Chapter 1

Question 1

International Accounting focuses on

Answer 1

the accounting issues unique to multinational corporations, especially with respect to international transactions and foreign investments

encompasses the study of the various functional areas of accounting in all countries of the world as well as the activities of a number of supranational organizations

Question 2

International Accounting can be defined at these 3 levels

Answer 2

1. General level
2. Supranational accounting
3. Company level

Question 3

General Level International Accounting

Answer 3

study of standards, guidelines and rules of accounting, auditing and taxation within and across countries

Question 4

Supranational Accounting

Answer 4

Standards, guidelines, and rules issued by supranational organizations such as IASB, IFAC, OECD

Question 5

Company Level International Accounting

Answer 5

Standards, guidelines, and rules followed by a company, specifically relating to its international business activities and foreign investments

Question 6

The first encounter with international business occurs through

Answer 6

sales to foreign customers

Question 7

Accounting issues encountered by companies involved in international trade

Answer 7

-credit sales are made to foreign customers who will pay in their own currency; it’s a foreign exchange
risk
-accounting for foreign currency-denominated export sales and import purchases; AR and AP that occur as exchange rates fluctuate
-accounting for derivative financial statements; forward contracts and foreign currency options, used to hedge the foreign exchange risk associated with foreign currency transactions.

Question 8

A U.S. company makes a sale to a UK/British customer for 100k pound sterling; exchange rate is 1 pound = $1.35. How many dollars does the British customer agree to pay? What is the journal entry?

Answer 8

Accounts Receivable US$ 135,000
Sales Revenue US$ 135,000

*$1.35 x 100K Pounds sterling= US$135,000

Question 9

Suppose that on the date payment is received, the exchange rate for Pound Sterling is £1 =$1.30. Magnum will receive 100,000 Pound Sterling, which are now worth $130,000.

Answer 9

Cash US$ 130,000
Loss on Foreign Exchange US$ 5,000
Accounts Receivable US$ 135,000

Question 10

Hedges of foreign exchange risk; Techniques to manage exposure

Answer 10

1. foreign currency option
2. forward contract

Question 11

Foreign currency option

Answer 11

gives the option owner the right, but not the obligation, to sell foreign currency at a predetermined exchange rate and time

Question 12

Forward contract

Answer 12

obligation to exchange foreign currency at a future date

Question 13

Foreign direct investment

Answer 13

the ownership and control of foreign assets
TWO WAYS:
1. Acquisition- investment in existing operations in foreign countries
2. Greenfield investment- new operation in foreign countries

Question 14

Reasons for Foreign Direct Investment

Answer 14

1. Increase sales and profits.
2. Enter rapidly growing or emerging markets.
3. Reduce shipping costs.
4. Gain a foothold in economic blocs.
5. Protect domestic markets.
6. Protect foreign markets.
7. Acquire technological and managerial know-how.

Question 15

Steps in reporting for Foreign Operations:

Answer 15

Conversion from local to U.S. G A A P.
Records prepared using local G A A P.

Question 16

Translate from local currency to U.S. dollars.

Answer 16

Records are prepared using local currency.
Translation adjustment to balance may be needed.
May be adjustment to component of OCI.

Question 17

Double taxation:

Answer 17

Foreign income taxes
- the company’s profits taxed at foreign rates

U.S. income taxes
- The U.S. will tax the company’s foreign-based income

Question 18

Tax treaties provide relief from

Answer 18

double taxation.

Objectives:
Legally minimize taxes in foreign countries and home country.
Maximize after–tax cash flows

Question 19

Issue for multinational companies making intercompany sales.

Answer 19

Companies’ use of discretionary transfer pricing.
-Price negotiation between buyer and seller not feasible due to tax rate differences.

Companies shift profits from countries with high tax rates to countries with low tax rates.

Countries regulate international transfer pricing to ensure companies pay their fair share of local taxes.

Question 20

Companies shift profits from countries with high tax rates to

Answer 20

countries with low tax rates.

Question 21

Countries regulate international transfer pricing to ensure

Answer 21

companies pay their fair share of local taxes.

Question 22

Performance Evaluation of Foreign Operations

Answer 22

Evaluation is through periodic reports on individual units’ performance.

Issues in evaluation:
-Use of local or home currency for evaluation.
-Inflated price paid in transfer pricing.
-Issues unique to foreign operations.

Question 23

Internal auditing is an important component of management’s

Answer 23

control process.

