Complete two exercises in accounting for foreign currency transactions and translating financial statements from a foreign currency into U.S. dollars.
Introduction
In today’s global economy, many companies conduct business in currencies other than the currency in which they report. Goods are often imported or exported with prices stated in a foreign currency. For the purpose of reporting, foreign currency balances must be stated in the company’s reporting currency. That is done by multiplying the foreign currency by an exchange rate.
To restate foreign currency balances, accountants consider two questions:
- What is the appropriate exchange rate for converting foreign currency balances?
- How does one account for changes in the exchange rate?
Companies often engage in foreign currency hedging activities in order to avoid any adverse impacts of exchange rate changes. As a result, accountants must determine how to account for these hedging activities.
Many U.S. companies have significant financial interests in foreign countries. As a result, the way in which foreign currency is translated into U.S. dollars is significant. The two major issues related to the translation process are:
- Which translation method to use.
- Where to report the resulting translation adjustment in the consolidated financial statements.
Translation methods differ based on whether accounts are translated at the current exchange rate or at historical rates. Accounts that are translated at the current exchange rate are exposed to translation adjustment. Different translation methods result in different concepts of balance sheet exposure.
Preparation
The following resources are required to complete the assessment.
Complete the problems in the Assessment 3 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided.
Problem 1: Foreign Currency Borrowing
- Journalize foreign currency borrowing transactions.
- Determine the effective cost of borrowing.
Problem 2: Financial Statement Translation
- Prepare financial statements in LCU units.
- Translate financial statement amounts to U.S. dollars.
- Compute translation adjustments.
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
- Competency 2: Evaluate the influence of global money markets on financial statements.
- Journalize foreign currency borrowing transactions.
- Determine the effective cost of borrowing.
- Prepare financial statements in LCU units.
- Translate financial statement amounts to U.S. dollars.
- Compute translation adjustments.
- Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
- Communicate results from accounting calculations accurately and clearly.
