Foreign Currency Transactions

Question 1

Foreign Currency Definition

Answer 1

• Foreign Currency is the recognized currency of a country, other than the organizations home country, in which it operates.
• Goldman Sachs, for example, has operations in 30 countries and is headquartered in New York. The US dollar is the domestic currency of this firm, whereas the Pound Sterling (British pound) is the Foreign Currency of its London operations.

Question 2

Foreign Exchange rate Quotations: Direct Quote

Answer 2

Direct Quote
Direct Rate= Value of Domestic Currency/ Value of Foreign currency

Direct rate= USD/ EURO = $1.12/ 1E

Question 3

Foreign Exchange rate Quotations: Indirect Quote

Answer 3

Indirect Quote

Indirect Rate= Value of Foreign Currency/ Value of Domestic currency

Indirect rate= Euro/ USD = .89E/ $1.00

Question 4

Conversion Between Direct and Indirect Quote

Answer 4

Conversion from Direct to Indirect Quote:

Direct rate = 1/ Indirect rate

Conversion from Indirect to Direct Quote

Indirect rate= 1/ Direct rate

Question 5

Currency Appreciation & Depreciation

Answer 5

Currency Appreciation
Currency Appreciation implies a currency is getting stronger concerning another currency. Currency Appreciating can buy more units of the other currency with the
same unit.

Currency Depreciation
Currency Depreciation implies a currency is getting weaker than another currency. Currency Depreciation can buy fewer units of the other currency with the same unit.

If Domestic Currency Appreciates, then Foreign currency depreciates, which would result in a loss (decrease in receivable) and a gain in (decreased in payable).

If Domestic currency Depreciates, Foreign currency appreciates, this causes a gain (increase in Receivable) and a loss (increase in payable).

Question 6

Foreign Currency Transactions

Answer 6

Foreign currency transactions or cross- borer transactions, refer to all trade transactions that occur between organizations in different countries.

• if goods/ services are exchanged with a foreign entity and the receivable/payable will be settled (denominated) in a foreign currency, we need to calculate the foreign exchange gain/loss based on the spot rate and report it on the income statement.