When a U.S. company receives foreigh currency, the amount must be converted to its equivalent in U.S. dollars. When payment is to be made in a foreign currency, U.S. dollars must be exchanged for the foreign currency for payment. To illustrate, assume that a U.S. company purchases merchandise from a British company that requires payment in British pounds. In this case, U.S. dollars must be exchanged for Bristish pounds to pay for the merchandise. The exchange of one currency for another involves using an exchange rate. The exchange rate is the rate at which one unit of currency (the dollar , for example) can be converted into another currency (the British pound).

Assume that a U.S. company had purchased merchandise for 1,000 pounds from a British company when the exchange rate was $1.40 per British pound. Thus, $1,400 must be exchanged for 1,000 to make the purchase.

We can analyze all transactions with foreign companies in the same manner as the example above. Assume that a sale is made by a U.S. company to a Swiss company. The Swiss company was billed in Swiss francs when the exchange rate was $.25 per Swiss franc. How many Swiss francs would be required to pay this invoice if the total in U.S. dollars is $1,000?

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