Deck 17: International Accounting and Financial Management

Question 1

FASB 52 requires that companies record foreign currency based transactions at the spot rate at the time of the transaction.

Answer 1

True

Question 2

Triple bottom line accounting is built on the assumption that capitalism can become humanized.

Answer 2

True

Question 3

Accounting standard convergence is unlikely,given the complexities of the systems,all of which would require harmonization.

Answer 3

False

Question 4

Consolidation is when a company's various results are aggregated into one report.

Question 5

The main argument against 3BL is that business is concerned with generating profit,not with social and ecological issues,except where the law requires it to be.

Question 6

The trend in the debt financing of foreign subsidiaries is to tap the local markets first,so Toyota in the U.S.would tend to tap into U.S.dept markets and Pepsi in Japan would tend to go to the Japanese debt markets first.

Question 7

American depository receipts are held by a bank in the stock's home country and these receipts then are traded on the U.S.exchange.

Question 8

The current rate translation method translates current assets at the rate in effect when they were acquired.

Question 9

Chief financial officers avoid tapping into international markets because they bring too many unpredictable variables.

Question 10

The purpose of all accounting is to provide internal and external decision-makers with the financial data they need to make their decisions.

Question 11

The temporal method of translation translates fixed assets at the rates in effect the day the assets were acquired.

Question 12

Although the international airline segment is competitive,British Air as it is today could not legally take over Delta or United.

Question 13

Firms may choose to issue stock in foreign markets in order to tap into a broader investor pool.

Question 14

With convergence of accounting standards,accounting statements will still need to be adjusted to be directly comparable due to varying legal requirements.

Question 15

Whether to use the current or temporal rates depends on the functional currency of the foreign operation.

Question 16

Accounting is an objective,fact-based discipline and not influenced by culture.

Question 17

The decision of whether to finance by debt or equity may be influenced by the practices of the local environment,that is,culture.

Question 18

Offshore financial centers operate in low tax and low regulation markets such as New York City and Milan.

Question 19

There are three points at which operating in a foreign currency raises accounting issues: when transactions are made in foreign currencies,when foreign subsidiaries consolidate their results to the parent company,and when debt is acquired in foreign currencies.

Question 20

The Global Reporting Initiative has made little effort in establishing a framework for global 3BL reporting,despite its UN collaboration.

Question 21

Operating in more than five local currencies is unusual for the international firm.

Question 22

Multilateral netting reduces foreign exchange transaction costs.

Question 23

In a forward market hedge,the firm sells forward its foreign currency receivables for its home currency,matching the time forward to the foreign currency receivable's due date.

Question 24

Translation exposure occurs when the subsidiary's results are consolidated at the corporate level.

Question 25

In a money market hedge,the firm matches the balance sheet asset with a liability in the same currency.

Question 26

Moving funds can reduce tax exposure in high tax locales and can be used as a way to address limitations placed by foreign governments on the repatriation of profits.

Question 27

There are four main types of FX risk: transaction,translation,economic and arbitrage exposure.

Question 28

The number of FX markets,along with floating exchange rates,varying country inflation rates,advances in technology for the management of cash,and the growth of the derivatives market are among the conditions that have led to the growth of international finance centers.

Question 29

The OECD and the U.S.Internal Revenue Service have issued guidelines on transfer pricing because it has such critical tax implications.

Question 30

A fronting loan is used when the firm does not have the collateral or reputation to borrow in a foreign environment.

Question 31

Unanticipated shifts in exchange rates present risk to the international firm.

Question 32

Finance is best left decentralized in international firms,so that local efficiencies and opportunities can be accessed.

Question 33

Multilateral netting is an approach to debt management in which subsidiaries aggregate their debt service.

Question 34

For the conservative international firm,there is no reason to move money other than the repatriation of profits.

Question 35

In a currency option hedge,the firm covers its downside risk,but,because the contract is an option,can also benefit from any upside.

Question 36

Many corporations do not hedge translation exposure.

Question 37

Swap contracts exchange foreign currency debt for another liability in the home currency.

Question 38

The overall goal of cash flow management is to reduce risk and position the firm so it can benefit from opportunities.

Question 39

Transfer pricing is what the company charges for transfers within the company.It is a bookkeeping cost of goods transferred across national borders.

Question 40

Exposure netting is a risk management technique similar to multilateral netting,a centralized clearing account that matches and nets out FX exposure across currencies or currency families.

Question 41

In the temporal method,fixed assets such as real estate are translated at

A)their market value.
B)their historic cost.
C)their assessed value.
D)an average of the period's rates.

