Deck 20: Accounting and Finance in the International Business

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Most subsidiaries of an international business operate in uniform environments.

Question 5

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

Question 6

Accounting is shaped by the environment in which it operates.

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

Evaluation of a subsidiary should be separate from the evaluation of its manager.

Question 12

Accounting standards are rules for preparing financial statements.

Question 13

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

Question 14

The IASB is made up of 24 members, and to issue a new standard, 51 percent of them must agree.

Question 15

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 16

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 17

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 18

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

Question 19

By pooling its cash reserves, the firm can increase the total size of the cash pool it must hold in highly liquid accounts.

Question 20

The IASB has the power to enforce its standards, so it has considerable power in the industry.

Question 21

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 22

A fronting loan is a loan between a parent and its subsidiary channeled through a financial intermediary.

Question 23

Three sets of related decisions are involved in financial management in an international business. Which of these involves making decisions about how to fund the chosen activities?

A) investment decisions
B) financing decisions
C) bilateral decisions
D) money management decisions

Question 24

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

A) Stocks or bonds
B) World Bank loans
C) Banks
D) Venture capitalists

Question 25

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

Question 26

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

Question 27

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 28

Financial management in an international business includes three sets of related decisions. Which of these involves making decisions about how to manage the firm's financial resources most efficiently?

A) multilateral decisions
B) financing decisions
C) investment decisions
D) money management decisions

Question 29

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

Question 30

What 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 31

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

A) transnational financing.
B) service exporting.
C) indirect financing.
D) transnational investment.

Question 32

Accounting standards are

A) rules for preparing financial statements.
B) the levels of tax payments needed.
C) the rules for performing an audit.
D) the technical process of balancing accounts.

Question 33

Financial management in an international business includes three sets of related decisions. Which of these involves making decisions about what activities to finance?

A) investment decisions
B) money management decisions
C) multilateral decisions
D) financing decisions

Question 34

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

Question 35

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 36

The principles of multilateral netting and bilateral netting are different.

Question 37

Which of the following was formed in March 2001 to replace the International Accounting Standards Committee (IASC)?

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

Question 38

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 39

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 40

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

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

Question 41

Lessard and Lorange refer to the company-generated forecast of future spot rates as the ________ rate.

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

Question 42

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 43

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

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

Question 44

According to Lessard and Lorange, the 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

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 46

Capital budgeting for a foreign project

A) begins with an audit of the current cash flows.
B) is vastly different from domestic capital budgeting.
C) begins with converting all cash flow to Eurocurrency.
D) uses the same theoretical framework that domestic capital budgeting uses.

Question 47

Political risk tends to be

A) greater in countries experiencing social unrest or disorder.
B) negligible for large multinational companies.
C) less in countries experiencing social unrest or disorder.
D) a consideration only for companies operating in third world countries.

Question 48

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 49

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

A) U.S. dollars.
B) euros.
C) a third- party currency.
D) Eurocurrency.

Question 50

The price at which goods and services are transferred between subsidiary companies in a multinational firm is referred to as

A) minimum retail price.
B) deferral price.
C) transfer price.
D) transaction price.

Question 51

According to Lessard and Lorange, the ________ rate is the spot exchange rate forecast for the end of the budget period.

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

Question 52

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

A) chief financial officer
B) corporate accounting
C) audit
D) budget

Question 53

The projected rate will typically be the ________ 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.

A) transfer price
B) forward exchange rate
C) carrying cost
D) foreign exchange rate

Question 54

Extensive empirical studies have shown that

A) there is only a short-run relationship between a country's relative inflation rates and changes in exchange rates; no long-run relationship exists.
B) there is a long-run relationship between a country's relative inflation rates and changes in exchange rates.
C) that there exists both short-run and long-run relationships between a country's relative inflation rates and changes in exchange rates.
D) a country's relative inflation rates and changes in exchange rates are not related to each other.

Question 55

The International Accounting Standards Board

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

Question 56

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 57

Compliance to IASB standards is

A) mandatory for countries that want to engage in international trade.
B) enforced through the World Trade Organization.
C) voluntary.
D) enforced through the United Nations.

Question 58

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

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 59

The ________ has 16 members who are responsible for the formulation of new international financial reporting standards.

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

Question 60

According to Lessard and Lorange, the ________ rate refers to the spot exchange rate when the budget is adopted.

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

Question 61

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 a majority stake in the subsidiary.
D) the subsidiary providing income is listed in the United States.

Question 62

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

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

Question 63

Multilateral netting is used primarily to

A) reduce transaction costs between subsidiaries.
B) avail tax credit from governments.
C) establish a tax treaty among multiple countries.
D) reduce the fixed costs of establishing a subsidiary.

Question 64

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

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

Question 65

Which of the following is an observation about 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 66

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

A) Capital budgeting does not provide a 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 67

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

A) a transaction cost.
B) a tax.
C) a transfer fee.
D) an audit.

Question 68

A ________ between two countries is an agreement specifying which 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 69

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

A) bilateral agreement
B) tax credit
C) deferral principle
D) tax treaty

Question 70

Critics of adjusting discount rates to reflect a location's riskiness argue that it

A) does not penalize either distant or early cash flows enough.
B) penalizes distant cash flows too heavily.
C) does not penalize early cash flows enough.
D) penalizes early cash flows too heavily.

Question 71

Most banks charge ________ for moving cash from one location to another.

A) a transfer fee
B) an internal forward rate
C) an accounting service fee
D) an audit fee

Question 72

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 the United States are widely regarded as tax havens.
D) Firms can save taxes by establishing a nonoperating subsidiary in the tax haven.

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 in liquid accounts.
D) avoid government-imposed restrictions on capital flows.

Question 74

Pooling the cash of all the subsidiaries centrally

A) lowers the interest rate earned.
B) reduces the earning potential for firms.
C) increases the interest rate paid.
D) increases the earning potential for firms.

Question 75

________ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

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

Question 76

Money management decisions attempt to manage a firm's

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

Question 77

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

A) cash flow
B) corporate expenses
C) working capital
D) corporate revenues

Question 78

A tax haven is a country

A) where companies benefit from establishing fully operating subsidiaries.
B) that does not charge local companies for importing products from other countries.
C) that does not charge taxes on the purchase or sale of any items.
D) with an exceptionally low, or even no, income tax.

Question 79

________ 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 80

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

A) tax amnesty
B) tax credit
C) waiver
D) tax treaty