Gains and losses do not directly affect cash flows in the case of translation exposure, but cash flows can be significantly affected by transaction exposure.

Question

Quizplus · Accepted Answer

Translation exposure refers to the impact of exchange rate changes on the financial statements of a company's foreign subsidiary or branch. Gains and losses from translation exposure do not impact cash flows directly. On the other hand, transaction exposure refers to the impact of exchange rate changes on the cash flows of a company's foreign currency transactions. Thus, cash flows can be significantly affected by transaction exposure.

Gains and Losses Do Not Directly Affect Cash Flows in the Case