Question 1

In which of the following countries is the use of the international financial reporting standards (IFRS) not mandatory?

Accepted Answer

The United States of America is the only country among the given options where the use of IFRS is not mandatory. The US Generally Accepted Accounting Principles (US GAAP) are followed instead.

Question 2

The advantage of raising money through debt financing is that company management doesn't give up any ownership of the firm.

Accepted Answer

In debt financing, companies borrow money from lenders or issue bonds to investors. This does not involve selling any ownership stake in the company, thus company management does not give up any ownership.

Question 3

Despite the costs associated with a forward contract, companies often prefer it to protect themselves against a potential larger downside loss.

Accepted Answer

Forward contracts allow companies to lock in a price for a future transaction, providing protection against potential losses due to market fluctuations. While there may be costs associated with the contract, such as margin requirements and credit risk, companies may still prefer it to avoid a larger downside loss in the future.

Question 4

Subsidiaries purchase assets at different times throughout the year and therefore the balance sheet of a multinational firm may not balance if the current-rate method is used.

Accepted Answer

The current-rate method converts all foreign currency balance sheet items at the current exchange rate at the balance sheet date, ensuring the balance sheet balances by adjusting shareholders' equity for translation adjustments.

Question 5

A company needs to buy US dollars in 90 days time. Therefore it signs a contract with a US bank to buy US dollars in exchange for euros 90 days from now at a specified exchange rate. The company would most likely use the _____ as a way to reduce exchange-rate risk if the value of the euro decreases substantially relative to the US dollar.

Accepted Answer

The company can use a forward exchange rate to lock in the exchange rate for the future transaction and reduce the risk of a decrease in the value of the euro relative to the US dollar. This allows the company to know exactly how much they will have to pay for the US dollars, regardless of any fluctuations in the exchange rate.

Question 6

The Indian subsidiary of a US-based MNC purchased three Caterpillars for its mining work. At the end of the financial year, the financial statements of the subsidiaries need to be translated into the currency of the parent corporation. When the Caterpillars were purchased, the exchange rate was 50 INR= 1USD. The present exchange rate is 60 INR= 1USD. The financial statement of the Indian subsidiary is translated into the currency of the parent corporation at the exchange rate of 60 INR= 1USD. The above serves as an example of the _____ of foreign-currency translation.

Accepted Answer

The current-rate method is used for foreign-currency translation where financial statements are translated at the current exchange rate at the end of the reporting period. This is what is happening in the given scenario, where the financial statements of the Indian subsidiary are being translated into the currency of the parent corporation at the present exchange rate of 60 INR= 1USD. The other options mentioned (Wiener process, Monte Carlo method, temporal method, Markov process) are not relevant in this context.

Question 7

_____ refers to a method of foreign currency translation in which items in the subsidiaries' financial statements are translated at the current exchange rate into the currency of the parent corporation.

Accepted Answer

The current-rate method is a foreign currency translation method that involves translating items in the subsidiaries' financial statements at the current exchange rate into the currency of the parent company. This method is used to determine the current value of foreign investments and helps to assess the financial position of the parent corporation. The hedging process, Monte Carlo method, temporal method, and Markov process are not relevant to this concept.

Question 8

Which of the following statements holds true for a consolidated financial statement?

Accepted Answer

A consolidated financial statement brings together all the financial statements of a parent and its subsidiaries into a single financial statement, showing the overall financial position and performance of the group as a whole. The other options describe different financial concepts, such as balance of payments, economic independence, promissory notes, and imports and exports, which are not directly related to consolidated financial statements.

Question 9

_____ refers to a method of foreign currency translation that uses exchange rates based on the rate at which the assets and liabilities were originally acquired or incurred.

Accepted Answer

The method described in the question is known as the temporal method of foreign currency translation. It uses exchange rates based on the rate at which the assets and liabilities were originally acquired or incurred, rather than current exchange rates (current-rate method). The other options listed are not related to this specific method of foreign currency translation.

Question 10

Which of the following statements holds true for forward exchange rates?

