foreign currency Flashcards
direct quote
This is a direct exchange rate and it measures how much domestic currency must be exchanged to receive one unit of a foreign currency. $1.25 = 1 €.
the domestic price of one unit of a foreign currency.ex it will cost a $1.24 of us dollars to buy one euro.
indirect quote
This is an indirect exchange rates and it measures how many units of foreign currency may be purchased with one unit of domestic currency. $1.00 = .80 €. The indirect quote is the reciprocal of the direct quote (1 ??? / $1.25 = .80 €).
the foreign price of one unit of domestic currency. so .806 euro will buy one dollar.
how much euro it will cost to buy one dollar
if the dollar weakens
It will take more U.S. dollars to acquire one unit of foreign currency (€ = foreign currency unit).
Imports become more expensive to the U.S.
U.S. exports become less expensive to the foreign country.
from to
indirect $1.00 = 0.80 € $1.00 = 0.625 €
direct $1.25 = 1 € $1.60 = 1 €
if the dollar strengthens
It will take fewer U.S. dollars to acquire one unit of foreign currency.
Imports become less expensive to the U.S.
U.S. exports become more expensive to the foreign country.
IF THE DOLLAR STRENGTHENS:
from to
indirect $1.00 = 0.80 € $1.00 = 0.909 €
direct $1.25 = 1 € $1.10 = 1 €
if you are given direct exchange rates you will have to _____the foreign currency by the direct rate to get the us dollar amount.
if you are given indirect rates you will have to ____ the foreign currency by the indirect rate to get the us dollar amount.
multiply
divide
functional currency
the currency of the primary economic environment in which an entity operates and generates cash flows. the currency in which that entity functions.
the indirect rate is the ____direct rate
if direct rate is .75 then the
indirect rate is 1/.75=1.33
translation rates to use
Revenues, Expenses, Gains, and Losses –
Assets and Liabilities –
Paid-In Capital –
Retained Earnings –
dividends —-
cs—
Revenues, Expenses, Gains, and Losses – weighted average
Assets and Liabilities – use spot rate at balance sheet date
Paid-In Capital – use historic rate when epic arose(but not earlier than investment in foreign entity)
Retained Earnings – calculate
dividends— use historic spot rate when dividends were declared
cs-historic rate when sub was established
translation adjustment financials
The translated Balance Sheet does not balance (Assets = $12,750; liabilities + Equity = $12,070) until the translation adjustment is included. The amount of the translation adjustment is the amount needed to make the Balance Sheet balance ($680). The $680 is “plugged.”
6. The Translation Adjustment is reported in the Shareholders’ Equity Section of the Balance Sheet and as an item of Other Comprehensive Income in reporting Comprehensive Income.
AOCI is at the bottom of the translated balance sheet as the last item in the oe account and it makes it balance
remeasurement adjustment
Amount needed to make the trial balance debit and credits (expressed in Dollars) balance is amount of Remeasurement Adjustment:
A. The Remeasurement Adjustment is reported as a Gain or Loss in the Income from Continuing Operations section of the Income Statement (expressed in Dollars).
B. The remeasurement adjustment “flows thru” the Income Statement to Retained Earnings.
measurement rules
income statement items (except depn expense)
depn expense
retained earnings
income statement items (except depn expense) -average rate
depn expense-historic rate when asset acquired
retained earnings-same as translation. actual amounts used, except dividends which use historic rate
- Revenues (sales) are assumed to have occurred evenly throughout the year.
- All inventory sold during the year and remaining on hand at year-end is assumed to have been acquired from the parent evenly throughout the year.
- Fixed assets and Depreciation expense are translated at the exchange rate in effect when the fixed assets were acquired.
- Dividends are remeasured at the exchange rate in effect on the date of declaration.
- Common stock is remeasured at the exchange rate in effect the day the stock was issued (since the parent created the Sub).
- The preliminary translated Balance Sheet does not balance (assets = $12,478; Preliminary Liabilities + Equity = $12,095). The difference ($383) is not reported as a Remeasurement Adjustment in Shareholders’ Equity.
- The amount needed to balance the Balance Sheet ($383) is recognized as a Remeasurement Adjustment Gain in the Income from Continuing Operations section of the Income Statement, which increases Net Income which, in turn, increases Ending Retained Earnings resulting in balancing the Balance Sheet.
- Since the remeasurement adjustment is recognized in net income, it is not shown as an item of Other Comprehensive Income.
translation adjustments are used when?
subs operations are concentrated in the country in which it is located and are essentially independent of parent. The economy of the foreign country is not highly inflationary.
Two different methods can be used for converting the financial statements of a foreign subsidiary, either translation or remeasurement. Which method is used depends on the functional currency of the foreign subsidiary. If the local foreign currency is the functional currency, the statements are translated. If the U.S. dollar is the functional currency, the statements are remeasured. Remeasurement gains and losses affect the income statement, while translation gains or losses are carried directly to an equity account, bypassing the income statement entirely.
This response is correct because a balance arising from remeasurement is reported in the income statement whenever the U.S. dollar is the functional currency (which requires that the financial statements be remeasured).
foreign currency translation adjustments on receivables and payables are reported in the I
I.S
