Deck 15: International Accounting and Financial Management

Question 1

A hedge involves a contract.

Answer 1

True
Explanation: The contract is the core of a hedge.

Question 2

An importer accelerates payment of the necessary currency exchange (leads)when she thinks the currency will devalue in terms of the foreign payment currency.

Answer 2

True
Explanation: This is leading and lagging.

Question 3

One decision faced by the financial management of an IC that can be turned into an opportunity is the choice of currency used to raise capital.

Answer 3

True
Explanation: Choices are, broadly, debt or equity.

Question 4

Transaction exposure or risk is a risk the customer may never take.

Question 5

The forward market hedge is less flexible than the currency option hedge.

Question 6

In a forward market hedge,only a few currencies can be hedged,and you are limited to contracts in fixed amounts of each currency that can be settled by delivery of the currencies at only a few set dates per year.

Question 7

Objectives of multilateral netting include keeping as much money as is reasonably possible in countries with high interest rates or where credit is difficult to obtain.

Question 8

When using a money market hedge,the hedger will immediately convert the currency borrowed into his or her own currency.

Question 9

One hedging method is to use one currency considered strong and a second currency considered weak,matching exposures.

Question 10

Trying to protect against losses due to currency exchange rate fluctuations is hedging.

Question 11

The money market hedge is less flexible because money market vehicles are somewhat thin in many currencies.

Question 12

Swap contracts can be used to hedge foreign currency exposure.They may be undertaken for long periods of time.

Question 13

In the forward market hedge example in the book,the exporter Nucor would deliver the euro it receives from the Spanish importer in return for US dollars from the other party to the forward contract.Hence,Nucor is in a covered position.

Question 14

When independent,unrelated companies use acceleration or delay of payment to each other,such leading and lagging is generally a win-win situation.

Question 15

Microloans are hardly ever repaid,so they function as an aid to developing economies.

Question 16

When using a money market hedge,the hedger will hold the currency borrowed until the day it receives payment in terms of the underlying transaction.

Question 17

One hedging method with exposure netting is to work with groups of currencies rather than individual ones.

Question 18

The UK favors a capital structure opposite that of the U.S.

Question 19

Translation exposure or risk occurs because the currency in which business is conducted may lose or gain value in terms of the company's home currency when financial statements are consolidated.

Question 20

Exposure netting is the acceptance of closed positions in two or more currencies that are considered to balance one another.

Question 21

Translation risks involve shorter time periods than do transaction risks.

Question 22

The money market hedge

A) is accomplished by one contract in the foreign exchange market.
B) should be avoided.
C) may involve borrowing money in a foreign currency and immediately converting it to dollars.
D) is carefully controlled in the EU.

Question 23

The forward market hedge

A) is of limited use.
B) offers great flexibility in currencies hedged, as well as in amounts and settlement dates.
C) offers limited flexibility in currencies hedged, as well as in amounts and settlement dates.
D) is seldom used.

Question 24

Hedging for currency risk is only for large businesses with established international operations.

Question 25

The currency losses or gains that can result from translating values of assets or liabilities and payables or receivable arising from investments abroad from one currency to another are referred to as translation risks.

Question 26

Currency fluctuations create risks categorized as

A) transaction, translation, and economic exposures.
B) domestic and foreign.
C) independent and dependent exposures.
D) hedging exposures.

Question 27

Transaction exposure

A) is a credit type risk.
B) is a currency exchange risk that arises when future payment in a foreign currency is involved.
C) is a currency exchange risk resulting from translating values in foreign currencies to the home-country currency.
D) cannot be protected against.

Question 28

A forward market hedge

A) is accomplished by a contract in the foreign exchange market.
B) involves credit.
C) should be avoided.
D) is rarely used.

Question 29

An advantage of exposure/multilateral netting is that it avoids the costs of hedging.

Question 30

A currency option hedge

A) is of limited use.
B) offers great flexibility in currencies hedged, as well as in amounts and settlement dates.
C) offers options in currencies hedged, as well as in amounts and settlement dates.
D) is seldom used.

Question 31

Economic exposure is the potential for unanticipated exchange rate movements to affect future cash flows.

Question 32

The financial issues confronting IC management include

A) fluctuating currency exchange rates, tariffs, taxes, and inflation.
B) market size and capitalization.
C) political issues impacting sales.
D) competitive forces.

Question 33

Governments tend to ignore transfer pricing.

Question 34

Transfer pricing is a term for the pricing involved when one unit of an IC buys from another.

Question 35

Translation exposure and economic exposure are risks that should be avoided by the IC.

