Slide

5-1

Chapter

15 GLOBAL BUSINESS
AND ACCOUNTING

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Slide
5-2

Globalization
Globalization

The
Theprocess
processofof managers
managersassessing
assessingthetheimpact
impactof
of
international
internationalactivities
activities on
on the
thefuture
future of
oftheir
theircompany.
company.

Globalization
Globalizationtypically
typicallyprogresses
progressesthrough
through an
an outward
outward
growth
growth path.
path.
Licensing & Wholly Owned Global
Exporting
Joint Venture Subsidiaries Sourcing

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Slide
5-3
Environmental
Environmental Forces
Forces Shaping
Shaping
Globalization
Globalization
Political/Legal
Political/Legal Cultural
Cultural

Globalization
Globalization

Economic
Economic Technological
Technological

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Slide
5-4
Environmental
Environmental Forces
Forces Shaping
Shaping
Globalization
Globalization
Political/Legal
Political/Legal Cultural
Cultural
••Businesses
Businesses
••Transfer
TransferRisk
Risk
••Control
ControlRisk
Risk Globalization
Globalization
••Reporting
Reporting
••Individuals
Individuals
••Tax
TaxLaws
Economic
Laws Technological
Economic Technological
••Policies
Policies

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

Slide
5-5
Environmental
Environmental Forces
Forces Shaping
Shaping
Globalization
Globalization
Political/Legal
Political/Legal Cultural
Cultural

Globalization
Globalization

Economic
Economic Technological
Technological

Economic
EconomicSystem
System

Obtaining
ObtainingCapital
Capital
Industrial
Industrial
Organization
Organization

Exchange
ExchangeRate
Rate
Fluctuation
Fluctuation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-6
Environmental
Environmental Forces
Forces Shaping
Shaping
Globalization
Globalization
Political/Legal
Political/Legal Cultural
Cultural

Individualism
Individualismvs.
vs.
Collectivism
Collectivism
Globalization 
Uncertainty
Uncertainty
Globalization Avoidance
Avoidance
Short
Shortvs.
vs.Long
Long
Horizon
Horizon
Economic
Economic Technological
 Power
PowerDistance
Technological
 Distance

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5-7
Environmental
Environmental Forces
Forces Shaping
Shaping
Globalization
Globalization
Political/Legal
Political/Legal Cultural
Cultural

Globalization
Globalization

Economic
Economic Technological
Technological

Education
EducationLevel
Level

Infrastructure
Infrastructure

Knowledge
Knowledge
Transfer
Transfer

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

Slide
5-8
Foreign
Foreign Currencies
Currencies and
and Exchange
Exchange
Rates
Rates

Each
Each country
country uses
uses its
its own
own
currency
currency for
for internal
internal
economic
economic transactions.
transactions.

ToTo make
make transactions
transactions in in
another
another country,
country, units
units of
of
that
that country’s
country’s currency
currency
must
must be
be acquired.
acquired.

The
The cost
cost of
of those
those
currencies
currencies isis called
called the
the
exchange
exchange rate.
rate.

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Slide
5-9

Exchange
Exchange Rates
Rates

Exchange
Exchangerates
ratesfluctuate
fluctuatedaily.
daily.

Daily
Dailyexchange
exchangerates
ratesare
arepublished
publishedin
inthe
thefinancial
financial
press,
press,such
suchas
asthetheWall
Wall Street
StreetJournal.
Journal.

The
Theprocess
processofof restating
restatingaaforeign
foreigncurrency
currencyamount
amount
into
intoaadomestic
domesticcurrency
currencyamount
amountisiscalled
called
“translation”.
“translation”.

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

Slide
5-10

Exchange
Exchange Rates
Rates

When
Whenthe theUS
US$$price
price Yes. Yesterday, Yen
of
ofaaforeign
foreigncurrency
currency cost $0.0106, but
unit
unitrises,
rises,we
wesay
say today, Yen only cost
that
thatthetheUS
US$$isis I noticed that $0.0100!
“weaker”.
“weaker”. the $ is stronger
against the Yen
today.
When
Whenthe theUS
US$$price
price
of
ofaaforeign
foreigncurrency
currency
unit
unitfalls,
falls,we
wesay
saythat
that
the
theUSUS$$is
is
“stronger”.
“stronger”.

