. dollars and vice versa. For example, if the exchange rate is $1 = 1.65 DM (Deutsche mark), and if one wishes to change 100 U.S. dollars into Deutsche marks, one will receive $100 ( 1.65 = 165 DM, and if one wishes to change 100 DM to U.S. dollars, one will receive 100 DM/1.65 = $60.61.
2. A foreign currency transaction occurs when a transaction is denominated in a currency other than that of the firm. For example, a foreign currency transaction occurs when a U.S. firm purchases electronics components from a Japanese firm and must make payment in yen.
3. This easiest way for a U.S. company to avoid foreign exchange risk is to denominate all transactions in U.S. dollars. Alternatively, there are a variety of methods for hedging foreign currency risk. One method is to enter into a foreign exchange forward or futures contract. See Chapter 12 for more details about hedging.
4. If the purchase is denominated in British pounds, the purchase of the oil is recorded at $144,900, or 5,000 barrels at £18 per barrel equals £90,000 at $1.61 equals $144,900.
5. In this situation the British pound increased in value from $1.50 to $1.53. This means the currency received in payment of the account will amount to more money in U.S. dollars. The exchange gain is $1,500 (£50,000 ( [$1.53–$1.50]).
6. According to U.S. accounting standards, foreign currency transaction gains and losses are included in income in the period in which the exchange rate changes. Any gains or losses that result from these changing exchange rates are measured and recognized separately from the underlying sale or purchase and are recorded as separate income statement items.
7. U.S. firms must consolidate all their majority-owned subsidiaries when preparing financial statements. Foreign currency statements can be consolidated only after