Question

1.What effect, if any, does a strengthening of the dollar have on reported sales and net income for companies operating outside the United States, when those foreign operations are translated to U.S. dollars for consolidation purposes?

2.How do companies use accounts receivables to shift income? Explain why managers engage in this sort of activity.

Answer 1

When a dollar rises or fall it mainly influence companies operating outside the U.S. With the fluctuating currency exchange rate, a company may face issues related to the net sales and revenue of companies operating outside the U.S. The company may sell or buy more from specific nations who have a more favorable exchange rates compared to U.S. Such alteration in foreign currency, during the strengthening of the dollar leads a firm to suffer lesser revenues and net sales. The decline in revenue is not caused due to an increasing quantity sold, however due to the fluctuations in the exchange rate of the strengthening of the US dollar. The strengthening dollar can lead to a fall in worth of foreign currencies and the ability of the company to produce products cheaper in the international markets.

Thus, strengthening of the dollar makes the foreign currencies weaken because these are translated to lesser USD. Consequently decreases every reported number on the financial statements in comparison to the USD equivalent and as a result reported sales, expenses and net income are all smaller