Financial Accounting: In an Economic Context

INTERNATIONAL PERSPECTIVE: RECEIVABLES, FOREIGN CURRENCIES, AND HEDGING

As companies expand, they often search for new markets in other countries. Most major U.S. companies operate in more than one country, and many have operations in countries throughout the world. Of the $64 billion in worldwide revenues generated by Johnson & Johnson in 2008, for example, $31 billion (48 percent) came from outside U.S. borders. The internationalization of business introduces an issue of major concern to accountants—that is, many transactions with foreign entities involve currencies other than the U.S. dollar. When General Electric, a multinational corporation, sells products on account to Japanese customers, the contract often requires payment to be made in Japanese yen. An accounting problem arises because the accounts receivable must be expressed on GE's balance sheet in U.S. dollars, and the exchange rate between the U.S. dollar and the Japanese yen is constantly fluctuating.

Suppose, for example, that on December 1, 2010, Motorola delivered a shipment of wireless communicators to a German customer for a price of 1.5 million euros. Assume that on that date 1.4 U.S. dollar could be exchanged for 1 euro. Because Motorola prepares financial statements expressed in U.S. dollars, it would convert the receivable to an equivalent U.S. dollar amount and record the following entry:

Accounts receivable (+A)	2.10*
Sales (R, +RE)	2.10
*(1.4 U.S. dollar/1 euro) X 1.5 million euros

Assume further ...