From Shakeel Ahmed Ghanghro

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

2. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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The process of managers assessing the impact of
international activities on the future of their company.
The process of managers assessing the impact of
international activities on the future of their company.
Globalization typically progresses through an outward
growth path.
Globalization typically progresses through an outward
growth path.
GlobalizationGlobalization
Exporting
Global
Sourcing
Licensing &
Joint Venture
Wholly Owned
Subsidiaries

3. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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EconomicEconomic
GlobalizationGlobalization
TechnologicalTechnological
Environmental Forces Shaping
Globalization
Environmental Forces Shaping
Globalization
CulturalCulturalPolitical/LegalPolitical/Legal

4. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Environmental Forces Shaping
Globalization
Environmental Forces Shaping
Globalization
EconomicEconomic
GlobalizationGlobalization
TechnologicalTechnological
Political/LegalPolitical/Legal
•Businesses
•Transfer Risk
•Control Risk
•Reporting
•Individuals
•Tax Laws
•Policies
•Businesses
•Transfer Risk
•Control Risk
•Reporting
•Individuals
•Tax Laws
•Policies
CulturalCultural

5. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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GlobalizationGlobalization
EconomicEconomic
Economic System
Obtaining Capital
Industrial
Organization
Exchange Rate
Fluctuation
Economic System
Obtaining Capital
Industrial
Organization
Exchange Rate
Fluctuation
TechnologicalTechnological
Environmental Forces Shaping
Globalization
Environmental Forces Shaping
Globalization
Political/LegalPolitical/Legal CulturalCultural

6. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Environmental Forces Shaping
Globalization
Environmental Forces Shaping
Globalization
EconomicEconomic
GlobalizationGlobalization
TechnologicalTechnological
CulturalCultural
Individualism vs.
Collectivism
Uncertainty
Avoidance
Short vs. Long
Horizon
Power Distance
Individualism vs.
Collectivism
Uncertainty
Avoidance
Short vs. Long
Horizon
Power Distance
Political/LegalPolitical/Legal

7. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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GlobalizationGlobalization
EconomicEconomic TechnologicalTechnological
Education Level
Infrastructure
Knowledge
Transfer
Education Level
Infrastructure
Knowledge
Transfer
Environmental Forces Shaping
Globalization
Environmental Forces Shaping
Globalization
Political/LegalPolitical/Legal CulturalCultural

8. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Foreign Currencies and Exchange
Rates
Foreign Currencies and Exchange
Rates
Each country uses its own
currency for internal
economic transactions.
To make transactions in
another country, units of
that country’s currency
must be acquired.
The cost of those
currencies is called the
exchange rate.
Each country uses its own
currency for internal
economic transactions.
To make transactions in
another country, units of
that country’s currency
must be acquired.
The cost of those
currencies is called the
exchange rate.

9. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Exchange RatesExchange Rates
Exchange rates fluctuate daily.
Daily exchange rates are published in the financial
press, such as the Wall Street Journal.
The process of restating a foreign currency amount
into a domestic currency amount is called
“translation”.
Exchange rates fluctuate daily.
Daily exchange rates are published in the financial
press, such as the Wall Street Journal.
The process of restating a foreign currency amount
into a domestic currency amount is called
“translation”.

10. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Exchange RatesExchange Rates
When the US $ price
of a foreign currency
unit rises, we say
that the US $ is
“weaker”.
When the US $ price
of a foreign currency
unit rises, we say
that the US $ is
“weaker”.
When the US $ price
of a foreign currency
unit falls, we say that
the US $ is
“stronger”.
When the US $ price
of a foreign currency
unit falls, we say that
the US $ is
“stronger”.
I noticed that
the $ is stronger
against the Yen
today.
Yes. Yesterday, Yen
cost $0.0106, but
today, Yen only cost
$0.0100!

11. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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When a transaction is
denominated in a foreign
currency . . .
And the transaction occurs on
one date (for example a
credit sale) . . .
. . . but the cash flow is at a
later date . . .
. . . fluctuating exchange rates
can result in exchange rate
gains or losses.
When a transaction is
denominated in a foreign
currency . . .
And the transaction occurs on
one date (for example a
credit sale) . . .
. . . but the cash flow is at a
later date . . .
. . . fluctuating exchange rates
can result in exchange rate
gains or losses.
?
12/10/02 1 DM = $.55
US
1/9/03 1 DM = $.53 US
Accounting for Transactions with
Foreign Companies
Accounting for Transactions with
Foreign Companies

12. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Exchange Rate Issues
Example
Exchange Rate Issues
Example
On 9/10/02, BobCo (a US firm) sells inventory to Knight
Corp. (a UK firm) on credit. Knight will pay BobCo
10,000 British pounds in 3 months.
The current exchange rate is $1 = .6093 £.
On 9/10/02, what is the expected US $ value of the 10,000
£ that BobCo expects to collect on 12/10/02?
On 9/10/02, BobCo (a US firm) sells inventory to Knight
Corp. (a UK firm) on credit. Knight will pay BobCo
10,000 British pounds in 3 months.
The current exchange rate is $1 = .6093 £.
On 9/10/02, what is the expected US $ value of the 10,000
£ that BobCo expects to collect on 12/10/02?
On September 10, BobCo would expect to be able to
convert the 10,000 £ into $16,412.27 on December 10,
2002 based on the current exchange rate.
10,000£ ÷ .6093 = $16,412.28
On September 10, BobCo would expect to be able to
convert the 10,000 £ into $16,412.27 on December 10,
2002 based on the current exchange rate.
10,000£ ÷ .6093 = $16,412.28

13. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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On December 10, 2002, BobCo would actually collect
$16,353.23, an exchange loss of of $59.05 since
September 10!
10,000£ ÷ .6115 = $16,353.23
On December 10, 2002, BobCo would actually collect
$16,353.23, an exchange loss of of $59.05 since
September 10!
10,000£ ÷ .6115 = $16,353.23
Exchange Rate Issues
Example
Exchange Rate Issues
Example
By 12/10/02, the foreign exchange rate has
changed to $1 = .6115 £.
After receiving the British £ from Knight, and
exchanging them into US $, how much will BobCo
have actually received?
By 12/10/02, the foreign exchange rate has
changed to $1 = .6115 £.
After receiving the British £ from Knight, and
exchanging them into US $, how much will BobCo
have actually received?

14. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
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.
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.
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.

15. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
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.

16. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
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.

17. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
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:

18. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
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:

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

20. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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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.
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.
HedgingHedging

21. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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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!
HedgingHedging
A forward contract requires the purchase of
currency units at a future date at the
contracted exchange rate.
A forward contract requires the purchase of
currency units at a future date at the
contracted exchange rate.

22. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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R e c o r d a n d
d i s c l o s e a l l
p a y m e n t s , p r o p e r
o r i m p r o p e r .
I n f l u e n c e
p e d d l i n g i s
i l l e g a l .
( 1 9 8 6 A m e n d m e n t )
F a c i l i t a t i n g
p a y m e n t s a r e
n o t i l l e g a l .
( 1 9 8 6 A m e n d m e n t )
B r i b e r y o f
g o v e r n m e n t
o f f i c i a l s i s
i l l e g a l .
M a i n t a i n a n
a d e q u a t e
s y s t e m o f
i n t e r n a l c o n t r o l s .
Foreign Corrupt Practices
Act of 1977
Foreign Corrupt Practices
Act of 1977

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