rises from 100 on the first day of month one to 169.0 by the end of the second month.
The exchange rate on Day 1 is $1 TL100. At month’s-end it is $1 TL130.
27.3 SALES REVENUE. To illustrate our proposed treatment of sales revenues, as-
sume that the firm sells TL2,000,000 worth of merchandise in Month 1, with varying
invoice dates and payment terms. Assuming monthly preparation of financial state-
ments, we illustrate the conventional practice of recording the sales transaction at the
month-end exchange rate regardless of when the sale is invoiced during the month or
when payment is received. While many firms also use the average rate, the principles
demonstrated here remain the same whether month-end or average rates are em-
ployed. The sales figure reported using the month-end exchange rate would be
TL2,000,000/130$15,385 (use of the average rate would produce a sales figure in
dollars of TL2,000/115 $17,391).
In our first scenario, assume that the sale is invoiced on Day 1 of Month 1, with
payment immediately being received in cash TL2,000,000/TL100$20,000.
Conventional treatment would measure the transaction at month end rather than when
cash is received. The economic basis of the transaction however, is the cash that has
actually been received on the invoice date. In this instance revenues would be un-
derstated by 30% or $4,615 determined as follows:
Actual $20,000
Reported _______15,385
Variance ______________$4,615In keeping with the translation methodology associated with FAS 52, this $4,615
understatement of sales would be offset by an equivalent nonoperating translation
gain appearing below the line.^7
In the next scenario, assume instead that the sale is invoiced on Day 5, with the
client being offered 25 days payment terms. Based on our model, the transaction
would be booked on the same day that payment is received. From an economic point
of view, there would be no variance and no nonoperating translation gain or loss.
Actual $15,385
Reported _______$15,385
Variance ______________$0From a control perspective, management should be able to elicit from the salesper-
son what the expected profit margin is on the day the sale is made. The salesperson
should not have to wait until the books are closed to know that. The information to
make this determination is already at hand as invoices in hyperinflationary environ-
ments will clearly state the date the customer has to pay.
In the following example, assume that the client is invoiced on Day 30 with pay-
27.3 SALES REVENUE 27 • 5(^7) Assume that the firm in question begins the period with a $10,000 equity investment and immedi-
ately converts this cash balance to saleable inventories. The goods are marked up 100% over cost and
sold for cash the next day. In this case, the aggregate exchange adjustment would be $4,615 determined
either as a plug when preparing the end of period translated balance sheet, or as a positive aggregate
translation adjustment comprising the gain on the hard currency cash balance.