This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Chapter 11 - Multinational Accounting: Foreign Currency Transactions And Financial Instruments 11-1 CHAPTER 11 MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND FINANCIAL INSTRUMENTS ANSWERS TO QUESTIONS Q11-1 Indirect and direct exchange rates differ by which currency is desired to be expressed in another currency. An indirect exchange rate is the number of foreign currency units that may be obtained for one local currency unit. The indirect exchange rate has the foreign currency unit in the numerator. As a fraction, the indirect exchange rate is expressed as follows: Number of foreign currency units One local currency unit A direct exchange rate is the number of local currency units needed to acquire one foreign currency unit. The direct exchange rate has the local currency units in the numerator (the U.S. dollar for the direct exchange rate for the U.S. dollar). As a fraction, the direct exchange rate is expressed as follows: Number of local currency units One foreign currency unit The indirect and direct exchange rates are inversely related and both state the same relationship between two currencies. Q11-2 The direct exchange rate can be calculated by taking the inverse of the indirect exchange rate. Such a computation follows: Number of foreign currency units = C$1.3623 (Canadian dollars) One local currency unit $1.00 (U.S. dollars) The inverse of the indirect exchange rate is: $1.00 (U.S. dollars) = C$1.36 (Canadian dollars) $0.7340 Q11-3 When the U.S. dollar strengthens against the European euro, imports from Europe into the U.S. will be less expensive in U.S. dollars. The direct exchange rate decreases, indicating that it takes fewer dollars to acquire European euros. Chapter 11 - Multinational Accounting: Foreign Currency Transactions And Financial Instruments 11-2 Q11-4 A foreign transaction is a transaction that does not involve the exchange of currencies on the part of the reporting entity. An example of a foreign transaction is the sale of equipment by a U.S. company (the reporting entity) to a Japanese firm that is denominated in U.S. dollars. A foreign currency transaction is a transaction that does involve the exchange of currencies on the part of the reporting entity. An example of a foreign currency transaction is the sale of equipment by a U.S. company (the reporting entity) to a Japanese firm that is denominated in Japanese yen. Q11-5 There are many types of economic factors that affect currency exchange rates, among which are the level of inflation, the balance of payments, changes in interest rates and investment levels, and the stability and process of governance. One example of an economic factor that results in a weakening of the U.S. dollar versus the European euro is a higher level of inflation in the U.S. relative to the inflation in Europe....
View Full Document
This note was uploaded on 03/26/2011 for the course ACTG 3400 taught by Professor Durkee during the Spring '11 term at Weber.
- Spring '11