When the U.S. dollar is expected to rise in value against foreign currencies, a U.S. company with foreign currency denominated receivables and payables should
Answer (D) is correct. The proper action would be to increase collections and decrease payments. Collections should be made quickly and converted into dollars to sustain the increase in their value as the dollar appreciates. Decreasing payments would be profitable because, as the company exchanges dollars for foreign currency at a later date, it will receive more of the foreign currency, thus lowering its real cost.
A short-term speculative rise in the world-wide value of domestic currency could be moderated by a central bank decision to
Answer (A) is correct. In the short run, a central bank’s sale of the currency increases the supply and reduces the price of the currency. In the long run, given the current system of managed floating exchange rates, changes in rates should reflect changes in economic conditions. In other words, exchange rates should float. But central banks are expected to manage the float by buying and selling currencies to counteract the disruptive effects on rates of such temporary factors as speculation.
Bonner Electronics has subsidiaries in several international locations and is concerned about its exposure to foreign exchange risk. In countries where currency values are likely to fall, Bonner should encourage all of the following policies except
Answer (A) is correct. Extension of credit in a foreign currency would result in receiving payment in less valuable dollars if the foreign currency became less valuable. Thus one would not want to encourage granting trade credit in a foreign country when the country’s currency is expected to lose value.
A U.S. company has an account payable it must pay in 6 months with one Japanese company and an account receivable to be received in 6 months with another Japanese company. The U.S. company would not have transaction exposure if
Answer (A) is correct. This is the only listed answer choice that completely avoids exchange rate fluctuation risks.
A firm in Australia imports chairs from Bangladesh and resells them in Australia for A$45 per unit. The firm placed an order for 1,000 chairs with the supplier in Bangladesh at a cost of B$60 per unit. As per the terms of the agreement, payment is not required until the goods arrive in 30 days. The current exchange rate is B$1.5753 for A$1. The firm expects the exchange rate to decline to B$1.5500 for A$1. In order to manage short-term exchange rate risk, the firm decides to hedge and lock in an exchange rate of B$1.5650 for A$1. What would be the pre-tax profit from the sale of chairs?
Answer (B) is correct. The firm can buy the chairs for A$38,340 since the costs of the chairs are B$60,000. B$1 is equal to A$0.639. Thus, the firm can purchase the chairs with A$38,340 using A$.639 multiplied by the B$60,000 cost (A$1 ÷ 1.565). Since the firm’s sales will be A 45,000 ( ,000 chairs × A$45 per chair), the firm would have a profit of A$6,660 (A$45,000 – A$38,340 cost).
Suppose that the current exchange rate between the Japanese yen (¥) and the U.S. dollar ($) is ¥100 = $1. A financial analyst predicts that the exchange rate will be ¥94 = $1 next year. If the analyst uses purchasing power parity as the basis of the prediction, the analyst expects that the yen will
Answer (A) is correct. Since the U.S. dollar exchanges to less Japanese yen in the future, the yen is expected to appreciate. According to the purchasing power parity, relative price levels determine exchange rates. So, as the price levels (inflation) increase at a higher rate in the U.S. compared to Japan, the yen will appreciate in value compared to the dollar.
Which of the following should be reported as a stockholders’
(c) The requirement is to determine which item is reported
in the stockholders’ equity section. Accumulated gains
and losses on certain foreign currency transactions should be
reported as a component of stockholders’ equity entitled other
comprehensive income. Answers (a), (b), and (d) are incorrect
because these items are reported on the balance sheet in the assets
and liabilities sections and are amortized over their respective
A foreign subsidiary’s functional currency is its local currency,
which has not experienced significant inflation. The
weighted-average exchange rate for the current year would be the
appropriate exchange rate for translating
Sales to customers Wages expense
(b) The current rate method for the translation of foreign
currency financial statements is used when a foreign subsidiary’s
functional currency is its local currency. Using the current
rate method, revenue and expenses should be translated into US
dollars at the weighted-average rate for the current year. Thus,
both sales to customers and wages expense should be translated
at the weighted-average rate.
The functional currency of Nash, Inc.’s subsidiary is the
euro. Nash borrowed euros as a partial hedge of its investment in
the subsidiary. In preparing consolidated financial statements,
Nash’s translation loss on its investment in the subsidiary exceeded
its exchange gain on the borrowing. How should the
effects of the loss and gain be reported in Nash’s consolidated
(a) Translation adjustments resulting from the translation
of foreign currency statements should be reported separately
as components of other comprehensive income, accumulated
other comprehensive income, and stockholders’ equity.
Additionally, gains and losses on certain foreign currency transactions
should also be reported similarly. Those gains and losses
which should be excluded from net income and instead reported
as components of other comprehensive income and of accumulated
other comprehensive income in stockholders’ equity include
foreign currency transactions designated as economic
hedges of a net investment in a foreign entity. Thus, both the
translation loss and the exchange gain are to be reported as other
comprehensive income and accumulated other comprehensive
income in the stockholders’ equity section of the balance sheet.
Because the translation loss on the investment exceeds the exchange
gain on the borrowing, the translation loss less the exchange
gain is the amount to be reported as separate components
of other comprehensive income and accumulated other comprehensive
income equity in the consolidated financial statements.
A balance arising from the translation or remeasurement of
a subsidiary’s foreign currency financial statements is reported in
the consolidated income statement when the subsidiary’s functional
currency is the
Foreign currency . . . . US dollar
(b) Translation adjustments result from translating an
entity’s financial statements into the reporting currency. Such
adjustments, which result when the entity’s functional currency is
the foreign currency, should not be included in net income.
Instead, such adjustments should be reported as other comprehensive
income and accumulated other comprehensive income
in the stockholders’ equity section of the balance sheet. If the
functional currency is the reporting currency (US dollar), a
remeasurement process takes place, with the resulting gain or
loss included in net income.