TVETPROGRAM TI

TLE:
Account
ingandFi
nanceLev
el–I
II

MODULETI
TLE:
Handl
i
ngFor
eignCur
rencyTr
ansact
ions

LEARNI
NGOUTCOMES:

Att
heendoft
hismodul
ethet
rai
nerwi
l
lbeabl
eto

LO1:
Ident
if
ynat
ureofcust
omer
'sf
orei
gncur
rencyneeds

LO2.Ver
if
ythatt
hepr
oposedt
ransact
ioncanbeconduct
ed

LO3:
Conductt
het
ransact
ion

LO4.Mai
ntai
naccur
ater
ecor
dsoft
ransact
ion

SETBY:
AYALNEHM. Page1
I
ntr
oduct
ion

For
eigncur
rency
:isanycur
rencyot
hert
hanEt
hiopi
aandi
nwhi
cht
hebankaccept
sfor
pur
posesoff
orei
gnexchangef
rom/
tocust
omer
.

Pur
posesoff
orei
gnexchange

 Al
l
owpaymentsforal
li
mports&exports
 Al
l
owpaymentforhot
elser
viceandother
s
 Al
l
owsal
arypaymentbyfor
eignemployees,
insur
ancepay
ment

LO1:
IDENTI
FYNATUREOFCUSTOMER'
SFOREI
GNCURRENCYNEEDS

 Thenat
ur hef
eoft orei
gncur
rencyt
ransact
ioni
scl
ari
fi
edwi
tht
he
cust
omer
 Relevanti
nformationisobtai
nedfrom t
hecustomeri
ncluding
veri
fyi
ngtheidentit
yofthepersonpresenti
ngnotesf
orsaleor
wishi
ngt opurchaseforei
gncurrencyaccor
dingt
oorganizati
onal
poli
cyandpr ocedures
 Customerrequestsforf
oreigncur
rencydeal
i
ngsar
ehandledin
accordancewit
hintheoffi
cer'
sauthor
it
ytoappr
ovetr
ansact
ions

 For
eignexchange(
for
ex)

 Ist
heconver
sionofonecountry
'scurr
encyintoanother
 Inafr
eeeconomy ,acount
ry'
scurr
encyisvaluedaccordi
ngtot
helawsofsuppl
y
anddemand.
 Acountr
y'
scurrencyval
uemayalsobesetbyt hecountr
y'
sgov
ernment
.

Fact
orsAf
fect
ingCur
rencyVal
ue
 marketforcesbasedont
rade
 investment
 Tourism
 geo-pol
iti
calr
isk.

SETBY:
AYALNEHM. Page2
Way
stoMai
ntai
nCl
eanandAccur
ateCust
omerI
nfor
mat
ion
#1Maintai
nComplet
eData
#2Av
oi dEntr
yofDupl
icat
eLeads&Cont
act
s

#3Exi
sti
ngDupl
icateRecor
ds?Mer
geThem
#4Maint
ainaSt
y l
eSheet

#5UseRol
esf
orSecur
it
y

For
eigncur
rencyt
ransl
ati
on

 Cur
rency

 Amedium ofexchangeforgoodsandservi
ces.
 Inshor
t,i
tsmoney,i
ntheform ofpaperorcoi
ns,usual
l
yissuedbyagov
ernment
andgeneral
l
yacceptedatit
sfacevalueasamethodofpay ment.

 For
eigncur
rencyt
ransl
ati
on

 Therestat
ement,int
hecur rencyinwhichacompanypr esent
sit
sfi
nanci
al
st
atements,ofall
assets,l
iabil
it
ies,
rev
enues,expenses,gai
nsandl
ossesthat
aredenominatedinf
oreigncur r
enci
es.

LO2:
VERI
FYTHATTHEPROPOSEDTRANSACTI
ONCANBECONDUCTED
 For
eigncur
rencyt
ransact
ionsandy
ourbookkeepi
ng

For
eigncur
rencyt
ransact
ion

 At
ransact
iont
hatr
equi
respay
mentorset
tl
ementi
naf
orei
gncur
rency

Aforei
gncurr
encyt
ransact
ionwi
l
lbeset
tl
edi
naf
orei
gncur
rencyduet
ovar
iousr
easons.
Theseincl
ude

 Pri
cesarestatedinaforei
gncurr
encyincaseofimpor
t&expor
t
 Loanspayableorrecei
vabl
einaforei
gncurrency
 Purchaseorsaleoffor
eigncur
rencyuni
ts
Thecust
omermaybe:

 anewcustomer
 al
ocalornon-l
ocal
ofEt
hiopi
a

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AYALNEHM. Page3
I
nEt
hi af
opi or
eigncur
rencyt
ransact
ionsmayi
ncl
ude:

 conversi
onofEt hi
opianbi
rrt
oanot
hercur
rency
 for
eignnot esandcoi ns
 i
nternati
onal draft
s
 tel
egraphictransfers
Af
orei
gnexchangemar
keti
sthemechani
sm bywhi
chpar
ti
cipant
s

