 Hello and welcome to this session. This is Professor Farhad. In this session, we would look at accounting for investments in international operation. This topic is covered briefly in financial accounting, much, much more in-depth in my advanced accounting course. So in this session, it's basically the basics of investments in international operation. In my advanced accounting, I have, I would say, 10 to 15 different lectures. Each one is 20 to 30 minutes with examples explaining this concept. I just wanna let you know this upfront. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover. If you like my lectures, please like them. It doesn't cost you anything. Share them, put them in playlists. Let other people know about them. Also connect with me on Instagram. On my website, you will find additional resources to supplement your accounting education or if you are studying for your CPA exam, CMA exam or the enrolled agent, I strongly suggest you check out my website. Once again, this topic is covered much more in advanced in my advanced accounting course. So let's go ahead and start to talk about investments in international operation. What are we talking about here? Well, we have a US company that's operating in Europe, in Asia, in South America. And what happened as a result, they're gonna be faced with two accounting challenges. What are those two accounting challenges? One, they're gonna have purchases and sales in a foreign currency. So they're gonna buy material, buy supplies in a foreign currency or sell their product. When they sell it, they're gonna sell it in a foreign currency. And the other issue that they face is they're gonna have to prepare their financial statements if it's a US company, they have to prepare their financial statements using US gap. So what they have to do, they have to prepare consolidated financial statements with their international operation. In this session, we don't worry about consolidated financial statements. This is where I cover this in my advanced accounting. In this session, we'll focus on, we'll work one example for sale, one example for purchase using a foreign currency. Now, just a little bit of basics about exchange rate between different currencies. Now, each country use their own currency. For example, if you're operating in Europe, when you sell your McDonald, when you sell your food, you're gonna receive euros, you will not receive US dollar. So each country uses its own currency. Now, in some circumstances, some countries use a US dollar or a third currency, but we're not gonna go into that topic in this session because that's way beyond the scope of this course. So to make a transaction in another country, you have to purchase, you have to acquire those units. So if you purchase supplies from Germany and they want to be paid in euros, then you have to buy the euro and pay them. So the cost of the currency is called the exchange rate and the exchange rate fluctuate on a regular basis. The best way to illustrate what we're trying to do here is to work an example. Maybe one is selling and one is buying. Just to give you an idea, how do we account for foreign sales and foreign purchases? Starting with the sales, let's assume a Boston company, it's a US company, makes a credit sales to a London outfitter, a British retail company. So on December 12, 2016, Boston sells 10,000 worth of pounds of goods with payment due February the 10th. Boston keeps its record in the US dollar at the date of the sale, the British pound was $1.80. So we basically have two date listed here, but we're gonna have to worry about three dates. One is the date of the sale. So the date of the sale is December the 12th. This is when we made the sale. On the date of the sale, we are going to recognize a receivable because we're not getting the money and how much do we value the receivable based on the value at that date. So on that date, we expect to receive $18,000 given a pound of $1.80. So on that date, December 12th, the date of sale, we have an account receivable for $18,000 credit sales of $18,000. This is the first date. The second date that we have to worry about is in this situation, December 31st, 2016. Why? That date is not listed in the problem. The reason I have to worry about this is because I'm not gonna be getting paid my money until February 2017. So I'm gonna, here's what I'm assuming. I'm assuming year end, I'm assuming December 31st, 2016 is my year end. I made the sale, I made the sale here and I'm gonna be receiving the money here. This is the sale, this is December the 12th and this is when I receive the payment. So in between, I'm gonna have to prepare my financial statements. On December 31st, I have to determine what happened to this investment. What do you mean investment? Well, yes, account receivable now is an investment. I basically have an account receivable in a foreign currency. So let's see what happened on December 31st. So Boston Company is a December 31st year end company. On December 31st, the British pound has an exchange rate of $1.84. Excellent, excellent. Now I can get more money for my pounds but I'm not getting the money. Well, now my 10,000 pounds, I can exchange them if I have them at $1.84. Therefore, I have 18,400. So my receivable went up by 400. Unfortunately, they're not paying me on December 31st but I have to value. I have to bring my currency to bring it to market value. Therefore, I'm gonna increase my