1. GLOBAL BUSINESS AND ACCOUNTING
Chapter 15
GLOBAL BUSINESS AND ACCOUNTING 2

2. Globalization typically progresses through an outward growth path.
The process of managers assessing the impact of international activities on the future of their company.
Globalization typically progresses through an outward growth path.
Exporting
Global Sourcing
Licensing & Joint Venture
Wholly Owned Subsidiaries

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

4. Environmental Forces Shaping Globalization
Political/Legal
Businesses
Transfer Risk
Control Risk
Reporting
Individuals
Tax Laws
Policies
Cultural
Globalization
Economic
Technological

5. Environmental Forces Shaping Globalization
Political/Legal
Cultural
Globalization
Economic
Technological
Economic System
Obtaining Capital
Industrial Organization
Exchange Rate Fluctuation

6. Environmental Forces Shaping Globalization
Political/Legal
Cultural
Individualism vs. Collectivism
Uncertainty Avoidance
Short vs. Long Horizon
Power Distance
Globalization
Economic
Technological

7. Environmental Forces Shaping Globalization
Political/Legal
Cultural
Globalization
Economic
Technological
Education Level
Infrastructure
Knowledge Transfer

8. 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.

9. 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”.

10. 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”.

11. 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 ?

12. 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 = £.
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, on December 10, 2002 based on the current exchange rate.
10,000£ ÷ = $16,412.28

13. Exchange Rate Issues Example
By 12/10/02, the foreign exchange rate has changed to $1 = £.
After receiving the British £ from Knight, and exchanging them into US $, how much will BobCo have 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£ ÷ = $16,353.23

14. 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.

15. 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 $ per FF.
Prepare Balloon Co.’s 12/1/02 journal entry.

16. 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 $ per FF.
Prepare Balloon Co.’s 12/1/02 journal entry.

17. 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 $ per FF.
Adjust the original receivable:

18. 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 $ per FF.
Adjust the original receivable:

19. Strategies to Avoid Losses from Rate Fluctuations
Insist that the transaction is consumated in your own currency (US $).
Hedging!

20. The exchange rates that are available today. Forward Exchange Rates
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.

21. Hedging
A forward contract requires the purchase of currency units at a future date at the contracted 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!

22. Foreign Corrupt Practices Act of 1977

23. End of Chapter 15
When the ad said, “Job with a hot future!” this isn’t exactly what I expected.