GLOBAL BUSINESS AND ACCOUNTING

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Chapter15
GLOBAL BUSINESS AND ACCOUNTING
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Globalization
The process of managers assessing the impact of
international activities on the future of their
company.
Globalization typically progresses through an
outward growth path.
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Environmental Forces Shaping Globalization
Cultural
Political/Legal
Economic
Technological
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Environmental Forces Shaping Globalization
Cultural
Globalization
Economic
Technological
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Environmental Forces Shaping Globalization
Political/Legal
Cultural
Globalization
Economic
Technological

• Economic System
• Obtaining Capital
• Industrial Organization
• Exchange Rate Fluctuation

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Environmental Forces Shaping Globalization
Cultural
Political/Legal

• Individualism vs. Collectivism
• Uncertainty Avoidance
• Short vs. Long Horizon
• Power Distance

Globalization
Economic
Technological
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Environmental Forces Shaping Globalization
Political/Legal
Cultural
Globalization
Economic
Technological

• Education Level
• Infrastructure
• Knowledge Transfer

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Foreign Currencies and Exchange Rates

• Each country uses its own currency for internal
  economic transactions.
• To make transactions in another country, units of
  that countrys currency must be acquired.
• The cost of those currencies is called the
  exchange rate.

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Exchange 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.

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Exchange Rates
When the US price of a foreign currency unit
rises, we say that the US is weaker.
Yes. Yesterday, Yen cost 0.0106, but today, Yen
only cost 0.0100!
I noticed that the is stronger against the Yen
today.
When the US price of a foreign currency unit
falls, we say that the US is stronger.
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Accounting for Transactions with Foreign Companies

• 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
?
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Exchange Rate IssuesExample
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
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Exchange Rate IssuesExample
By 12/10/02, the foreign exchange rate
haschanged to 1 .6115 . After receiving the
British from Knight, and exchanging them into
US , how much will BobCohave actually received?
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
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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.
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.
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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.

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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.

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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
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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
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Strategies to Avoid Losses from Rate Fluctuations
Insist that the transaction is consumated in your
own currency (US ).
Hedging!
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Hedging
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.
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Hedging
A forward contract requires the purchase
ofcurrency units at a future date at
thecontracted exchange rate.
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!
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Foreign Corrupt PracticesAct of 1977
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End of Chapter 15
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