Foreign Currency Transactions Basic Information Summer I 2009

Foreign Currency Transactions Basic Information Summer I 2009

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Accounting 401 Advanced Accounting Foreign Currency Transactions Summer I 2009 A. Introduction 1. In most countries, a country’s currency is treated much like a commodity or money market instrument. 2. In the United States, foreign currencies are bought and sold by the international banking departments of commercial banks. 3. The buying and selling of foreign currencies result in variations in the exchange rate between the currencies of two countries. For example, suppose the exchange rates for the British pound are: Foreign Currency in Dollars in Foreign U.S. Dollars Currency $1.572 0.636 Thus, 1 British pound could be exchanged for about $1.50; while $1 could be exchanged for about .64 British pounds. Note that the two exchange rates are reciprocals (1/0.636 = 1.572 or 1/1.572 = 0.636). 4. Since our perspective will be from the U.S. company records, we will use direct exchange rates to convert to U.S. dollars. For example, suppose a contract indicates 152,000 British pounds. Using the exchange rate given above, the conversion is made by multiplying 152,000 by $1.572 to arrive at $238,934. 5. Factors that affect fluctuations in exchange rates include a country’s balance of payments surplus or deficit, global rates of inflation, money market variations (such as interest rates) in the individual countries, capital investment levels, and the monetary actions of central banks of various countries. B.
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Foreign Currency Transactions Basic Information Summer I 2009

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