Question 42

A foreign currency sale is recorded as revenue,using the exchange rate

A)on the date of the sale.
B)on the date the balance sheet is consolidated to corporate.
C)on an historical average over the period between the sale and the consolidation.
D)that the company decides to use.

Question 43

These countries prefer debt to equity by large margins:

A)France,Italy and Japan.
B)UK,Italy and U.S.
C)U.S.,Canada and UK.
D)Japan,U.S.and UK.

Question 44

The Anglo-American inclination toward optimism is explained by a desire to

A)promote good feelings within the firm.
B)show impressive earnings that will attract investors.
C)promote capitalism.
D)contribute to political stability.

Question 45

In their measurement and disclosure for accounting systems,less developed countries tend toward

A)transparency and conservatism.
B)transparency and optimism.
C)secrecy and optimism.
D)secrecy and conservatism.

Question 46

Compared to equity financing,debt financing is thought to be

A)less expensive,because interest on the debt is usually tax deductable.
B)more expensive,because interest rates are beyond the control of the company.
C)more expensive,because debt markets are professionally run and mostly institutional.
D)less expensive because the debt is usually aggregated.

Question 47

ADRs are a way for non-U.S.firms to

A)participate in U.S.debt markets.
B)lock in dollar exchange rates.
C)leverage in a foreign currency.
D)participate in local U.S.equity markets without incurring the need for a broker or foreign exchange.

Question 48

In the current rate method,assets and liabilities are translated

A)at their historical rates.
B)at an average of the historical and current rates.
C)on the date the balance sheet is produced.
D)whichever the company chooses,as long as it is consistent in all its foreign operations.

Question 49

Income tax is a direct tax levied on earnings;

A)VAT is also a direct tax.
B)VAT is not a tax,in the legal sense.
C)VAT,vertical added tax,is indirect.
D)VAT is an indirect tax.

Question 50

In debt markets,the corporate trend is to

A)raise debt-based capital in their home country first.
B)raise debt capital in the local markets first.
C)raise equity capital first.
D)rely first on retained earnings before debt is incurred.

Question 51

In this book Cannibals with Forks,John Elkington puts forward the argument that

A)capitalism can become civilized.
B)capitalism is not,by its very nature,uncivilized and destructive of natural resources.
C)natural resources are a God-given gift for mankind to use.
D)developing nations will become more competitive with Western nations.

Question 52

Elkington suggests that the drivers for triple bottom line accounting can be

A)corporate profits and growth.
B)markets,values,transparency,life-cycle technology,partnerships,time and corporate governance.
C)CSR.
D)the SEC.

Question 53

The capital structure of the firm can be raised externally through

A)leveraging and bonds.
B)debt and equity.
C)debt and retained earnings.
D)retained earnings and bonds.

Question 54

The U.S.body that establishes accounting standards,the FASB,is

A)a branch of the U.S.government.
B)elected by seat holders on the NYSE.
C)appointed by the chair of the U.S.House of Representatives Banking Committee.
D)a private organization.

Question 55

When a firm offers its stock in a foreign market,it is

A)encountering foreign currency exposure.
B)trying to limit its investor pool.
C)violating domestic law in the EU or U.S.
D)cross-listing.

Question 56

The functional currency of a foreign operation is

A)the currency of the parent company.
B)the currency of the host country.
C)whichever currency the company chooses to declare as the functional currency.
D)the currency in which cash flows,pricing,expenses and financing are denominated.

Question 57

Assumptions that underlie a country's legal,political and economic systems

A)do not influence accounting because it is a quantified discipline,objective and factual.
B)influence accounting,both its practice and the commonly shared understanding of its purpose.
C)influence accountants but not the science of accounting.
D)do not influence accounting because value is measured in currency,an objective and comparable measure.

Question 58

Off shore financial centers are appealing to the international firm because they

A)outsource all of the administrative details.
B)are in Switzerland,the Cayman Islands,the Bahamas.
C)offer reduced regulations and lower taxes than in the home country.
D)have lower labor costs.

Question 59

Companies in the U.S.,Canada and the UK tend to

A)rely on equity more than do companies in most other countries.
B)depend on debt more than do other countries.
C)divide their equity-debt almost evenly.
D)rely on retained earnings more than do companies in most other countries.

Question 60

There are two points at which operating in a foreign currency raises issues for accounting,

A)when debt is incurred and when foreign payrolls are run.
B)when transactions are made in foreign currencies and when foreign subsidiaries consolidate their results back to corporate.
C)when the currency fluctuates and when the local inflation rate changes.
D)when the interest and inflation rates change.

Question 61

Discuss the risks associated with transaction exposure and how to hedge them.

