 Hello and welcome to this session in which we would look at CPA exam questions that deals with foreign currency transaction, not translation. There's a difference between the two and you need to understand both concepts, transaction and translation. When it comes to transaction, the good thing about foreign currency transaction is you can use it for your far section. The knowledge also it's tested on the BEC section. So it's very important to be comfortable with foreign currency transaction. Now on the far section, this may not be a major topic, but those could be the extra two or three points that could help you pass the exam. However, on the BEC section, the foreign currency transaction could be considered a major topic. So if you fail that there as part of international business, you could fail the exam. So it's a topic that you need to be familiar with. So the way the exam starts, it might start with, I would say, a straightforward question like this one. Okay, do you know a term that it may add to questions with numbers. But if you get this question wrong, then what's going to happen, they will start to notice that you are not comfortable or you are not competent in this topic and you will start to toward heading a grade lower than 65. So you want to understand all topics before setting for the exam. How can I help you? Forhatlectures.com. How can I help you become comfortable? Well, if you are studying for the CPA exam, keep your CPA course. I don't replace your CPA course. However, I can be a useful addition to your Becker, Roger, Glyme, Wiley or any other course. I can add 10 to 15 points. Why can I do so? Because I explain the material slower. I explain the material in depth. Maybe you never took international accounting in college or maybe you never took foreign currency translation. It was not part of your accounting program. I can't compensate for that. Forhatlectures can't compensate for that. 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Please like this recording, share it, put it in playlist, connect with me on Facebook and Instagram. So this is how the exam might start. A simple question. Can you answer this question? The forward rate. Okay, so they might ask you on the exam, one simple question, what is the forward rate? Now they may also want you to know how to use the forward rate with an A question. But this, if you get this question wrong, then you don't have even a basic knowledge. So don't sit for the exam if you can't get this question wrong. Not yet. Not before you subscribe and learn the material. A, the price of foreign currency that can be purchased or sold today. This is a statement, but this statement describes something called the spot rate, not the forward rate. It means how much you can buy and sell the currency today. B, the price today at which a foreign currency can be purchased or sold in the future. Hold on a second. So it's a price today, but at which the foreign currency can be purchased or sold in the future. Is that possible? Yes, that's exactly what the forward rate is. It's you can lock in your rate that you can buy the currency or sell the currency in the future today. So today you can lock in the rate and that rate that you can lock it in is called the forward rate. Simply put, let's assume you want to travel to Europe. Today, if you want to buy the euro, you have to pay $1.25. One for one euro, you have to pay. Let's assume the rate is that much $1.25. This is the day. This is the spot rate. This is the day you're traveling. You are traveling 30 days from today. You're traveling 30 days from today. Here's what you can do. You can go to the forward market and see that you can lock in your rate at $1.30. Hold on a second. Why would I pay 5 cent more in 30 days? Here's your risk. You don't want to buy today because you don't have the money. Maybe you don't have the money now. But in 30 days, you are going to travel. So why would you pay more? Well, because in 30 days, the price could be $1.45. You don't want to take your chance. So what you do is you buy a contract in the forward market, the forward rate, and you will lock in that rate. So let's assume you're taking $10,000. You know you're going to be taking 10,000 times 1.3, and that's going to be your expense for that trip. It's locked. Otherwise, if you wait until you are ready to travel, the price could be $1.45. But also, the price could go down to $1.10. That's another risk you are taking. But if you want to have a piece of mind, you will buy the forward rate. But this is what the forward rate is. Let's make sure the other questions are incorrect. The forecasted future value of a foreign currency, you can forecast as much as you want to. Everyone can forecast whatever they want to, but no one's going to buy and sell you the currency based on something called forecasted rate. The US dollar value of a foreign currency? Yeah, that's the exchange rate. That's not the forward rate. Okay, that's the exchange rate. So the answer indeed is B as in boy. Let's take a look at this question. And I would say this question is also easy. They may even start with this question as a potential question. Okay, let's see. Backer company, a US corporation sold inventory on credit to a British company on April 8, 2021. Backer reviewed the payment, received the payment, so they received the payment, 40 British pound on May 8. So there we go. So here's what we have. This is the timeline. This is April 8. We made the sale. Good. But we are not going to be paid the money until May 8. This is when we get not actually not US dollar, it's, it's a British pound. Okay, it's a British pound. This is when we get the money. The exchange rate was for one British pound, you'll pay $1.56 on April 8. And for one British pound, you pay you get $145 on May 8. What amount of foreign currency gain or loss should be recognized? Okay. So simply put, what, what's the amount of the currency gain or loss? How do we find this out? Well, when they make the sale, when they make the sale, the rate was, the rate was when they make the sale April, April 8. April 8 was $1.45 by, by, by May, May, May 8. No, the exchange rate was $1.56, sorry, $1.56 in April and $1.45 on May 8 when we got the money. Well, hold on, let's see. First of all, do we have a gain or do we have a loss? You have to be very careful here. Becker is a US company. They make a sale. When they make a sale, this is, they