Which statement about exchange rates and cash flows is true?

Which statement about exchange rates and cash flows is true?

• A. They impact the timing of cash receipts, but not the amount.
• B. They affect audit procedures.
• C. They influence cash flows when foreign currencies are involved.
• D. They are irrelevant to financial planning.

Answer: (C)

If a business has cash flows in currencies other than its own, exchange rates directly affect how much cash it finally receives or pays when those amounts are converted to the home currency. The rate used to translate a foreign-currency cash flow determines the domestic-currency value of that inflow or outflow. If the rate moves between the time a sale or a payment is set and when it is settled, the actual cash in home currency can be higher or lower. That means exchange rates influence not just when cash appears in the books, but how large the cash amounts are in the planning and budgeting horizon. This is why budgets and liquidity planning must incorporate assumptions about exchange rate movements or hedging strategies to stabilize expected cash inflows and outflows. While exchange rates can also affect audit considerations, the fundamental effect on cash flows is the change in domestic-currency value of foreign cash flows. They are not irrelevant to financial planning, and the impact is not limited to timing—it also changes the actual amounts realized.

If a business has cash flows in currencies other than its own, exchange rates directly affect how much cash it finally receives or pays when those amounts are converted to the home currency. The rate used to translate a foreign-currency cash flow determines the domestic-currency value of that inflow or outflow. If the rate moves between the time a sale or a payment is set and when it is settled, the actual cash in home currency can be higher or lower. That means exchange rates influence not just when cash appears in the books, but how large the cash amounts are in the planning and budgeting horizon.

This is why budgets and liquidity planning must incorporate assumptions about exchange rate movements or hedging strategies to stabilize expected cash inflows and outflows. While exchange rates can also affect audit considerations, the fundamental effect on cash flows is the change in domestic-currency value of foreign cash flows. They are not irrelevant to financial planning, and the impact is not limited to timing—it also changes the actual amounts realized.