Question 24

International Auditing

Answer 24

-Ensure that company policies/procedures are being followed.
-Uncover errors, inefficiencies, and possibly fraud.
-Abide by FCPA (Foreign Corrupt Practices Act).

Question 25

Issues faced by internal and external auditors.

Answer 25

Differences in language and culture. Differences in accounting standards and auditing standards.

Question 26

Cross–Listing on Foreign Stock Exchanges

Answer 26

Cross–listing: Stock listed and traded on several foreign stock exchanges Issues: Listing regulations can differ for foreign companies. Reconciling to U.S. G A A P.

Question 27

Sustainability Report/Corporate Responsibility Report

Answer 27

Mostly voluntary but required in several countries. Provides information on: -Environmental impact. -Labor practices. -Product safety. -Corporate governance.

Question 28

Global Financial Reporting Standards

Answer 28

Requires countries to adopt a common set of financial reporting standards. Advantages: -Avoids G A A P conversion. -Easier to evaluate foreign investment opportunities.

Question 29

Largest exporters are

Answer 29

China, the United States, and Germany

Question 30

Largest importers are

Answer 30

United States, China, and Germany

Question 31

International trade constitutes a significant portion of the world economy.

Answer 31

Largest exporters are China, the United States, and Germany. Largest importers are United States, China, and Germany. Foreign direct investment to retain advantage over competition. Multinational corporations. International capital markets: Help companies find capital at a reasonable cost. Help in having an “acquisition currency” for acquiring firms through stock swaps.

Question 32

There is an even greater number of accounting issues encountered by companies that have made a direct investment in a foreign operation. These issues primarily result from the fact that accounting rules, tax laws, and other regulations differ across countries, and include:

Answer 32

A. Making sense of financial stmts. of a foreign acquisition target prepared with unfamiliar GAAP when making a foreign direct investment decision B. Determining correct amounts to include in consolidated financial statements for assets, liabilities, revenues, and expenses of foreign operations. Determining how to translate foreign currency to parent company currency and parent company GAAP. C. Complying with host country income tax laws and home country tax laws related to income earned in a foreign country (foreign secure income); makes double taxations a potential problem (foreign tax credits are the most important relief from this. D. Establishing prices for intercompany transactions that cross national borders (international transfer prices) to achieve corporate objectives and comply with gov. regulations. E. Evaluating the performance of both a foreign operating unit and its management. Which currency should the foreign operations be evaluated with. Should mgmt. be held accountable for items over which they have little control. F. Establishing an effective internal audit function over foreign operations taking differences in culture, customs, and language into consideration. G. Deciding whether to cross-list securities on foreign stock exchanges and complying with local stock exchange regulations; could require using a GAAP different from the parent company

Question 33

Steps to consolidate a foreign subsidiary

Answer 33

1. restate foreign GAAP financial statements into parent company GAAP 2. translate foreign currency amounts into parent company currency

Question 34

The Big 4 public accounting firms are among the most

Answer 34

multinational business organizations in the world.

Question 35

Problems encountered by MNCs when confronted with different local GAAP in different countries lead to

Answer 35

the desire for a single set of global accounting standards; There would be significant advantages to MNCs if all countries used the same GAAP.

Question 36

The world economy is becoming increasingly more

Answer 36

-International trade (imports and exports) has grown substantially in recent years and has become a normal part of business for relatively small companies -The number of U.S. exporting companies has increased four-fold over the last three decades.

Question 37

The tremendous growth in foreign direct investment (FDI) over the last several decades is partially attributable to the

Answer 37

-liberalization of investment laws in many countries specifically aimed at attracting FDI. -The aggregate revenues generated by foreign operations are more than twice as large as the revenues generated through exporting

Question 38

VIII. There were more than _______multinational companies in the world in 2009 with ______foreign subsidiaries

Answer 38

82k; 810k

Question 39

The 100 largest multinationals generated approximately____% of global GDP

Answer 39

4

Question 40

A disproportionate number of multinational corporations are headquartered in the

Answer 40

United States, China, Japan, and the European Union

Question 41

According to one definition of multinationality used by the United Nations, six of the ten most multinational companies in the world in 2020 were headquartered in

Answer 41

Europe

Question 42

Many companies also cross-list their shares on stock exchanges outside of their home countries. . There are a number of reasons for doing this, including

Answer 42

having access to a larger pool of capital.