Deck 18: 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

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

Consolidation is the process in which a company's various results are aggregated into one report.

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Multilateral netting reduces foreign exchange transaction costs.

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

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 31

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

Question 32

Many corporations do not hedge translation exposure.

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

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

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 43

One of the major differences between GAAP and the IFRS is that:

A) IFRS relies more on norms than does GAAP, which relies on expedience for compliance.
B) IFRS is more lax than is GAAP.
C) IFRS relies on principles, whereas GAAP is rules-based.
D) A and C.

Question 44

Opportunities for corporations to tap into varying international markets exist because:

A) markets, although interconnected, are not fully integrated.
B) some regional markets favor certain business sectors (Mexico, cement; U.S., fast food; EU, cheese).
C) national markets favor domestic companies.
D) B and C.

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

In his 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 47

The process of transferring value across borders is complex because it involves:

A) currency exchange rates.
B) restrictions on the movement of funds.
C) differing tax systems.
D) A, B, and C.

Question 48

The major argument against 3BL is that:

A) companies don't want the public to know what they are doing.
B) social and environmental impacts cannot be measured as well as can economic results.
C) measurement won't get us closer to the desired state.
D) A and B.

Question 49

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 financial reports.
C) when the currency fluctuates and when the local inflation rate changes.
D) when the interest and inflation rates change.

Question 50

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 United States.
D) cross-listing.

Question 51

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 52

The United States is moving toward convergence with IASB standards:

A) and is the only major economy that does not follow them now.
B) and expects to be harmonized by 2015.
C) although the goal is long term, over 50 years.
D) A and B.

Question 53

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 54

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 financial reports.
C) on a historical average over the period between the sale and the consolidation.
D) that the company decides to use.

Question 55

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 56

3BL gives companies the chance to measure and make public the social and environmental effects of their decisions: they should welcome this, in part because:

A) what we tend to learn about companies is what is reported in the media, and that reporting tends to be focused on problems.
B) it's about time companies are held accountable for their actions.
C) right now we measure company decision results only at the economic level.
D) A and C.

Question 57

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 58

Income tax is a direct tax levied on earnings, and:

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 59

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) however the company chooses, as long as it is consistent in all its foreign operations.

Question 60

Once convergence is reached:

A) financial markets will be more integrated than they are now.
B) direct comparisons of company statements will be possible.
C) A and B.
D) Western-style capitalism will be at its apex.

Question 61

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 62

These countries prefer debt to equity by large margins:

A) France, Italy, and Japan.
B) United Kingdom, Italy, and United States.
C) United States, Canada, and United Kingdom.
D) Japan, United States, and United Kingdom.

Question 63

Offshore 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 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 with receivables in strengthening currencies.

Question 66

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 67

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 68

The cash flow management of a global firm, compared to that of 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 69

The following 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 70

A fronting loan enables the firm to:

A) protect itself from the risk of blocked asset transfers, such as remittances, loan payments, and 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 71

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 72

Compared to equity financing, debt financing is thought to be:

A) less expensive, because interest on the debt is usually tax deductible.
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 73

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 74

One way to avoid transaction exposure is to:

A) issue all bonds in the home currency.
B) use home-country currency for all transactions.
C) hedge the risk by a forward money market contract.
D) A and C.

Question 75

Companies in the United States, Canada, and the United Kingdom tend to:

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

Question 76

In debt markets, the corporate trend is to:

A) raise debt-based capital in the 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 77

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

A) uninterested, because these transactions are outside the United States 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.

Question 78

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 79

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 interfirm and intrafirm transfer pricing.

Question 80

Transfer pricing may serve as a vehicle for:

A) moving blocked goods from one country to another.
B) moving profits and blocked royalties from high-tax to low-tax subsidiaries.
C) manager motivation.
D) A, B, and C.