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

Slide
5-11
Accounting
Accounting for
for Transactions
Transactions with
with
Foreign
Foreign Companies
Companies
When
When aa transaction
transaction is is
denominated
denominated in in aa foreign
foreign 12/10/02 1 DM = $.55
US
currency
currency .. .. .. 1/9/03 1 DM = $.53 US
And
And the the transaction
transaction occursoccurs on

?
on
one
one date
date (for
(for example
example aa
credit
credit sale)
sale) .. .. ..
.. .. .. but
but the
the cash
cash flowflow is is at
at aa
later
later date
date .. .. ..
.. .. .. fluctuating
fluctuating exchange
exchange rates rates
can
can result
result in in exchange
exchange rate rate
gains
gains or or losses.
losses.

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

Slide
5-12
Exchange
Exchange Rate
Rate Issues
Issues
Example
Example
On
On 9/10/02,
9/10/02, BobCo
BobCo (a (a US
US firm)
firm) sells
sells inventory
inventory to to Knight
Knight
Corp.
Corp. (a(a UK
UK firm)
firm) on on credit.
credit. Knight
Knight will will pay
pay BobCo
BobCo
10,000
10,000 British
British pounds
pounds in in 33 months.
months.
The
The current
current exchange
exchange rate
rate isis $1
$1 == .6093
.6093 £.£.
On
On 9/10/02,
9/10/02, what
what isis the
the expected
expected US
US $$ value
value of
of the
the 10,000
10,000
££ that
that BobCo
BobCo expects
expects to
to collect
collect on on 12/10/02?
12/10/02?

On
On September
September10,10,BobCo
BobCowould
would expect
expect to
to be
be able
able to
to
convert
convert the
the10,000
10,000 ££ into
into $16,412.27
$16,412.27on
onDecember
December 10, 10,
2002
2002based
basedononthe
thecurrent
currentexchange
exchange rate.
rate.
10,000£
10,000£ ÷÷ .6093
.6093 == $16,412.28
$16,412.28
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-13
Exchange
Exchange Rate
Rate Issues
Issues
Example
Example
By
By 12/10/02,
12/10/02, the
the foreign
foreign exchange
exchange raterate has
has
changed
changed to to $1
$1 == .6115
.6115 £.
£.
After
Afterreceiving
receiving the
the British
British ££ from
from Knight,
Knight, and
and
exchanging
exchanging them
them into
into US
US $,
$, how
how much
much will
will BobCo
BobCo
have
have actually
actually received?
received?

On
OnDecember
December10,
10,2002,
2002,BobCo
BobCowould
wouldactually
actuallycollect
collect
$16,353.23,
$16,353.23,an
anexchange
exchangeloss
lossof
ofof
of $59.05
$59.05since
since
September
September 10!
10!
10,000£
10,000£ ÷÷ .6115
.6115 == $16,353.23
$16,353.23
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide

Adjustment
Adjustment ofof Foreign
Foreign Currency
5-14

Currency
Transaction
Transaction at
at the
the Balance
Balance Sheet
Sheet Date
Date
Occasionally,
Occasionally,aa
transaction
transaction occurs
occursin in
one
onefiscal
fiscal period,
period, but
but
cash
cashisisnot
notreceived
receivedor or
paid
paid until
until the
thenext
nextfiscal
fiscal At
Atthe
thebalance
balancesheet
sheet
period.
period. date,
date,anyanyoutstanding
outstanding
foreign
foreign currency
currency
receivables
receivablesor orpayables
payables
must
must bebe“remeasured”
“remeasured”
using
usingthethespot
spotrate
rate
available
availableon onthe
thebalance
balance
sheet
sheetdate.
date.

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

Slide

Adjustment
Adjustment ofof Foreign
Foreign Currency
5-15

Currency
Transaction
Transaction at
at the
the Balance
Balance Sheet
Sheet Date
Date
On
On 12/1/02,
12/1/02, Balloon
Balloon Co.,
Co., aa US
US balloon
balloon manufacturer
manufacturer sells
sells
balloons
balloons to
toMaison
Maison Rue.,
Rue.,aafrench
french company,
company, for
for 20,000
20,000
french
french francs
francs on
on credit.
credit. Payment
Payment isisdue duein
in 90
90 days.
days.
The
The current
current exchange
exchange rate
rate isis $0.1575
$0.1575 per
per FF.
FF.
Prepare
Prepare Balloon
Balloon Co.’s
Co.’s 12/1/02
12/1/02 journal
journal entry.
entry.

