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chapter_9_10th_word - 1 Under the two-transaction...

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1. Under the two-transaction perspective, an export sale (import purchase) and the sub- sequent collection (payment) of cash are treated as two separate transactions to be ac- counted for separately. The idea is that management has made two decisions: (1) to make the export sale (import purchase), and (2) to extend credit in foreign currency to the foreign customer (obtain credit from the foreign supplier). The income effect from each of these decisions should be reported separately. 4. Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid po- tential losses from fluctuations in exchange rates. In addition to avoiding possible losses, companies hedge foreign currency transactions and commitments to introduce an element of certainty into the future cash flows resulting from foreign currency activities. Hedging in- volves establishing a price today at which foreign currency can be sold or purchased at a future date. 25. Foreign Currency Receivable (Export Sale) (LO2) (10 minutes) 9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000
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