1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-1 GLOBAL BUSINESS AND ACCOUNTING Lecture 14

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-2 Adjustment of Foreign Currency Transaction at the Balance Sheet Date Occasionally, a transaction occurs in one fiscal period, but cash is not received or paid until the next fiscal period. At the balance sheet date, any outstanding foreign currency receivables or payables must be “remeasured” using the spot rate available on the balance sheet date.

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-3 Adjustment of Foreign Currency Transaction at the Balance Sheet Date On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $0.1575 per FF. Prepare Balloon Co.’s 12/1/02 journal entry. On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $0.1575 per FF. Prepare Balloon Co.’s 12/1/02 journal entry.

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-4 Adjustment of Foreign Currency Transaction at the Balance Sheet Date On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $0.1575 per FF. Prepare Balloon Co.’s 12/1/02 journal entry. On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $0.1575 per FF. Prepare Balloon Co.’s 12/1/02 journal entry.

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-5 Adjustment of Foreign Currency Transaction at the Balance Sheet Date On 12/31/02, the value of the foreign currency receivable must be adjusted based on the 12/31/02 spot rate of $0.1500 per FF. Adjust the original receivable: On 12/31/02, the value of the foreign currency receivable must be adjusted based on the 12/31/02 spot rate of $0.1500 per FF. Adjust the original receivable:

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-6 Adjustment of Foreign Currency Transaction at the Balance Sheet Date On 12/31/02, the value of the foreign currency receivable must be adjusted based on the 12/31/02 spot rate of $0.1500 per FF. Adjust the original receivable: On 12/31/02, the value of the foreign currency receivable must be adjusted based on the 12/31/02 spot rate of $0.1500 per FF. Adjust the original receivable:

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-7 Strategies to Avoid Losses from Rate Fluctuations Insist that the transaction is consumated in your own currency (US $). Hedging!

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-8 The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations by using forward exchange rates to offset changes in spot rates. Spot Rates The exchange rates that are available today. Forward Exchange Rates The exchange rates that can be locked in today for expected future exchange transactions. Spot Rates The exchange rates that are available today. Forward Exchange Rates The exchange rates that can be locked in today for expected future exchange transactions. Hedging

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-9 This forward contract allows us to purchase 1,000,000 ¥ at a price of $.0080 US in 30 days. Good. If the spot rate is $.0090 US in 30 days, we only have to pay $.0080 US, and we avoid a $1,000 loss! Hedging A forward contract requires the purchase of currency units at a future date at the contracted exchange rate.

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-10 Foreign Corrupt Practices Act of 1977

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-11 When the ad said, “Job with a hot future!” this isn’t exactly what I expected.

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-12 Source: Adopted from McGraw-Hill/Irvin