foreign currency translation

foreign currency translation - International Accounting,...

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Choi/Meek, 6/e 1 International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 6: Foreign Currency Translation
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Choi/Meek, 6/e 2 Learning Objectives Why do firms translate from one currency to another? What is the difference between a spot, forward, and swap transaction? What exchange rates are used in the currency translation process and what are their financial statement effects? How does a translation gain or loss differ from a transactions gain or loss? Is there more than one way of translating financial statements from one currency to another? If so, what are they? How does the temporal method of currency translation differ from the current rate method? What is the relationship between currency translation and inflation?
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Choi/Meek, 6/e 3 Why do Firms Translate? Facilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinational company’s total operations both domestic and foreign. Facilitates the measurement of a firm’s exposure to foreign exchange risk. Facilitates the recording of foreign currency transactions; i.e., foreign currency sales, purchases, borrowing or lending in the consolidated entity’s reporting currency. Facilitates reporting domestic accounts to foreign audiences-of-interest.
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Choi/Meek, 6/e 4 Types of Transaction Rates Spot transactions: the physical exchange of one currency for another in which delivery takes place immediately. Direct quote: the exchange rate specifies the number of domestic currency units needed to acquire a unit of foreign currency. Indirect quote: the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency. Forward transaction: agreements to exchange a specified amount of one currency for another at a future date. Swap transaction: involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase of a currency.
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Choi/Meek, 6/e 5 Accounting for Spot Transactions Spot transaction: occurs when an enterprise purchases or sells goods for which payment is made in a foreign currency, or when it borrows or lends foreign currency. At the transaction date, each asset, liability, revenue, and expense
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foreign currency translation - International Accounting,...

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