Analysis of Exchange Rate Fluctuations for Striking Furs (Finance)

This assignment solution addresses the impact of exchange rate fluctuations on a US-based company, Striking Furs, which imports furs from a Canadian supplier. The solution details the journal entries required under a perpetual inventory system, considering the conversion of CAD to USD and the gains or losses resulting from exchange rate fluctuations. The assignment covers the initial purchase, adjustments for exchange rate changes, and the final payment. Furthermore, the solution explores various strategies Striking Furs can employ to mitigate exchange rate risk, including sourcing from US-based suppliers, finding Canadian customers, utilizing forward exchange contracts, and employing currency options. The solution references relevant financial literature to support the analysis.

MANAGEMENT ACCOUNTING
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Question 1
The given situation pertains to a company named Striking Furs which is a US based company
and tends to import furs from a Canadian supplier named Capable Trappers Ltd. The requisite
journal entries for the various events are highlighted as follows.
1) Considering the perpetual inventory system is used, hence the inventory account is debited
and accounts payable is credited since the inventory has been purchased on account. The
inventory price is quoted in CAD and needs to be converted into USD considering $ 0.85
USD = 1 CAD. The USD amount for inventory = 25000*0.85 = USD 21,250. The date of
this event is December 11, 2017 and the requisite journal entry for the same is indicated
below.
2) In the given case, there has been fluctuation of exchange rate resulting in appreciation of
CAD against USD owing to which there would loss incurred by Striking Furs. This loss
would be adjusted against the accounts payable. The quantum of loss on account of exchange
rate fluctuations would be (0.89-0.85)*25000 = USD 1,000. The adjusting entry for this
would be made at the end of year i.e. December 31, 2017 and the relevant journal entry for
the same is indicated below.
3) When the payment for the inventory bought earlier is payment, there is gain realised by
Striking Furs since the USD has appreciated against the CAD. Appreciation of USD against

the CAD would result in lesser amount being paid in USD for settling the outstanding
account payable for the inventory purchased.
Gain on fluctuation in exchange rate = (0.89-0.87)*25000 = USD 500
The check amount that is issued for the settlement amounts to USD 21,750. The payment is
made on February 9, 2018 and the relevant journal entry for the same is indicated below.
Question 2
The various ways in which Striking Furs can protect itself against the exchange rate
fluctuations are indicated below.
 The company can choose a US based supplier so as to avoid exposure to foreign currency
since the local supplier would be paid in USD. However, it may be possible that this
supplier may be expensive than the current supplier owing to which this may not be
feasible (Damodaran, 2015).
 It may be worthwhile that the company finds customers in Canada so that CAD invoice
may be received which would essentially minimise the foreign currency risk since the
invoice from customers can be used to pay the supplier of inventory (Parrino & Kidwell,
2014).
 Hedging instruments such as forward exchange contracts should be entered into with
Canadian bank for the invoice amount so as to minimise the risk. In case of forward

exchange contracts, a particular exchange rate is agreed to for USD/CAD, then at the
expiry date the exchange of USD and CAD would take place at the agreed rate irrespective
of the actual exchange rate prevailing at that time (Brealey, Myers & Allen, 2014).
 Further, currency options may also be engaged by the company to minimise the currency
risk for the company thereby ensuring the fluctuations of exchange rate limits the
downside.
References
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications, pp. 161-162

Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons pp.97-98
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications, pp.79-80