Question 36

The right to receive,or the obligation to pay,a foreign currency up to one year in the future involves a transaction risk.

Question 37

A covered position occurs when

A) you have hedged a transaction exposure.
B) you can cover your short position with another currency.
C) you are covered by insurance against loss in your short.
D) you have recovered your basic investment.

Question 38

Transfer pricing may be used to

A) decrease IC taxes.
B) fund exports only.
C) move goods within a region.
D) support debt equity.

Question 39

Temporal method of translation would recognize market value of real estate assets.

Question 40

Swap contracts are used to hedge

A) derivatives.
B) foreign currency exposure.
C) covered positions.
D) sales performance.

Question 41

In raising capital,an IC can look

A) within the larger company and in home, host-country, and third-country capital markets.
B) at IMF loans.
C) at developing country markets.
D) at checking account facilities and overdraft protection.

Question 42

Sovereign wealth funds are

A) funds controlled by governments.
B) politically volatile due to their size.
C) funds that are owned by private investors.
D) another form of central reserves.

Question 43

Decisions to be made before an IC raises new capital include

A) what currency will be used and whether to use equity or debt.
B) whether to sell parts of the company and reduce wages.
C) what risk profile to assume and for what period.
D) what accounting approach and what operating currency to use.

Question 44

In their foreign operations,companies with foreign subsidiaries regularly follow

A) their home-country accounting practices.
B) their host-country accounting practices.
C) both their home- and host-country accounting practices.
D) their choice of accounting practices, being consistent.

Question 45

Leading or lagging payments

A) are more useful between unrelated companies than within an IC.
B) usually profit both parties.
C) do not permit either party to gain.
D) depend on an ability to predict currency movements.

Question 46

Swaps

A) are becoming less popular in international business.
B) are always advantageous.
C) can be used for either currency or interest rate holdings.
D) are used only to change currency holdings.

Question 47

Interest rate swaps

A) hedge and permit transforming floating-rate debt to fixed-rate.
B) provide hedging but not potential rate savings.
C) may not be based on outstanding debt.
D) allow the firm to delay interest payments.

Question 48

Swaps may be used to

A) protect against transaction and translation risks and to raise or transfer capital.
B) level out human resource issues.
C) establish international experience in the finance function.
D) acquire valuable local resources.

Question 49

The money market hedge

A) is flexible and frequently used.
B) offers little flexibility in currencies hedged, as well as in amounts and settlement dates.
C) is of little use.
D) is seldom used.

Question 50

Multilateral netting

A) is more expensive than hedging.
B) should be avoided.
C) is using IC open positions in two currencies that are expected to balance each other.
D) creates competition among subsidiaries.

Question 51

Currency swaps

A) never involve banks.
B) are the same as synthetic swaps.
C) might be used to enable a foreign borrower to get local currency at a lower interest rate.
D) are rarely done.

Question 52

There are two points at which operating in foreign currencies raises accounting issues-

A) transactions in foreign currencies and corporate consolidation.
B) buying and selling in the host-country currency.
C) bank loans and issuing foreign shares such as American depository receipts (ADRs).
D) consolidation and bank loans.

Question 53

The adoption of the euro has affected transaction exposure by

A) reducing it for some ICs, significantly for ICs that are euro-based.
B) expanding it.
C) increasing the number of currency options available for hedging.
D) equating it to translation exposure.

Question 54

The impact of blocked funds includes

A) being unable to continue business in the blocked currency.
B) exploration of transfer pricing options.
C) maximizing the holdings of blocked currencies.
D) refusing to source in economies with blocked currencies.

Question 55

The process of accounting standards convergence is

A) underway, but deadlines have been extended.
B) not likely for at least 20 years, the process is so complex.
C) just about complete.
D) not likely due to the related political issues.

Question 56

Parallel loans are useful to

A) save taxes.
B) avoid foreign exchange risk.
C) save tariffs.
D) save interest costs.

Question 57

Translation risk

A) is a currency exchange risk resulting from translating values in foreign currencies to the home-country currency.
B) is a credit type risk.
C) is a currency exchange risk that arises when future payment in a foreign currency is involved.
D) cannot be protected against.

Question 58

The currency option hedge

A) offers little flexibility in currencies hedged, as well as in amounts and settlement dates.
B) offers great flexibility in currencies hedged, as well as in amounts and settlement dates.
C) is of little use.
D) is seldom used.

Question 59

Swap contracts

A) can be used to limit currency exposure.
B) are a way to reward expatriate workers.
C) can be exchanged internally among accounting operations.
D) are illegal in the EU.

