Fine Foods Inc, a US wholesaler, buys merchandise from suppliers in Germany and pays the suppliers in euros. It also sells merchandise to customers in Italy, and receives payment in euros. Fine Foods' accounting year ends June 30. Exchange rates are as follows:
|
Date
|
Spot rate ($/€)
|
|
1-Mar-11
|
1.55
|
|
1-Apr-11
|
1.6
|
|
30-Jun-11
|
1.62
|
|
1-Jul-11
|
1.63
|
|
15-Aug-11
|
1.65
|
|
31-Aug-11
|
1.68
|
Purchases of € 1,000,000 are made on March 1, 2011. Fine Foods pays its German suppliers on August 15, 2011, and sells the merchandise to its US customers on August 31, 2011. Sales of € 100,000 are made on April 1, 2011. Fine Foods receives payment from its Italian customers on July 15, 2011.
Required:
What amounts will appear on the financial statements of Fine Foods for:
a. Accounts payable, on the June 30, 2011, balance sheet?
b. Accounts receivable on the June 30, 2011 balance sheet?
c. Exchange gain or loss, on the fiscal 2011 income statement?
d. Exchange gain or loss on the fiscal 2012 income statement?
e. Sales revenue, on the fiscal 2011 income statement?
f. Cost of Goods Sold, on the fiscal 2012 income statement?
g. What hedging strategy would you recommend for Fine Foods and why?