SIE Ready📈 Economic Factors · Lesson 5 of 5 · 6 min
The Dollar Abroad and Reading the Books
💱 A strong dollar sounds like good news for everyone. Ask an American tractor exporter how it feels.
💡 Key idea
Strong dollar: good for importers, bad for exporters. Balance sheet = a moment; income statement = a period.
🧠 Why it matters
A STRONG (rising) dollar makes U.S. goods more expensive abroad, HURTING EXPORTERS, and makes foreign goods cheaper here, HELPING IMPORTERS and U.S. travelers. A WEAK dollar does the reverse. The BALANCE OF PAYMENTS records all transactions between a country and the rest of the world; when imports exceed exports, the trade balance is in deficit. BALANCE SHEET: a snapshot on one date; Assets = Liabilities + Shareholders' Equity. WORKING CAPITAL = current assets minus current liabilities. CURRENT RATIO = current assets divided by current liabilities (liquidity). INCOME STATEMENT: results over a period (revenue, expenses, net income). EPS = (net income minus preferred dividends) / common shares outstanding. Example: $10M net income, $1M preferred dividends, 3M shares: EPS = $3.
📈 In the real world
Grace runs a fictional Ohio maker of farm equipment that sells half its output in Europe. The dollar climbs 10% against the euro, so her machines suddenly cost Europeans more and orders slow. Across town, a wine importer is thrilled: his French wine just got cheaper to buy.
📌 Takeaways
- Strong dollar hurts exporters, helps importers; weak dollar does the opposite
- Assets = liabilities + equity; working capital = current assets minus current liabilities
- EPS = (net income − preferred dividends) ÷ common shares outstanding
📖 Terms in this lesson
Current ratio: Current assets divided by current liabilities, a measure of a company's ability to pay its short-term obligations.
Working capital: Current assets minus current liabilities.
Earnings per share (EPS): Net income available to common shareholders divided by the number of common shares outstanding.
STRONG DOLLAR, SHOP ABROAD: A stronger dollar makes imports cheaper and helps importers, while US exporters' goods get pricier abroad.
✅ Test yourself
A rising U.S. dollar against other currencies would most likely benefit:
- Foreign tourists visiting the U.S.
- U.S. companies that import
- U.S. farms selling crops abroad
- U.S. companies that export
Answer: B · U.S. companies that import
A stronger dollar buys more foreign goods, so importers benefit. Exporters, farms selling abroad and foreign tourists all face higher costs for U.S. goods and services.
A company has current assets of $6 million and current liabilities of $2 million. Its current ratio is:
- 2 to 1
- 3 to 1
- 4 to 1
- 0.33 to 1
Answer: B · 3 to 1
Current ratio = current assets ÷ current liabilities = $6M ÷ $2M = 3 to 1. Working capital would be $4M, which is a dollar amount, not a ratio; 0.33 inverts the formula.
Which statement shows a company's financial position at a single point in time?
- Cash flow statement
- Balance sheet
- Proxy statement
- Income statement
Answer: B · Balance sheet
The balance sheet is a snapshot of assets, liabilities and equity on one date. The income and cash flow statements cover a period, and a proxy statement concerns shareholder voting.
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