receivable by $400 and I'm gonna book a foreign currency gain. Basically, I have a gain of $400. This is what happened. Now, here's what happened to my account receivable. Now let's keep track of this because we're gonna come back and work with this. So this is the account receivable subsidiary ledger. First is I debited the balance 18,000. I had the balance of 18,000. Then I debited the receivable 400 on December 31st, adjustment for foreign currency and it's 18,400. Now, the third date is the date I'm gonna be paid which is February, which is February the 10th. So let's see what's gonna happen on February the 10th. On February the 10th, Boston received the money. Now they wire us the pound Boston immediately exchanged the pound for US dollar. The exchange rate on that date, though was $1.78 per pound. When we got the money, we're gonna be receiving less US dollar. So how do we do this? Basically, they're gonna send us the money and we're gonna convert the money into US dollar. So now when we convert the money into US dollar, they send us 10,000 pound. We can only convert it at $1.78. Therefore, we're gonna be receiving 17,800. We thought we had a receivable of 18,400 as of December 31st. So this is what happened here. Now, let me tell you this. In the real world, companies don't do that. They don't get caught with their pants down like this. What they do is they hedge those positions. And this is what I teach in my advanced accounting and international accounting course. What do companies do to hedge so they don't experience this loss? But let's take a look at the transaction. We debit cash 17,800 because this is how much we're gonna exchange those pounds. We're gonna credit the receivable 18,400 because this is how much we have receivable. And what happened is now we have a loss of $600. And those gains and losses goes to the income statement. So at the beginning, we were happy. The British pound increased in value. We were happy. It means the US dollar deteriorated in value. So if you have a receivable, if you have a receivable, you want your currency. And my currency is USD. I want my currency to go down if I have a receivable. Now, if I have payable, it's the opposite. So if I have a receivable, I want my currency to go down. The dollar appreciate in value, which it gave me less US dollar when I exchanged it. Simply put, I have to remove the receivable. Now the receivable is zero. That's why I credit the receivable 18,400. Remember, if you have a receivable and a foreign currency, you want your local currency, US dollar to deteriorate, to go down, to depreciate. So you could buy more of your local currency. Let's take a look at another purchase example. Let's assume NC imports at the US company purchases product costing 20,000 euros from Hamburg, which is a German company. On that day, the exchange rate was $1.20 per euro. So it's a US company buying supplies from a German company and they owe them 20,000 euros. On that date, the euro is January $15, $20, $20. Therefore, we bought the inventory. 20,000 euros times $20. So we have inventory of 24,000, accounts payable of 24,000. Now what happened is for this example, we made the purchase in January and we're gonna be receiving the money. We're gonna be paying the money in February 14th. Therefore, we don't have to worry about year end adjustment. So there's no year end adjustment in this example. When we were ready to pay the German company, when we were ready to take the US dollar and convert it into euros, now we have to pay $1.25. Okay, well, what does that mean? It means we have to pay a little bit more than 24,000 because if we're gonna convert the US dollar into a euro, we need 20,000 euros and we're gonna have to pay $1.25. Now we need $25,000, which is more than what we thought initially of 24. Once again, companies don't do this. Companies, they hedge those positions. Hedging foreign currency transaction is covered in another course in my advanced accounting. Therefore, what we do is we debit accounts payable. We have to remove this accounts payable of 24,000. The cash that we'll pay is 25,000 and unfortunately the difference is a loss of $1,000. Now you had an accounts payable and your currency deteriorated, it worked against you. If you have an accounts payable, you want your US dollar, if you're a US company, you want the US dollar to go up to appreciate. Why? Because now, because you have to make the payment and the foreign currency, you want your local currency to buy you more of that foreign currency. Here, your foreign currency depreciate, it worked against you, the opposite of having a receivable. If you had a receivable from the German company, you would have been better off of the US dollar depreciate. And this is basically two examples. The thing that we don't cover in this session or in this financial accounting course is consolidated financial statements with the international subsidiaries. I do cover this topic in two different courses. And those two different courses are my advanced accounting course and my international accounting. I cover those way, way more in details. So as always, I would like to invite you to like this recording, visit my website for additional lectures and lessons if you're interested in supplementing your education, pass in the CPA, CMA, enrolled agent exam, or just improve your professional career. Good luck, study hard and stay safe, especially during those coronavirus days.