 Tr ansferPurchasi
ngpowerbet weencount r
ies
 Obt ainorprovidecredi
tforint
ernat
ionaltr
adetransact
ions
 Mi nimizeexposuret ot
heriskofexchanger at
echanges
Rel
evanti
nformati
ont obecoll edmayi
ect nclude:

 bankaccountdetai
l
s
 name,addressandcont
actdet
ail
s
 sourceoffundstocovert
ransact
ion
Therel
evantdocumentsorinf
ormati
onmaydependont
hebankscust
omert
ypeandneedsf
or
var
iousfor
eigncur
rencytr
ansact
ion.

I
mpor
ter
s

 Appli
cati
onform
 Perf
ormai nv
oice(3copy)
 Photocopyofvali
dtradel
i
cense
 I
nsurancecerti
fi
cate
 Cl
earancecerti
fi
cate
Expor
ter
s

 Val
idtradeli
censeforexport
 Customsdeclarati
on(5copies)
 Banksdeclar
ation(6copies)
 I
nvoice(2copies)
 Copyofsalescontract

 For
eignCur
rencyEx
changeRat
es,
Quot
es,
andPr
ici
ng

 Aforeigncurrencyexchanger ateisapr i
cethatrepresentshowmuchi tcoststo
buythecurrencyofonecount ryusingthecur r
encyofanot hercountr
y.
 Curr
encyt r
adersbuyandsel l curr
enciesthroughforextransacti
onsbasedon
howt heyexpectcurrencyexchanger ateswi l
lfl
uctuate.
 Whent hevalueofonecur rencyr i
sesrelati
vetoanot her
,tr
aderswi l
learnprofi
ts
i
ftheypurchasedt heappreciatingcurrency,orsuf
ferlossesiftheysoldthe

SETBY:
AYALNEHM. Page4
appreciatingcur r
ency .
 therear eal soot herf actorsthatcanr educeat rader’sprofit
sev enifthattrader
“pi
cked”t her i
ghtcur rency .
 Currenciesar eidentifiedbyt hree-lett
erabbr eviati
ons.
 Forexampl e, USDi st hedesi gnationf ortheU. S.dollar
 EURi st hedesi gnationf ortheEur o
 GBPi sthedesi gnat i
onf ort heBr i
tishpound
 JPYi st hedesi gnati
onf ortheJapanesey en.
 Forextransact i
onsar equot edi npairsofcur rencies( e.g.
,GBP/ USD)because
youar epur chasi ngonecur rencywi t
hanot hercur r
ency .
 Somet imespur chasesandsal esar edoner elativetot heU.S.dol l
ar,si
mi l
arto
thewayt hatmanyst ocksandbondsar epr i
cedi nU. S.dollars.Forexampl e,you
mightbuyEur osusi ngU. S.dol lar
s.Inot hert ypesoff orextransactions,one
for
eigncur r
encymi ghtbepur chasedusi nganot herfor ei
gncur rency.An
exampl eoft hiswoul dbet obuyEur osusi ngBr it
ishpounds-t hatis,tr
adingboth
theEur oandt hepoundi nasi nglet r
ansact ion.

LO3:
CONDUCTTHETRANSACTI
ON
 Conversionoffor
eigncur
rencyamount
siscal
cul
atedusi
ngthe
Organizati
on’
ssetproceduresandt
abl
esorbyaccessi
ngrel
evant
databases
 Thecustomerisprov
idedwi
thacopyoft
her
atesusedt
ocal
cul
atet
he
cur
rencyconversi
on
 Wheretr
avel
l
ers’chequesar
ebeingpur
chasedorsold,
thecustomer’
s
si
gnatur
eiswit
nessedinaccor
dancewit
hpoli
ciesandprocedures
 Det ai
l
soft
het
ransact
ionar
eent
eredi
ntot
her
elev
antdat
abase
Ty
pesoft
ransact
ion

A.SpotTransacti
on
 Callfori
mmedi at
epaymentf
orthecur
rency
,usual
l
yataspeci
fi
edr
ateandi
nthe
cur
rencyprefer
redbyt
hesell
er.
B.Forwardtr
ansacti
on
 Thepur
chaseorsal
eofani
tem ataspeci
fi
edpr
icef
ordel
i
ver
yataf
utur
e
dat
e

C.Swaptransact
ion
 Anagr eementbet
weent
wopar
ti
est
oexchangesequencesofcashf
lowsf
oraset
per
iod.

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AYALNEHM. Page5
For
eigncur
rencyexchanger
ates

 I
tist
hepr
iceofaf
orei
gncur
rency

 I
tistherati
obetweenaunitofonecur
rencyandt
heamountofanot
hercur
rencyf
or
whichthatuni
tcanbeexchangedataparti
cul
art
ime.

