Deck 20: Accounting and Finance in the International Business

Question 1

Most subsidiaries of an international business operate in uniform environments.

Answer 1

False
Explanation: Foreign subsidiaries do not operate in uniform environments; their environments have widely different economic, political, and social conditions, all of which influence the costs of doing business in a country.

Question 2

The initial rate,in the Lessard-Lorange Model,refers to the spot exchange rate when the budget is adopted.

Answer 2

True
Explanation: In the Lessard-Lorange Model, the initial rate is the spot exchange rate when the budget is adopted.

Question 3

Auditing standards are rules that define the accounting principles and monetary policy of a nation.

Answer 3

False
Explanation: Auditing standards specify the rules for performing an audit-the technical process by which an independent person (the auditor) gathers evidence for determining if financial accounts conform to required accounting standards and if they are also reliable.

Question 4

The projected rate will typically be the forward exchange rate as determined by the foreign exchange market when firms use the projected spot exchange rate to translate both the budget and performance figures into the corporate currency.

Question 5

Evaluation of a subsidiary should not be separate from the evaluation of its manager.

Question 6

A European subsidiary of a U.S.firm will usually prepare its budgets in Euro.

Question 7

Compliance to IASB standards is mandatory for countries to engage in international trade.

Question 8

The ending rate refers to the spot exchange rate forecast for the end of the budget period in the Lessard-Lorange Model.

Question 9

Using the ending rate to translate the budget is a valid practice according to the Lessard-Lorange Model.

Question 10

The price at which goods and services are transferred between subsidiary companies in a multi-national firm is referred to as minimum retail price.

Question 11

The standards of U.S.Financial Accounting Standards Board and IASB are vastly different.

Question 12

Banks are the most important source of external capital for business enterprises in the United States.

Question 13

Accounting is shaped by the environment in which it operates.

Question 14

Performance of international subsidiaries depends on the transfer price set-up by the corporate.

Question 15

IASB is a major proponent of international accounting standards.

Question 16

Lessard and Lorange recommend that firms use the projected spot exchange rate to translate both the budget and performance figures into the corporate currency.

Question 17

The budget is the main instrument of financial control in an organization.

Question 18

Accounting information is the means by which firms communicate their financial position to the providers of capital.

Question 19

Most international businesses require all budgets and performance data within the firm to be expressed in the currencies of the countries where its subunits are located.

Question 20

Accounting standards are rules for preparing financial statements.

Question 21

The total size of a firm's cash pool increases when it pools cash reserves of subsidiaries.

Question 22

A tax credit allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

Question 23

The theoretical framework for performing capital budgeting for a foreign project is vastly different from domestic capital budgeting.

Question 24

Capital budgeting is the technique financial managers use to try to quantify the benefits,costs,and risks of an investment.

Question 25

A deferral principle specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.

Question 26

Payment of dividends is an uncommon method of transferring funds from foreign subsidiaries to the parent company.

Question 27

A tax treaty between two countries is formed to fix the exchange rates between the two countries.

Question 28

A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary.

Question 29

A firm's ability to establish a centralized depository that can serve short-term cash needs might be limited by government-imposed restrictions on capital flows across borders.

Question 30

Every time a firm changes cash from one currency into another currency it must bear a transaction cost.

Question 31

Firms cannot use transfer prices to move funds from a subsidiary to the parent company when financial transfers in the form of dividends are blocked by host-country government policies.

Question 32

The governments of some countries require or prefer foreign multinationals to finance projects in their country by local debt financing or local sales of equity.

Question 33

The connection between cash flows to the parent and the source of financing must be recognized when performing capital budgeting for an international business.

Question 34

Political risk tends to be greater in countries experiencing social unrest or disorder.

Question 35

Money management decisions attempt to manage the firm's working capital most efficiently.

Question 36

Studies have shown that a country's relative inflation rates and changes in exchange rates are not related to each other.

Question 37

A tax heaven is a country that gives income tax exemptions to firms that export all or part of its products.

Question 38

Pooling the cash of all the subsidiaries reduces the earning potential for firms.

Question 39

The principles of multilateral netting and bilateral netting are different.

Question 40

Royalties represent the remuneration paid to the owners for the use of technology or the right to manufacture and/or sell products under patents or trade names.

Question 41

Transfer price refers to the _____.

A) price at which goods and services are transferred to a subsidiary
B) price at which the title of products is transferred to a customer
C) price at which a supplier provides raw materials to a firm
D) cost incurred when goods or services are transferred from one place to another

Question 42

In countries such as the United States and Britain,firms typically raised capital by _____.

