B. Woods Chapter 12 - Chapter 12 FOREIGN CURRENCY CONCEPTS...

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178 Chapter 12 FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS Answers to Questions 1 A transaction is measured in a particular currency if its magnitude is expressed in that currency. Assets and liabilities are denominated in a currency if their amounts are fixed in terms of that currency. 2 A Canadian dollar is a foreign currency from the viewpoint of a U.S. corporation and from the viewpoint of a Canadian entity whose functional currency is not the Canadian dollar. This is because a foreign currency is any currency other than the functional currency of the entity being referred to. 3 Direct quotation: .72/1 = $.72 Indirect quotation: 1/.72 = 1.3889 Canadian dollars 4 Official or fixed rates are set by a government and do not change as a result of changes in world currency markets. Free or floating exchange rates are those that reflect fluctuating market prices for currency based on supply and demand factors in world currency markets. The United States changed from fixed to floating (free) exchange rates in 1971. But the U.S. dollar is sometimes described as a "filthy float" because the United States has frequently engaged in currency transactions to support or weaken the dollar against other currencies. Such action is taken for economic reasons, such as to make U.S. goods more competitive in world markets. Both Japan and Germany have engaged in currency transactions in an attempt to support the U.S. dollar. In February 1987, the United States and six other industrial nations (the Group of 7 or G-7) entered the Louvre accord to cooperate on economic and monetary policies in support of agreed upon exchange rate levels. 5 Spot rates are the exchange rates for immediate delivery of currencies exchanged. The current rate for foreign currency transactions is the spot rate in effect for immediate settlement of the amounts denominated in foreign currency at the balance sheet date. Historical rates are the rates that were in effect on the date that a particular event or transaction occurred. 6 The transaction is a foreign transaction because it involves import activities, but it is not a foreign currency transaction for the U.S. firm because it is denominated in local currency. It is a foreign currency transaction for the Japanese company.
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179 Foreign Currency Concepts and Transactions 7 At the transaction date, assets and liabilities denominated in foreign currency are translated into dollars by use of the exchange rate in effect at that date, and they are recorded at that amount. At the balance sheet date, cash and amounts owed by or to the enterprise that are denominated in foreign currency are adjusted to reflect the current rate. Assets carried at market whose current market price is stated in a foreign currency are adjusted to the equivalent dollar market price at the balance sheet date. 8
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This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.

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B. Woods Chapter 12 - Chapter 12 FOREIGN CURRENCY CONCEPTS...

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