Question 62

The value-added tax is levied on

A)luxury items and paid by the consumer.
B)export items only and thus a direct tax.
C)non-essential goods and paid by the consumer.
D)all goods and is indirect,collected from the value-adder.

Question 63

Firms have developed international finance centers in order to

A)centralize the financial management function,and thereby reduce costs and increase both profits and efficiencies.
B)meet WTO guidelines.
C)compete with international banks.
D)facilitate inter and intra firm transfer pricing.

Question 64

What is the purpose of multilateral netting?

A)to increase market penetration.
B)to increase levels of standardization.
C)to decrease inflation risk.
D)to reduce transaction costs and increase efficient use of funds.

Question 65

Leading and lagging is a practice

A)of timing,leading with receivables in a weakening currency and payables in strengthening currencies.
B)a defensive marketing strategy with finance implications.
C)of interest rate manipulation,borrowing in low rate environments and lending in high rate environments.
D)of leading with payables in weakening currencies and receivables in strengthening currencies.

Question 66

Transaction exposure occurs when

A)the value of the currency changes between when the asset or liability is recorded and when results are consolidated.
B)the firm has transactions in a foreign currency.
C)the firm's strategic projections use a currency value that has changed.
D)the recorded value of an asset or liability changes between its being reported and its consolidation.

Question 67

In a forward market hedge for transaction exposure,the firm sells forward

A)foreign currency receivables for the home currency,matched to the due date of the receivables.
B)domestic currency receivables for the foreign currency,matched to the due date of the receivable.
C)its anticipated sales in the foreign currency.
D)its projected earnings in the foreign currency,that will be repatriated.

Question 68

The key issue related to translation exposure is

A)the local interest rates.
B)what method to use for the translation,current rate or temporal.
C)strategic planning.
D)A and C

Question 69

The cash flow management of a global firm,compared to a domestic firm,is

A)exactly the same: moving money is moving money.
B)less complex,because the sums are larger and the process is centralized.
C)more complex,because currencies vary,as do national-level regulations.
D)more complex,because the number of subsidiaries or branches is larger.

Question 70

Whether the functional currency is local or the parent company's currency,owner's equity is always translated at

A)the rate in effect when the stock was issued.
B)the rate in effect the day of the consolidation.
C)the rate in effect the day of the journal entry.
D)the method of the company's choice,but consistency is required.

Question 71

Discuss the concerns conducting business in a foreign currency raises from an accounting perspective.

Question 72

Regardless of the functional currency,retained earnings are translated at

A)their market value based on recent stock price.
B)the rate in effect when the earnings were posted.
C)the rate in effect the day of consolidation.
D)a reasonable rate of the company's choice.

Question 73

Why is a currency option sometimes preferred to a forward market hedge?

A)It is an optional contract,so that the company could not exercise it and be able to benefit from upside swings in the foreign currency value.
B)The rates are cheaper.
C)They are available for longer periods.
D)The IRS favors them for tax credits when they are exercised.

Question 74

Exposure netting is a transaction exposure hedging technique that is similar to

A)leading and lagging.
B)a forward market contract.
C)multilateral netting.
D)a spot currency contract.

Question 75

These conditions led to the establishment of international finance centers:

A)the end of the gold standard and the Bretton Woods Accord.
B)WTO guidelines and IMF regulations.
C)floating exchange rates and growth in the FX markets.
D)growth of sustainable business practices and social responsibility.

Question 76

A fronting loan enables the firm to

A)protect itself from the risk of blocked asset transfers,such as remittances,loan payments,profit repatriations.
B)build collateral with local firms.
C)devote more resources to bricks and mortar.
D)gain a competitive advantage in new markets.

Question 77

Foreign exchange risks,transaction,translation or economic,are caused most directly by

A)unanticipated political actions by foreign governments.
B)anticipated movements in interest rates in foreign economies.
C)trade-related distribution risks such as weather,the price of fuel and transport strikes.
D)unanticipated movements in exchange rates.

Question 78

Microloans are usually

A)loans made in small,developing economies.
B)loans made to small,entrepreneurial businesses.
C)small loans made to small businesses,usually in developing countries.
D)pharmaceutical-backed loans.

Question 79

Discuss how culture might impact accounting.

Question 80

U.S.government's attitude towards transfer pricing on subsidiary transactions in foreign locations is

A)uninterested,because these transactions are outside the U.S.and thus,beyond U.S.jurisdiction.
B)interested,because transfer pricing has tax implications for the host governments.Hence the IRS guidelines.
C)neither interested nor uninterested,because,although there are tax implications for the host country,the U.S.tax authorities feel comfortable exercising their authority globally.
D)uninterested,because foreign taxes are of no interest to them.