Question

CompuTech is a U.S.-based multinational corporation. Foreign sales are made at prices set in U.S. dollars, but foreign purchases are often made at prices stated in foreign currencies. If the exchange rate for the U.S. dollar has risen against most foreign currencies throughout the year, would CompuTech have recognized primarily gains or losses as a result of exchange rate fluctuations? Explain.

Answer 1

Answer 2

If the exchange rate for the U.S. dollar has risen against most foreign currencies throughout the year, CompuTech would have recognized primarily gains as a result of exchange rate fluctuations.

When the exchange rate for the U.S. dollar increases against foreign currencies, it means that the U.S. dollar has become stronger compared to those foreign currencies. As a multinational corporation, CompuTech sells its products and services to foreign customers at prices set in U.S. dollars. Therefore, when the U.S. dollar strengthens, the revenue earned from foreign sales, when converted back to U.S. dollars, will be higher than originally anticipated. This results in foreign exchange gains.

On the other hand, CompuTech may make purchases from foreign suppliers at prices stated in foreign currencies. When the U.S. dollar strengthens, it can buy more of the foreign currency with each dollar spent. As a result, the cost of these purchases, when converted back to U.S. dollars, will be lower than originally anticipated. This results in foreign exchange gains on purchases.

In summary, a rising exchange rate for the U.S. dollar leads to foreign exchange gains for CompuTech on both its foreign sales (revenue) and foreign purchases (costs). This can have a positive impact on CompuTech's financial performance and profitability when it consolidates its financial statements and converts the foreign currency amounts back into U.S. dollars. However, it's essential to note that foreign exchange gains or losses can also be influenced by other factors, such as the timing of transactions and the specific foreign exchange risk management practices employed by the company.