have what's called an account receivable, not what's called, it's an account receivable. They're waiting to receive the money. Now here's what's going to happen. On the date of the sale, all, all what Becker has as all the information that they have is the rate on that date, which is how much, how much it was. So if they are, if they are expecting to receive 40,000 British pound, that's how much they're expecting to receive. If they're expecting to receive 40,000 on that date, the value of that 40,000 would have been times 1.56 equal to 62,400. So this is, so they were happy. They're thinking we're going to be receiving, if we receive the money today, which they won't, the account receivable is 62,400. By the time we got to May 8th, by the time we got to May 8th, they received the 40,000 pound and they, when they exchanged them, the rate was $1.45. They received $58,000. Well, if we take $58,000 minus 62,400, the difference of what they thought they will receive, sorry, let's go back. So $58,000 minus what they thought they're going to be receiving 62,400 equal to, let's see one more time, 62,400. Yeah, my calculator is this very small keypad with my large fingers, minus $58,000. They're going to give us a loss of 4,400. Now be careful that this is a loss, not a gain, because notice you have 4,400 as gain, 4,400 at a loss. Why? Because by the time you get the money, you received less than what you thought. Now, if I change from sold to bought, if I change this example, same exact information from sold to bought, and obviously if they bought it means they have to pay, rather than an account receivable, Becker will have an account payable. And rather than a gain, rather than a loss, they will have a gain. Why? Because when you have an account's payable and you are paying less, then you have a gain. But be careful. So this question actually, it's a bit tricky. First you have to know it's you sold, you have an account receivable and what happened to the foreign currency, simply put, the US dollar strengthened. The US dollar becomes more expensive by May 8, which is as a result, it's not good for you because you have an account receivable. If you have an account payable, you want the US dollar to strengthen because you can buy more of the foreign currency, but it's the exact opposite when you have an account receivable. So be careful, be careful. Again, go to forehead lectures. I do have plenty of lectures. Take a look at this question. While the US corporation sold inventory on December 1st with the payment of 12,000 British pound to be received in 60 days, the exchange rate were us follow December 1st, December 31st, January 30th. Question is, for what amount should the sales be credited on December 1st? Simply put, December 1st, as of December 1st, all what we know on December 1st is the spot rate, dollar 81. Therefore, how much I can get for this money? I have 12,000 pound expected to be received times dollar, $1, 1.831. Therefore, I would be receiving 21,972, but I'm not getting the money today, but this is my receivable. Therefore, I will debit account receivable for 21,972, credit sales, 21,972. That's as of December 1st. What amount of foreign currency gain or loss should be recorded on December 31st? So notice, we made the sale. This is the same question. So what happened from December 1st to December 31st? By December 31st, now I have, I'm expecting to receive 12,000 British pound. By December 31st, the value of that is dollar, $1.976. I would have received, if that's the case, let's see how much. Let's do the computation here, but I'm going to be receiving more money. Why? Because the British pound strengthened and I like that. I am receiving this currency. I'm expecting to receive this currency, $1.976. So it's $23,712. Now my receivable is $23,712. Hold on a second. My receivable was $21,971. The difference between them is again, so loss is out, zero is out, is a gain of $1740. So the difference between $23,000 and $21,972. Okay, good. I have a gain. That's excellent, but I did not receive the money yet. And this gain, by the way, goes on the income statement in case you are wondering. Okay, but I did not receive the money. I received the money January 30th and the rate was $1.768. So what would the amount of the foreign exchange or loss be recorded on January 30th now? Okay. Now, I actually received the money, $12,000. I multiplied. I went to the exchange rate. I asked my bank to exchange it and they said we are going to give you, let's see, let's do the computation here. Let's see how much they gave us. $20,000 times $1.768. Oops, not $20,000. $12,000 times $1.768. They're going to give us $21,2116. $212116. This is how much we're going to be receiving by cash. Hold on a second. Last time we checked, we thought we're going to be getting $23,712. $23,712. So you know we are at a loss. It's a disappointment. And first of all, it's a loss. So you can take out the gain. Take out the gain. The loss is $2,496. And the answer is B. So again, we started with an account receivable of $21,972. By December 31st, our account receivable went up, which is we have a gain, but there's nothing we can do about this gain because we did not receive the money. By the time we received the money, we incurred a loss of $2,496. Now in the real world, not in the real world, also on the CPA exam, as well as in the real world, these companies don't let this happen. What they do is they buy contract, like puts and options on a foreign currency to hatch this type of a risk because this is a huge risk for companies that buy and sell in foreign currency. That topic is also covered on my website, farhatlectures.com and it's heavily covered on the CPA exam. So make sure if you want to add points to your CPA exam, if you want to learn the material better, if you want something in addition to your CPA review course, I am the answer for you. I teach you the material. I don't give you notes. I don't ask you to review multiple choice questions. I teach you the material. So you have confidence, you have the knowledge, you have the basics to answer the CPA questions and learn the material better. Once again, my risk is $30. If you don't like it too bad, you lost. Okay, $30. That's all. In the grand scheme of things, you are investing for the next 30 to 40 years. Are you willing to risk $30 to find out if you can pass the CPA exam? Good luck, study hard and stay safe.