Chapter 11 – Multinational Accounting: Foreign Currency Transactions And Financial Instruments
CHAPTER 11
Q11-1 Indirect and direct exchange rates differ by which currency is desired to be
expressed in another currency. An indirect exchange rate is the number of foreign
currency units that may be obtained for one local currency unit. The indirect exchange
rate has the foreign currency unit in the numerator. As a fraction, the indirect exchange
Q11-2 The direct exchange rate can be calculated by taking the inverse of the indirect
exchange rate. Such a computation follows:
Number of foreign currency units
=
C$1.3623 (Canadian dollars)
One local currency unit
$1.00 (U.S. dollars)
The inverse of the indirect exchange rate is:
$1.00 (U.S. dollars)
=
C$1.36 (Canadian dollars)
$0.7340
Q11-3 When the U.S. dollar strengthens against the European euro, imports from
Q11-4 A foreign transaction is a transaction that does not involve the exchange of
currencies on the part of the reporting entity. An example of a foreign transaction is the
sale of equipment by a U.S. company (the reporting entity) to a Japanese firm that is
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C11-1 Effects of Changing Exchange Rates
a. The major factors influencing the demand for the U.S. dollar on the foreign exchange
(1) Exports from the U.S. to the other country become less expensive and foreign
buyers tend to increase their orders for U.S. goods. For example, assume the U.S.
dollar weakened relative to a foreign currency unit (FCU) as follows:
direct exchange rate
=
after weakening
=
This would mean that a U.S.-manufactured machine selling for $10,000 would cost
the foreign customer 20,000 FCU before the weakening of the dollar ($10,000 =
20,000 FCU x $0.50). After the weakening of the dollar, this same machine would
cost the foreign customer 16,667 FCU ($10,000 = 16,667 FCU x $0.60). This
means a significant price reduction for the foreign buyer, thereby increasing the
foreign demand for the U.S.-manufactured machine.
(2) The opposite effect occurs for the U.S. business firm as the dollar weakens.
Foreign-made goods are now more expensive as it takes more dollars to acquire
imports. For example, a foreign-made part selling for 10 FCU before the weakening
costs the U.S. company $5.00 ($5.00 = 10 FCU x $0.50). After the dollar weakens,
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C11-2 Reporting a Foreign Currency Transaction on the Financial Statements
[AICPA Adapted]
a. Bow should report a foreign exchange loss on its 20X5 income statement. This loss is
calculated by taking the number of pounds that are due in 20X6 and multiplying them by
C11-3 Changing Exchange Rates
Note to Teacher: Currency exchange rates may be found in a variety of places on the
Internet. A good site is http://finance.yahoo.com/currency-investing. Note that to obtain
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
E11-1 Exchange Rates
a. Indirect exchange rates for pounds and dollars:
E11-2 Changes in Exchange Rates
a. Exchange rates:
Arrival Date
Departure Date
Direct
Exchange Rate
1 florin = $0.20
($200 / 1,000 florins)
1 florin = $0.15
($15 / 100 florins)
Indirect
Exchange Rate
$1.00 = 5 florins
(1,000 florins / $200)
$1.00 = 6.67 florins
(100 florins / $15)
b. The direct exchange rate has decreased. This means that the dollar has
strengthened during Mr. Alt’s visit. For example, upon arrival, Mr. Alt had to pay
$0.20 per each florin. Upon departure, however, each florin is worth just $0.15. This
means that the relative value of the dollar has increased or, alternatively, the value
of the florin has decreased.
Arrival date
100 florins x $0.20 =
$20
Departure date
100 florins x $0.15 =
15
Foreign Currency Transaction Loss
$ 5
Mr. Alt held florins for a time in which the florin was weakening against the dollar.
Thus, Mr. Alt experienced a loss by holding the weaker currency.