An American corporation making purchases from foreign companies will experience gains and losses from exchange rate fluctuations if (a)the purchase prices are stated in terms of the foreign currency and (b)the purchases are made on account.

Question

Quizplus · Accepted Answer

If the purchase prices are stated in terms of the foreign currency and the purchases are made on account, then the American corporation will experience gains and losses due to exchange rate fluctuations. This is because the exchange rate between the U.S. dollar and the foreign currency will affect the cost of the purchases when the American corporation pays for them in U.S. dollars. If the exchange rate has weakened, then the American corporation will have to pay more dollars to purchase the same amount of foreign currency. Similarly, if the exchange rate strengthens, the American corporation will need to pay fewer dollars for the same amount of foreign currency. These fluctuations can result in either gains or losses for the American corporation.

An American Corporation Making Purchases from Foreign Companies Will Experience