So what if you receive goods earlier than the invoice for them and as it happens, you need to take them into use right away. They need a price, that’s for one, but what if the price is quoted in a currency that fluctuates as compared to your functional currency?

Say that your functional currency is A and you bought something for 120B. The B in this case would be the foreign currency that fluctuates. The exchange rate is let’s say 1A = 1.2B. 

Now, say you bought 10 items for the total of 120B at the time. This 120B is something you calculate yourself since in our example you got no invoice with them just yet. Now you account for the 10 items in your accounting in their functional currency value that is 120 / 1.2 = 100A. Value of each item is 10.

Furthermore, as we gave the situation, you end up using all of the materials in your production or sell them all prior you receive the actual invoice. Say now that the invoice is obtained 2 weeks later within the same month and the currency exchange rate is now 1A = 1B.

In your accounting you’ve accounted the items into expenses with the item value as 10A and the total of 100A. Your supplier still wants 120B from you, however, the exchange rate has changed and this 120B costs now 120 / 1 = 120A for you. As such, your expenses for the item actually increased and you account for the difference of 20A into your cost of goods sold (had you waited for the invoice, your cost of goods sold would be bigger so it’s only proper to add this expense into this group).

Remember, it doesn’t really matter at which date you receive the invoice, but when you pay your balances. Why you ask? Simply due to the fact that you need buy foreign currencies anyhow and as such, they cost you something. This means that either they are cheaper or more expensive as opposed to the date you took on the liability; you’re making either profits or losses from the transaction. That is if the currency fluctuates obviously.