Question 60

For the parent company in an IC group,translation of assets and liabilities as well as payables and receivables of subsidiaries from the currencies of their host countries to the currency of the parent's home country

A) is a waste of time.
B) is prohibited by laws of most host countries.
C) is necessary for parent company management to understand how well subsidiaries are doing and for companywide financial reports.
D) is required by the laws of most home countries.

Question 61

Accounting standards in the U.S.are allocated by Congress as the responsibility of

A) the Security and Exchange Commission (SEC).
B) the Secretary of the Treasury.
C) a committee of accounting scholars.
D) a committee of CFOs.

Question 62

If a U.S.industrial subsidiary in France sells in dollars for European sales

A) there will be no exchange risk.
B) exchange risk will be encountered between the euro and the dollar.
C) the subsidiary will not be able to use the local debt markets.
D) their sales force will be challenged to meet local needs.

Question 63

How many accounting standards are there now in operation?

A) Two
B) Four
C) Six
D) Three

Question 64

In the current rate,assets and liabilities translated

A) at the rate in effect the day the balance sheet is produced.
B) at the rate in effect the day the original transaction was posted.
C) using an average of the rate of the preceding 10 days.
D) at the LIBOR rate on the day before the translation is prepared.

Question 65

Gains or losses from exchange rate changes in payables or receivables are

A) posted in the income statement.
B) set aside as tax account payments.
C) posted in the payables or receivables as an entry correction.
D) carried forward in the payables or receivables, as they tend to even out over time.

Question 66

The two methods of currency translation are

A) temporal and current.
B) interlinear and historical.
C) functional and temporal.
D) intermediary and vehicle.

Question 67

The SEC allows

A) foreign companies to list on U.S. exchanges using IASB standards.
B) foreign companies to list shares in U.S. exchanges if they relist according to FASB.
C) foreign companies to list only as ADRs.
D) domestic companies to list on U.S. exchanges using IASB.

Question 68

The purpose of accounting is

A) influenced by a country's culture.
B) to build an objective measure of a company's results.
C) assumed around the world to be the same.
D) about to be codified in the process of convergence.

Question 69

The International Accounting Standards Board (IASB)represents the standards of

A) most of the world, except the U.S.
B) the U.S. exclusively.
C) Europe and parts of Africa.
D) most globally minded managers.

Question 70

According to the S.Gray,in the values related to accounting,

A) transparency and optimism tend to occur together.
B) transparency and conservatism tend to occur together.
C) optimism and secrecy tend to occur together.
D) honesty is found through the accounting systems of the most conservative countries.

Question 71

Using the current rate,equity accounts are translated

A) using the historical rates of the transaction.
B) using current rates, just as in assets and liabilities.
C) using market rates (real estate market, stock market).
D) only when they are liquidated, and then at current rates.

Question 72

Accounting data generated in foreign subsidiaries are used by

A) managers, investors, governments, and suppliers.
B) foreign governments.
C) home-country tax authorities exclusively.
D) local managers to make strategic decisions.

Question 73

If a sale made in a foreign subsidiary is in the local currency,and there is a time lag on payment,

A) there is likely to be exchange risk.
B) interest may be due.
C) there is no transaction risk because the currency is local.
D) economic risk may be present.

Question 74

Countries that value privacy or secrecy over transparency include

A) Japan and Germany.
B) Spain and Portugal.
C) Britain and China.
D) the U.S. and Japan.

Question 75

FASB 52 requires that companies record foreign currency transactions

A) at the spot rate.
B) within two days of the transaction.
C) in the foreign currency only.
D) unless the payment is made in cash.

Question 76

The functional currency is

A) the primary currency of the business.
B) the currency with the most advantageous interest rate.
C) the currency of the home office.
D) whatever currency the buyer would like to use for the transaction.

Question 77

Consolidation is the process of

A) translating results into one financial statement.
B) combining debts for a lower interest rate.
C) trading currencies so that a one-currency ledger can be produced.
D) moving accounting convergence forward.

Question 78

Among the results of convergence will be

A) more integrated financial markets and cost savings related to harmonization.
B) increases in the cost of listing for U.S. companies abroad.
C) increased competition to list in U.S. stock markets.
D) increased ambiguity about which standards are operating.

Question 79

Gray's dimension of secrecy-transparency measures

A) the degree to which companies disclose information to the public.
B) the degree to which companies hide information from the public.
C) how much of a company's disclosures are accurate.
D) how public the company is on wage parity disclosure.

Question 80

The SEC established the seven-member Financial Accounting Standards Board to oversee accounting standards.They are

A) a private nonprofit organization.
B) a committee of the Department of the Treasury.
C) a committee of the Department of Commerce.
D) a for-profit public company.