A) obtaining funding from the government
B) borrowing money from national banks
C) issuing stock or bonds to investors
D) borrowing money from international banks

Question 43

Most international businesses require all budgets and performance data within the firm to be expressed in the "corporate currency," which is normally _____.

A) a common currency such as the U.S. dollar
B) the home currency
C) a foreign currency
D) the currency of the country where products are sold

Question 44

According to Lessard-Lorange model,ending rate is the spot exchange rate:

A) forecast for the end of the budget period.
B) when the budget is adopted.
C) when no formal exchange rate exists.
D) when the budget and performance are being compared.

Question 45

Which of the following is an accounting problem that only international businesses face?

A) Lack of consistency in the accounting standards
B) Inaccurate filing of profit-and-loss statements
C) False reporting of income to the government
D) Lack of a dedicated accounting function within the firm

Question 46

Historically,financial reports prepared by firms in Germany _____.

A) reveal less information than reports of British or U.S. firms
B) contain detailed information required by individual investors
C) overvalued assets and undervalued liabilities
D) made more public disclosures compared to firms in other countries

Question 47

According to Lessard-Lorange model,_____ is the spot exchange rate forecast for the end of the budget period.

A) projected
B) initial
C) ideal
D) ending

Question 48

The technical process by which an independent person gathers evidence for determining if financial accounts conform to required accounting standards is known as _____.

A) standardization
B) an audit
C) reporting
D) a benchmark

Question 49

Accounting standards _____.

A) are rules for preparing financial statements
B) define the levels of tax-payments needed
C) specify the rules for performing an audit
D) refer to the technical process of balancing accounts

Question 50

Of the five combinations,Lessard and Lorange recommend that firms use the _____ spot exchange rate to translate both the budget and performance figures into the corporate currency.

A) ending
B) initial
C) final
D) projected

Question 51

Which of the following is a disadvantage of comparing managers in different countries only on the basis of return on investment?

A) The managers are not responsible for increasing the ROI of an organization.
B) Managerial actions do not have a significant impact on firms' profitability.
C) Return on investment is not a valid indicator of organizational profitability.
D) Environmental factors also contribute to ROI of firms and these factors differ.

Question 52

The International Accounting Standards Board _____.

A) can issue a new accounting standard if majority of the board members agree
B) was formed to replace the Financial Accounting Standards Board
C) proposes standards but has no power to enforce the standards
D) was formed to supervise the accounting practices that U.S. firms follow

Question 53

A German firm raising capital by selling stock through the London Stock Exchange is an example of _____.

A) transnational financing
B) service export
C) indirect financing
D) transnational investment

Question 54

Which of the following combinations of exchange rates was ruled out by Lessard and Lorange as illogical and unreasonable?

A) Translating budget using ending rate and translating actual performance using initial rate
B) Translating both actual performance and budget using projected rate
C) Translating both actual performance and budget using initial rate
D) Translating budget using projected rate and translating actual performance using ending rate

Question 55

The _____ writes the generally accepted accounting principles (GAAP)that govern the financial statements of U.S.firms.

A) US Securities and Exchange Commission
B) Office of Economic Analysis
C) International Accounting Standards Board
D) Financial Accounting Standards Board

Question 56

Lessard and Lorange refer company-generated forecast of future spot rates as _____ rate.

A) forward exchange rate
B) internal forward rate
C) initial exchange rate
D) ending exchange rate

Question 57

According to Lessard-Lorange model,_____ rate refers to the spot exchange rate when the budget is adopted.

A) ending
B) initial
C) ideal
D) projected

Question 58

Transnational financing occurs when a firm based in one country enters another country to raise capital _____.

A) by borrowing from financial institutions
B) from the sale of stocks or bonds
C) by borrowing from banks
D) through exchange policies of governments

Question 59

When using the projected spot exchange rate to translate both the budget and performance figures into the corporate currency,the projected rate in such cases will typically be the _____.

A) forward exchange rate as determined by the foreign exchange market
B) exchange rate that exists at the start of a project
C) exchange rate when the budget was prepared
D) transfer price that a firm will offer to one or more of its subsidiaries

Question 60

Which of the following is a country in which banks emerged as the main providers of capital to enterprises?

A) United States
B) Britain
C) Philippines
D) Switzerland

Question 61

_____ is the most common method by which firms transfer funds from foreign subsidiaries to the parent company.

A) Issue of long-term loans
B) Payment of annual fee
C) Issue of bonds
D) Payment of dividends

Question 62

A _____ represents the remuneration paid to the owners of technology,patents,or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names.

