A U.S.-based firm consolidates all foreign sales and profits in its profit-and-loss statement. The sales are made in a foreign currency but reported in U.S. dollars in the firm's profit-and-loss statement. An important subsidiary exists in a foreign country where the currency has just been devalued, relative to the U.S. dollar, by 50 percent. What effect will the currency devaluation have on the reporting of the subsidiary's sales (in U.S. dollars)?

Question

Quizplus · Accepted Answer

When a foreign currency is devalued by 50% relative to the U.S. dollar, the value of sales made in that currency, when converted to U.S. dollars for reporting purposes, will effectively be halved, resulting in a 50% reduction in reported sales.

A US-Based Firm Consolidates All Foreign Sales and Profits in Its