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Slide

Adjustment
Adjustment ofof Foreign
Foreign Currency
5-16

Currency
Transaction
Transaction at
at the
the Balance
Balance Sheet
Sheet Date
Date
On
On 12/1/02,
12/1/02, Balloon
Balloon Co.,
Co., aa US
US balloon
balloon manufacturer
manufacturer sells
sells
balloons
balloons to
toMaison
Maison Rue.,
Rue.,aafrench
french company,
company, for
for 20,000
20,000
french
french francs
francs on
on credit.
credit. Payment
Payment isisdue duein
in 90
90 days.
days.
The
The current
current exchange
exchange rate
rate isis $0.1575
$0.1575 per
per FF.
FF.
Prepare
Prepare Balloon
Balloon Co.’s
Co.’s 12/1/02
12/1/02 journal
journal entry.
entry.

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Slide

Adjustment
Adjustment ofof Foreign
Foreign Currency
5-17

Currency
Transaction
Transaction at
at the
the Balance
Balance Sheet
Sheet Date
Date
On
On 12/31/02,
12/31/02, the
the value
value ofof the
the foreign
foreign currency
currency
receivable
receivable must
must bebe adjusted
adjusted based
based on
on the
the
12/31/02
12/31/02 spot
spot rate
rate of
of $0.1500
$0.1500 per
per FF.
FF.
Adjust
Adjust the
the original
original receivable:
receivable:

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

Slide

Adjustment
Adjustment ofof Foreign
Foreign Currency
5-18

Currency
Transaction
Transaction at
at the
the Balance
Balance Sheet
Sheet Date
Date
On
On 12/31/02,
12/31/02, the
the value
value ofof the
the foreign
foreign currency
currency
receivable
receivable must
must bebe adjusted
adjusted based
based on
on the
the
12/31/02
12/31/02 spot
spot rate
rate of
of $0.1500
$0.1500 per
per FF.
FF.
Adjust
Adjust the
the original
original receivable:
receivable:

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Slide
5-19
Strategies
Strategies to
to Avoid
Avoid Losses
Losses from
from
Rate
Rate Fluctuations
Fluctuations

Insist
Insist that
thatthe
the
transaction
transactionis is
consumated
consumatedin in Hedging!
Hedging!
your
your own
own currency
currency
(US
(US$).
$).

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Slide
5-20

Hedging
Hedging

The
Thepractice
practiceof
of minimizing
minimizingor oreliminating
eliminating risk
riskof
ofloss
loss
associated
associatedwith
withforeign
foreign currency
currencyfluctuations
fluctuationsbybyusing
using
forward
forwardexchange
exchangerates
rates to
tooffset
offset changes
changesin in spot
spot rates.
rates.

Spot
Spot Rates
Rates
The
Theexchange
exchangerates
ratesthat
thatare
are
available
availabletoday.
today.
Forward
Forward Exchange
Exchange Rates
Rates
The
The exchange
exchangerates
ratesthat
thatcan
can be
be
locked
lockedin
intoday
todayfor
forexpected
expected
future
futureexchange
exchangetransactions.
transactions.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-21

Hedging
Hedging
AAforward
forwardcontract
contract requires
requires the
thepurchase
purchaseof of
currency
currencyunits
units at
ataa future
futuredate
date at
atthe
the
contracted
contracted exchange
exchangerate.
rate.

Good. If the spot rate

This forward contract is $.0090 US in 30 days,
allows us to purchase we only have to pay
1,000,000 ¥ at a price of $.0080 US, and we
$.0080 US in 30 days. avoid a $1,000 loss!

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Slide
5-22
Foreign
Foreign Corrupt
Corrupt Practices
Practices
Act
Act of
of 1977
1977

R e c o rd a n d B r ib e r y o f M a in ta in a n
d is c lo s e a ll g o v e rn m e n t a d e q u a te
p a y m e n ts , p ro p e r o ffic ia ls is s y s te m o f
o r im p r o p e r . ille g a l. in te r n a l c o n tr o ls .

In flu e n c e F a c ilita tin g

p e d d lin g is p a y m e n ts a re
ille g a l. n o t ille g a l.
(1 9 8 6 A m e n d m e n t) (1 9 8 6 A m e n d m e n t)

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Slide
5-23

End
End of
of Chapter
Chapter 15
15

When the ad said,

“Job with a hot
future!” this isn’t
exactly what I
expected.

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