An article in Forbes noted that “accounting rules ... can often change the way companies do business.” Under the accounting rule covering receivables and payables denominated in foreign currencies, for example, “it is very important for companies to monitor their currency deal¬ ings.” A case in point is R. J. Reynolds Industries, who recently “opened regional treasury offices in London and Hong Kong to keep tabs on world-wide cash flow and direct local bor¬ rowings.” In that same article a partner from a major accounting firm indicated that “more and more companies are centralizing their treasury-management function. Those that don’t may be operating at a disadvantage.” Source: Christopher Power, “RJR’s Foreign Coup,” Forbes, September 12, 1983, p. 226. 310 Part 3 Assets: A Closer Look required:

a. Explain why the methods of accounting for foreign currencies might cause a company to centralize its treasury-management function, and why those that don’t may be operating at a disadvantage.

b. What is one of the main strategies used by U.S. companies to reduce the risks of holding receivables or payables denominated in non-U.S. currencies?

c. Explain how the strategy in

(b) works—specifically, how it might be used to reduce the possibility of violating a covenant on an outstanding debt.