 I
tist
hepr
iceofonecur
rencyexpr
essedi
nter
msofanot
hercur
rency

For
eigncur
rencyexchanger
atesbet
weencur
renci
esar
eest
abl
i
shedbyNBE

Di
rectv
s.I
ndi
rectexchanger
ates

Di
rectexchanger
ate

 ahomecur
rencypr
iceofauni
toff
orei
gncur
rency

E.
g.USD/
Eur
o,USD/
Bir
r,Bi
rr
/USD

 Anumberofl
ocal
cur
rencyuni
tsneededt
oacqui
reonef
orei
gncur
rencyuni
t.

DER=LCU

1FCU

Exampl
e:Assumet
hatETB24canacqui
re1USD

DER=24ETB/
USD

I
ndi
rectexchanger
ate

 I
tist
her
eci
procal
oft
hedi
rectr
ate.

 I
tist
henumberoff
orei
gncur
rencyuni
tst
hat1ETBcanacqui
re.

I
ER= 1FCU

LCU

Exampl
e:Assumet
hatEt
hiopi
anbasedcompany/i
ndi
vi
dual
canpur
chaseoneEur
oforETB28.

I
ER=1Eur
o

28ETB

=0.
036

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AYALNEHM. Page6
Bi
dpr
icev
sAskpr
ice

Bi
dpr
ice-pr
iceatwhi
cht
hedeal
er(
banks)i
swi
l
li
ngt
obuyf
orei
gncur
rencyf
rom y
ou.

Askpr
ice-pr
iceatwhi
cht
hedeal
eri
swi
l
li
ngt
osel
lfor
eigncur
rencyt
oyou.

Spotv
sFor
war
drat
e

Spotr
ate

 Thepri
ceatwhichafor
eigncur
rencycanbepur
chasedorsol
dtoday
 Theexchanger
atefori
mmediatedeli
ver
yofcur
renci
es
For
wardrat
e

Ratespeci
fi
call
ycont
ract
edtodayforfut
ureexchangeofcur
rency,t
hepr
icet
odayatwhi
ch
for
eigncur
rencycanbepurchasedorsol
dsomet i
mesinthefutur
e

Fact
orsaf
fect
ingDet
ermi
nat
ionofExchangeRat
es

 Levelofi
nflat
ion
 Balanceofpay ment
 Gov er
nmentcont rol
s
 Economic&Pol i
ti
calInf
luence
 Expectat
ionsabout
 I nfl
ation
 I nterestr
ate
 I ncomel evel
 Gov ernmentacti
on

 Whati
sJour
nal
Ent
ryf
orFor
eignCur
rencyTr
ansact
ions?

 For
eigncur
rencytr
ansacti
onsaredenomi nat
edinacurr
encyothert
hanthe
company’
sfuncti
onalcur
rency
.
 For
eigncur
rencytr
ansacti
onsmayr esulti
nreceiv
abl
esorpayabl
esfi
xedinthe
amountoffor
eigncur
rencytobereceivedorpaid.

Exampl
e:

Merchandi
seisboughtf
or100,
000pounds.The“
exchanger
ate”i
s4poundst
o1dol
l
ar.
Thej
ournalent
ryi
s:

Purchases- -
--
-25,
000
Accountspayabl
e---
--
-25,
000
(Note:100,000/4=$25,000)

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AYALNEHM. Page7
Anot
herexampl
e:

AU.S.companysell
sgoodstoacust
omerinEnglandon11/ 15/
X7for10,
000pounds.
Theexchangerat
eis1poundis$0.
75.Thus,
thetransact
ioniswor
th$7,
500(10,
000
pounds×0.75)
.Paymentisduet
womont hsl
ater
.Theent ryon11/
15/X7i
s:

Account
srecei
vabl
e--
--
--
--
7,500
Sales--
-7,
500

LO4.Mai
ntai
naccur
ater
ecor
dsoft
ransact
ion

 Howt
oAccountf
orFor
eignCur
rencyTr
ansact
ions

 Af orei
gn- currencyt r
ansact i
oni sonet hatrequiressett
lement ,eit
her
pay mentorr eceipt
, i
naf or
eigncurrency .
 Whent heexchanger atechangesbet weent heor i
ginalpurchaseorsale
transactiondat eandt hesettlementdat e, t
hereisagainorl ossont he
exchange.
 Whoev erv i
ewst hedenomi nat edcurrency( thecurr
encyt hetransact
ion
takespl acein)ast hef orei
gncur r
encyt akest hegainorloss.
 Compani est hatmakemanyf orei
gn-currencyt r
ansacti
onsmaybuya
forwardcur rencycont racttogetaguar anteedrate.
 Busi nesseswi thfewf oreign-curr
encyt ransactionsaremor elikel
yto
conv er
tcur rencyont hespot ,orcurrent,rate.