Accepted Answer

Forward exchange rates refer to the rate at which two parties agree to exchange currency and execute a deal at some specific point in the future. Choices A and E refer to other financial concepts such as currency baskets and interest rates. Choice B refers to the spot exchange rate, which is the rate for an immediate exchange. Choice C refers to the strike price in options contracts.

Question 11

An organization wants to raise cash in order to fund its expansion plans. The company that currently has 500,000 ordinary shares decides to issue 125,000 new shares to raise cash. The above is an example of:

Accepted Answer

The organization is raising cash by issuing new shares, which means it is using equity financing. Debt financing would involve borrowing money, while capital budgeting is the process of allocating financial resources for specific projects. Multilateral netting and fronting loans are not applicable in this scenario.

Question 12

Which of the following statements about the GAAP rules and IFRS is true?

Accepted Answer

Multinational firms that operate in countries with different accounting standards need to prepare separate financial statements for each location, which can result in additional labor and paperwork. This is true for companies that adhere to both US GAAP and IFRS, as there are differences between the two standards. Choices A, B, and C are incorrect as they contain factual errors. Choice E is incorrect as China follows their own accounting standards, known as Chinese Accounting Standards (CAS), which are similar to IFRS but not identical.

Question 13

Which of the following statements holds true for accounting standards?

Accepted Answer

Accounting standards refer to a system of rules and principles that prescribe the format and content of financial statements. They are designed to ensure that financial statements prepared by companies provide relevant and reliable information to users, such as investors, creditors, and regulators.

Question 14

Which of the following statements holds true for a forward contract?

Accepted Answer

A forward contract refers specifically to an agreement between two parties to buy or sell an asset at a future date at a specific price. It is a financial contract that obligates the buyer to purchase an asset (or the seller to sell an asset) at a predetermined future date and price. The price is determined at the beginning of the contract and is not subject to change, regardless of the spot price at the time of delivery.

Question 15

The advantage of the _____ agreement between the parent and foreign subsidiaries is that if the exchange rate changes, the subsidiary will be not be blamed or credited for the change.

Accepted Answer

The internal forward rate agreement between a parent company and its foreign subsidiaries is designed to protect the subsidiaries from being blamed or credited for changes in exchange rates. This agreement sets a specific rate for transactions between the entities, insulating them from fluctuations in the external currency market.

Question 16

The internal forward rate is a company-generated forecast of future spot-exchange rates.

Accepted Answer

The internal forward rate is calculated based on the expectations of the company for the future exchange rates. It is not a market-determined rate but a forecast generated by the company itself.

Question 17

The _____ is the major entity proposing international standards of accounting and was formerly known as the International Accounting Standards Committee (IASC).

Accepted Answer

The International Accounting Standards Board (IASB) is the major entity proposing international standards of accounting and was formerly known as the International Accounting Standards Committee (IASC). The other options listed are not responsible for proposing international accounting standards.

Question 18

Which of the following statements holds true for hedging?

Accepted Answer

Hedging refers to using financial instruments to reduce adverse price movements by taking an offsetting position. This helps to minimize potential losses from market fluctuations.

Question 19

An Indonesian importer needs U.S. dollars to pay for the shipment that he has just received. He will have to purchase the dollars to pay for the shipment. He exchanges rupiah for U.S. dollars which he pays to the foreign exporter. The rate at which he buys US dollars in the market is known as the _____.

Accepted Answer

The rate at which the Indonesian importer buys US dollars in the market to pay for the shipment is known as the spot exchange rate.

Question 20

Which of the following statements holds true for a spot exchange rate?

Accepted Answer

A spot exchange rate is the rate at which two parties agree to exchange currency and execute a deal that takes place immediately. It is different from a forward exchange rate, which refers to the rate at which two parties agree to exchange currency and execute a deal at some specific point in the future. Options A, C, and E are not accurate definitions of a spot exchange rate.

Quiz 15: Understanding the Roles of Finance and Accounting in Global Competitive Advantage