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Chapter 15. GLOBAL BUSINESS AND ACCOUNTING. Exporting. Licensing & Joint Venture. Wholly Owned Subsidiaries. Global Sourcing. Globalization. The process of managers assessing the impact of international activities on the future of their company.

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GLOBAL BUSINESS AND ACCOUNTING

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Global business and accounting

Chapter15

GLOBAL BUSINESS AND ACCOUNTING


Globalization

Exporting

Licensing & Joint Venture

Wholly Owned Subsidiaries

Global Sourcing

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.


Environmental forces shaping globalization

Globalization

Environmental Forces Shaping Globalization

Political/Legal

Cultural

Economic

Technological


Environmental forces shaping globalization1

Political/Legal

  • Businesses

    • Transfer Risk

    • Control Risk

    • Reporting

  • Individuals

    • Tax Laws

    • Policies

Environmental Forces Shaping Globalization

Cultural

Globalization

Economic

Technological


Environmental forces shaping globalization2

Environmental Forces Shaping Globalization

Political/Legal

Cultural

Globalization

Economic

Technological

  • Economic System

  • Obtaining Capital

  • Industrial Organization

  • Exchange Rate Fluctuation


Environmental forces shaping globalization3

Environmental Forces Shaping Globalization

Political/Legal

Cultural

  • Individualism vs. Collectivism

  • Uncertainty Avoidance

  • Short vs. Long Horizon

  • Power Distance

Globalization

Economic

Technological


Environmental forces shaping globalization4

Environmental Forces Shaping Globalization

Political/Legal

Cultural

Globalization

Economic

Technological

  • Education Level

  • Infrastructure

  • Knowledge Transfer


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.


Exchange rates

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”.


Exchange rates1

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”.


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.

Accounting for Transactions with Foreign Companies

12/10/02 1 DM = $.55 US

1/9/03 1 DM = $.53 US

?


Exchange rate issues example

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


Exchange rate issues example1

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


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.

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.


Adjustment of foreign currency transaction at the balance sheet date1

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.


Adjustment of foreign currency transaction at the balance sheet date2

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.


Adjustment of foreign currency transaction at the balance sheet date3

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:


Adjustment of foreign currency transaction at the balance sheet date4

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:


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 $).

Hedging!


Hedging

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.


Hedging1

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!


Foreign corrupt practices act of 1977

Foreign Corrupt PracticesAct of 1977


End of chapter 15

End of Chapter 15

When the ad said, “Job with a hot future!” this isn’t exactly what I expected.


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