Step1Recordt hevalueofthetransactioni ndol

larsatt heexchangerate
curr
entatthetimeofpur chaseorsale.Forexampl e,aUni t
edStates
companybuy splantandequi pmentfrom t heUnitedKi ngdom whenthe
exchangerat
ei s$1.50to£1andagr eestopay£10, 000.Conv er
t£10,000
todoll
arsbymul ti
plyi
ngby1. 5andent erthetransactioninthecompany '
s
l
edgersas$15,000.Debittheplantandequi pmentaccountandcr edi
t
accountspayablewith$15,000.

Step2Calculatet
hev al
ueofthepaymentindol l
arsatt
heexchanger
ate
curr
entwhent hetr
ansacti
onisset
tled.Int
heexampl e,
attheti
meof
sett
lementtheexchangeratei
s$1.55t o£1.Thecosttothecompanyin
doll
arsi
stherefor
e£10,000multi
pli
edby1. 55,or$15,
500.

Step3Postt hepay mentoft

heaccount sreceivableattheori
ginalr
at e
andrecordthel ossonexchangebyaccount ingf orthedif
fer
ence
betweentheor iginaltr
ansact
ionval
ueandt heset tl
ementamount .I
nt he
example,creditthebankaccountwi t
ht heact ualamountpaidof$15, 500.
Debitaccountspay abl
ewiththeori
ginaldebtof$15, 000anddebi tt
he
l
ossonf oreignexchangeaccountwi tht hediffer
enceof$500.

St
ep4Cal
cul
atet
hev
alueoff
orei
gn-
cur
rencyaccount
srecei
vabl
eor

SETBY:
AYALNEHM. Page8
payableatthespotrateatt heendoft heaccount i
ngy ear.Recordany
changeinv al
uefrom theoriginaltransactiondateasaf orei
gn-curr
ency
gainorlossintheyearandpostt heot hersideoft heentrytoaccount s
payableoraccountsreceivable,asappr opr i
ate.I
nt heexample, i
fthe
amountof£10, 000remai nsunpai daty earendandt hespotrateatt hat
dateis$1.55,debi
tlossonf or
eignexchangeaccountwi ththechangei n
val
ueof$500andcr editaccount spay ablewi t
h$500.

 Howt
oKeepAccur
ateRecor
dsf
oraSmal
lBusi
ness

 Allsmallbusi
nessesar er
equir
edtokeepaccuraterecordsofthei
rcash
fl
owf ortaxpurposes.
 I
naddi ti
on,i
tisvit
alforpr
opermanagementt otrackothermeasuresof
businesssuccess.
 Thebestwayt oensur epr
operrecor
d-keepi
ngist oautomateasmuchof
theseprocessesaspossible,
sonohumanef f
ortisrequi
red.

St
ep1Recor
dimmedi
atel
yanyi
ncomei
ncur
redbyy
ourbusi
ness.

St
ep2Trackbusi
nessout
fl
owsbymaki
ngasmanypur
chasesaspossi
ble
wi
thel
ect
roni
cpayments.

St
ep3Measur ewor
kedhour
sonthepartofal
lsal
ari
edandhour
ly
employees,
usi
ngmeanswhi
chdonotimpactuponthei
rwor
kfl
owor
morale.

Step4Keepaddi
ti
onalr
ecordsont
henumberofcust
omer
syouhav
e
eachday
,inaddi
ti
ontothei
rsal
esvol
ume.

 Thei
mpor
tanceofmai
ntai
ningaccur
ateaccount
s

 I
t'
si mport
antt hatyouraccountsareaccurateanduptodatesoy oucan
drawup' t
rueandf air
'annualaccount
s.
 Youraccount sshouldbebackedupwi thfullanddetai
l
edrecordsofall
businessincomeandexpendi ture,
suchasr ecei
pts,
invoi
cesand
purchaseorders,paymentsinandout ,et
c.

 Whyy
oushoul
dkeepr
ecor
dsanddocument
s

 Fol
lowingcar
efulrecordkeepingprocedur
escanalsohelpyouwi
thtax
ret
urnsandpreventfraudortheft
.Usingagoodrecordkeepi
ngsy
stem
wil
lkeepyouupt odat eandhelpyouto:

 t
rackexpenses,
debt
sandcr
edi
tor
s

SETBY:
AYALNEHM. Page9
 appl
yforaddit
ionalfunding-egabankl oanorover
draf
tfacil
i
ty
 savet
imeandaccount ancycosts
 paytax,accur
atelyandont i
me, avoi
dingpenal
ti
es
 applyforandreceivethecorrectamountofbenefi
tsorcredi
ts

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AYALNEHM. Page
10