Deck 20: Accounting and Finance in the International Business

Question 1

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

Answer 1

False
Explanation: A tax treaty between two countries is an agreement specifying what items of income will be taxed by the authorities of country where the income is earned.

Question 2

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.

Answer 2

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

Question 3

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.

Answer 3

True
Explanation: The governments of some countries require, or at least prefer, foreign multinationals to finance projects in their country by local debt financing or local sales of equity. In countries where liquidity is limited, this raises the cost of capital used to finance a project.

Question 4

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

Question 5

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

Question 6

Most subsidiaries of an international business operate in uniform environments.

Question 7

Accounting standards are rules for preparing financial statements.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

The principles of multilateral netting and bilateral netting are different.

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

Accounting is shaped by the environment in which it operates.

Question 18

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

Question 19

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 20

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 21

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

Question 22

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

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

Question 23

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

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

Question 24

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 25

_____ 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 26

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 27

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

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

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 30

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

Question 31

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

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

Question 32

The _____ has 15 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 33

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 34

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 35

Every time a firm changes cash from one currency into another currency it must bear a(n) _____.

A) transaction cost
B) tax
C) transfer fee
D) audit

Question 36

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 37

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

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

Question 38

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

Question 39

Compliance to IASB standards is:

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

Question 40

Pooling the cash of all the subsidiaries:

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 41

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 42

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 43

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 44

_____ is a term used to describe the practice of transferring liquid funds from a foreign subsidiary to the parent company.

A) Deferral principle
B) Bilateral netting
C) Unbundling
D) Multilateral netting

Question 45

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 46

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 47

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) proposes standards but has no power to enforce the standards.
D) was formed to supervise the accounting practices that U.S. firms follow.

Question 48

Royalties and fees have certain tax advantages over _____, particularly when the corporate tax rate is higher in the host country than in the parent's home country.

A) transaction costs
B) deferrals
C) dividends
D) transfer fees

Question 49

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 50

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 51

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 52

It is common for a parent company to charge its foreign subsidiaries _____ for the technology, patents, or trade names it has transferred to them.

A) transfer fees
B) royalties
C) an internal forward rate
D) usage fees

Question 53

The age of a foreign subsidiary:

A) has no influence on payment of dividends.
B) indicates the number of capital investment needs; older subsidiaries have higher needs.
C) influences dividend policy in that younger subsidiaries tend to remit a higher proportion of their earnings in dividends to the parent company.
D) influences dividend policy in that older subsidiaries tend to remit a higher proportion of their earnings in dividends to the parent company.

Question 54

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 55

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

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

Question 56

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 57

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 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

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 60

_____ 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.

A) Royalties
B) Transfer costs
C) Fees
D) Licensing costs

Question 61

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 62

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 63

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 United States.

Question 64

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 65

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 66

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

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

Question 67

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 68

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 69

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

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

Question 70

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 71

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

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

Question 72

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 73

_____ 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 74

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 75

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 76

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 77

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 78

Multilateral netting is used primarily 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 79

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 80

_____ 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