Advanced Ch 11 - Multinational Accounting Foreign Currency...

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Unformatted text preview: Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11 The Accounting Issues 0. Foreign currency transactions of a U.S. company denominated in other currencies must be restated to their U.S. dollar equivalents before they can be recorded in the U.S. company’s books and included in its financial statements 0. Translation - The process of restating foreign currency transactions to their U.S. dollar equivalent values 1. Many U.S. corporations have multinational operations 1. The foreign subsidiaries prepare their financial statements in the currency of their countries 2. The foreign currency amounts in these financial statements have to be translated into their U.S. dollar equivalents, before they can be consolidated with the U.S. parent’s financial statements Foreign Currency Exchange Rates 2. Foreign currency exchange rates between currencies are established daily by foreign exchange brokers who serve as agents for individuals or countries wishing to deal in foreign currencies 3. Some countries maintain an official fixed rate of currency exchange 3. Determination of exchange rates 4. Exchange rates change because of a number of economic factors affecting the supply of and demand for a nation’s currency 5. Factors causing fluctuations are a nation’s: 0. Level of inflation 1. Balance of payments 2. Changes in a country’s interest rate 3. Investment levels 4. Stability and process of governance 4. Direct Exchange Rate (DER) is the number of local currency units (LCUs) needed to acquire one foreign currency unit (FCU) 5. From the viewpoint of a U.S. entity: 6. DER is identified as American terms 6. To indicate that it is U.S. dollar–based and represents an exchange rate quote from the perspective of a person in the United States 5. Indirect Exchange Rate (IER) is the reciprocal of the direct exchange rate 7. From the viewpoint of a U.S. entity: 7. IER is identified as European terms 8. To indicate the direct exchange rate from the perspective of a person in Europe, which means the exchange rate shows the number of units of the European’s local currency units per one U.S. dollar 6. Changes in exchange rates 8. Strengthening of the U.S. dollar—direct exchange rate decreases, implies: 9. Taking less U.S. currency to acquire one FCU 10. One U.S. dollar acquiring more FCUs 9. Weakening of the U.S. dollar—direct exchange rate increases, implies: 11. Taking more U.S. currency to acquire one FCU 12. One U.S. dollar acquiring fewer FCUs 7. Relationships between Currencies and Exchange Rates 8. Spot Rates versus Current Rates 10. The spot rate is the exchange rate for immediate delivery of currencies...
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Advanced Ch 11 - Multinational Accounting Foreign Currency...

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