P2B.6 INTERNATIONAL FINANCE Flashcards
An international firm with locations in other countries would operate in _______ currencies.
Local country’s currency
Ex: US based firm with a Chinese location would operate in yen
Equity is reported at _______ foreign exchange rate
Historical
Assets and liabilities are recorded at ________
Current forex rate
How would currency depreciation against a foreign currency affect debt/equity?
We would owe more towards AP as value of functional currency decreased.
This in turn increases our debt in total, which increases total debt/equity
Letter of credit
Importer’s bank promises to pay for for goods
What happens when currency depreciation occurs after we bought inventory in a different country?
- Liabilities increase so we would CREDIT AP
- FOREX LOSS –> DEBIT unrealized forex loss
What happens if currency further depreciates on payment day?
- Realized forex loss INCREASES and is DEBITED in X+Y
- Unrealized forex loss is a liability or equity and increases so it is CREDITED in X amount
- AP is a liability that increases and is CREDITED in Y amount
Practice Problem:
On November 1st, Seaside Construction orders lumber (a raw material) from Canadian Lumber for 100,000 CAD (canadian dollars). The lumber inventory is delivered on November 15th, and Seaside pays for the order on December 1st. Here are the spot rates for $1 exchanged to CAD on November 1st:
Spot Rates for $1 in CAD
November 1st 1.3
November 15th 1.45
Seaside enters into a forward contract to lock in an exchange rate of 1.62 on December 1st. Which statement is correct?
A. On November 15th, Seaside debits inventory and credits finished goods for delivery of the lumber
B No entry is recorded on November 1st, because the lumber has not been delivered to Seaside
C The price used to calculate the journal entry for the November 15th delivery of the lumber is 1.62
D The price used to calculate the journal entry for the December 1st Seaside payment is 1.45
Answer Explanation:
A. Incorrect. No entry is recorded on November 1st, because the lumber has not been delivered to Seaside. On November 15th, Seaside debits inventory and credits accounts payable for delivery of the lumber.
B. Correct. No entry is recorded on November 1st, because the lumber has not been delivered to Seaside. On November 15th, Seaside debits inventory and credits accounts payable for delivery of the lumber.
C. Incorrect. On November 15th, Seaside debits inventory and credits accounts payable for delivery of the lumber. The price used to calculate the journal entry for the November 15th delivery of the lumber is 1.45
D. Incorrect. The price used to calculate the journal entry for the December 1st Seaside payment is 1.62. Seaside purchased a forward contract, in order to lock in a specific price when CAD must be paid on December 1st.
What is the purpose of M&A’s?
- lower risk by diversifying into additional industries
- enter new markets,
- provide possible opportunities for quick profitability in new areas
- provide opportunities to take advantage of economies of scope
- potentially lower costs along the value chain of activities
- broaden the strength of resources and capabilities.
Country R’s currency would tend to depreciate relative to Country T’s currency when:
When Country R has lower interest rates compared to country T’s
Letter of Credit
Fast acceptance of importer accepting goods as exporter is virtually guaranteed to be paid upon delivery of goods
TRUE/FALSE: In consignment, importer would not take the title to the goods and exporter would get paid only after goods are sold
TRUE