A) fronting loan
B) fee
C) royalty
D) transfer price

Question 63

The problem of blocked earnings is not as serious now as it once was because _____.

A) fixed exchange rates have become more common now
B) governmental intervention in earnings is more frequent now
C) there is greater acceptance of free market economics now
D) political risk within the economy is very low in modern times

Question 64

Which of the following is a valid observation of the cost of capital?

A) The cost of capital is typically higher in the global capital market.
B) Domestic capital markets have more liquidity than global markets.
C) Local debt financing raises the cost of capital if liquidity is limited.
D) A local sale of equity is preferred to global sale by international firms.

Question 65

A _____ is compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary.

A) fronting loan
B) fee
C) royalty
D) transfer price

Question 66

_____ is the technique financial managers use to try to quantify the benefits,costs,and risks of an investment.

A) Capital budgeting
B) External audit
C) Transfer pricing
D) Control system analysis

Question 67

Funds can be moved out of a particular country in which a parent country has set up a subsidiary by _____.

A) setting high transfer prices for the goods supplied
B) removing royalties imposed on the subsidies
C) charging a discounted fee on the subsidiary
D) issuing loans to the subsidiary at discounted rate

Question 68

Which of the following statements is true of tax havens?

A) Firms that export to tax havens get special tax concessions from home governments.
B) Firms would require huge capital investments to start business in tax havens.
C) Nations such as United States are widely regarded as tax havens.
D) Firms can save tax by establishing a non-operating subsidiary in the tax haven.

Question 69

Part of the benefit that a parent company receives by receiving payment through royalties can be lost if the subsidiary's _____.

A) combined tax rate is higher than the parent's
B) local government views royalties as an expense
C) local tax rates on profits are extremely high
D) managers are controlled directly by the parent

Question 70

Firms use fronting loans to _____.

A) avoid host-country restrictions on the remittance of funds from a foreign subsidiary
B) implement a cost-based and fair pricing policy across an international business
C) increase the profit center revenue of a subsidiary functioning in another country
D) implement a market-driven and fair pricing policy across an international business

Question 71

A _____ between two countries is an agreement specifying what items of income will be taxed by the authorities of the country where the income is earned.

A) tax deferral agreement
B) fixed-rate treaty
C) tax treaty
D) free trade agreement

Question 72

Money management decisions attempt to manage a firm's _____.

A) equity capital
B) fixed costs
C) working capital
D) equipment costs

Question 73

By pooling cash resources centrally firms can _____.

A) better handle short-term cash needs of subsidiaries
B) increase liquidity of independent subsidiaries
C) reduce the total size of the cash pool it must hold
D) avoid government-imposed restrictions on capital flows

Question 74

_____ costs are incurred every time a firm changes cash from one currency into another currency.

A) Dividend
B) Capital
C) Fixed
D) Transaction

Question 75

Which of the following is a disadvantage of pursuing a transfer pricing policy?

A) It is not useful in shifting earnings from a high-tax country to a low-tax one.
B) Transfer pricing does not treat each subsidiary as a profit center.
C) It is not effective when significant currency devaluation is expected.
D) A transfer price policy cannot be used to move funds when dividends are restricted.

Question 76

Multilateral netting is used majorly to _____.

A) reduce the number of transactions between subsidiaries
B) avail tax credit from governments
C) establish a tax treaty amongst multiple countries
D) to reduce the fixed costs of establishing a subsidiary

Question 77

A(n)_____ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

A) indirect tax
B) tax haven
C) tax credit
D) internal tax

Question 78

Which of the following statements is true of the capital budgeting used in international businesses?

A) Capital budgeting does not provide connection between cash flows to the parent and subsidiaries.
B) Its basic framework is vastly different from the framework of domestic capital budgeting.
C) Capital budgeting does not consider the cash flows between subsidiaries of a firm.
D) It enables top managers to compare different investment alternatives in an objective fashion.

Question 79

A _____ is a loan between a parent and its subsidiary channeled through a financial intermediary,usually a large international bank.

A) fronting loan
B) equity loan
C) direct loan
D) security loan

Question 80

A deferral principle specifies that parent companies are not taxed on foreign source income until _____.

A) the subsidiary providing income makes some profit
B) they actually receive a dividend
C) they acquire majority stake in the subsidiary
D) the subsidiary providing income is listed in the U.S.