Lesson: Foreign currency transactions and translation - Practice Questions

Instructor: Nick Palazzolo

In this lesson, dive into the world of foreign currency transactions and translation with Nick Palazzolo, CPA, as he tackles multiple choice questions that demystify these complex concepts. Watch Nick demonstrate how to determine the reporting of foreign currency transaction gains by unraveling the details of spot rates and payment dates, and learn why certain dates matter more than others in financial reporting. Furthermore, join him as he dissects a question on identifying a company's functional currency, providing insightful tips on how to pinpoint the currency that truly reflects a company's day-to-day operations. This lesson promises to equip you with the clear, practical understanding needed to confront such questions with confidence.

Updated: June 18, 2024 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Welcome back everyone to another multiple choice question grouping here. We've got some on foreign currency transactions and translation. Alright, let's think about what the first question is asking. It says, How should the foreign currency transaction gain be reported on Tuego's financial statements at year end, December 31st? Well, let's see. We purchased merchandise from a vendor in England on November 20th for 500,000 British Pounds. Payment was due in British Pounds on January 20th. Spot rates to purchase one pound were as follows. Alright, one thing I'm immediately going to eliminate is January 20th. This is not important at all, not relevant. This is after our reporting date. We purchased the British Pounds on November 20th. January 20th is just completely irrelevant there. Not going to be important. Now, let's also look at our possible answers. Is it going to be on the income statement or is it going to be considered a separate component of stockholders equity? Now, to be honest, my answer here is there's no reason why it should be a component of stockholders equity. This should simply be put on the income statement. So that eliminates letters B and D. Now that we've done sort of the thought process conceptual, let's think about the math. All right. Now, simply put, what's our gain? Well, we bought these British Pounds on November 20th when the rate was a dollar twenty five. Now, what gain should we report? Well, you can see here you might think this is a loss because you bought it for higher. Now it's lower. But what this is saying is that the dollar value of the pound went down. So the British pounds that you bought are now worth more than dollars. In terms of the exchange rate. Now, simply put

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