Final Exam Flashcards
What is balance sheet exposure?
When assets translated at current exchange rate are greater than liabilities translated at current exchange rate
Does the current / non current method exist under IFRS and GAAP
No
What is the temporal method?
Produces a set of parent currency translated financial statements as if foreign subsidiary had actually use the parent curreny
What is current rate method?
Parent’s entire investment in a foreign operation is exposed to foreign exchange risk and translation of the financial statement should reflect this risk
How are equity accounts translated?
Historical rates
What is functional currency determination?
Determines whether company used temporal or current rate translation. Functional is primary currency of foreign entity’s environment
What is the U.S Dollar Perspective to translation?
Reflects integrated nature of foreign subsidary with its US parent. Companies would carry their operations out in US Dollars if they could
What is the local currency perspective?
Foreign entitites are self contained and integrated with local economy and primarily use foreign currency in their daily operations
What is inflation?
General increase in the prices of goods and services in an economy
Is inflation accounting required under US GAAP
No
Holding monetary assets during inflation results in?
Purchase power loss
Holding monetary liabilities during inflation results in?
Purchase power gains
What is the treshold for determining significant influence in an associate enterprise?
20%
How do multinational corporations combine?
- acquired firm dissolved and merged into acquiring company 2. one company acquires majority shares of another. 3. both companies dissolve and merge to create a new corporation
Three reasons for analyzing foreign financial statements?
- making credit decisions 2. evaluating international business combinations. 3. diversifying an investment portfolio
What is diversification?
investing in several corporate stocks that have different characteristics
What is the optimal tax objective of multinational corporations?
Minimize worldwide taxes paid within limitations of tax law
What two primary taxes are imposed on profit?
Corporate income tax and withholding tax
Do all governments impose a direct tax on business income?
No
What is a tax haven?
Jurisdiction where taxes are abnormally low
What are withholding taxes?
Amount taken from dividends of foreign investor remitted to government
What is thin capitalization?
Minimizing amount of equity capital used to fund foreign operations
How is a decentralized organization structured?
A delegation of decision making authority
What is goal congruence?
Creating incentives for managers to make decisions that are consistent with corporate goals
What is an upstream transfer?
From a subsidiary to parent
What is a downstream transfer?
From a parent to subsidiary
What is a discretionary transfer price?
Transfer price set by management of a parent company than by subsidiary managers
How can cost minimization objectives be achieved?
Used through discretionary transfer pricing
How does a company avoid withholding taxes?
Cash is transferred in the form of sales price from subsidiary by its parent or other affliates
How does a company minimize import duties (tarriffs)
Transfer goods to foreign operation at lower price
How does U.S transfer pricing rules work?
IRS can audit international transfer prices and adjust a company’s tax liability if price is inappropriate
What is the penalty under Gross valuation misstatement?
40%
What is strategic planning?
determining a firm’s long term goals and objectives, adopting a course of action and allocating resources required to achieve goals
What is strategy formulation?
process of revising existing goals and adopting new goals
What is an operating budget?
plan for next year expressed in quantitative terms
How does accounting operate in formulating strategy?
- quantifying opportunities and threats 2. preparing budgets 3. making estimates of cost and benefits
What are capital investments?
Committed resources to projects that have cost and benefits into the future
What is capital budgeting?
Process of identifying, evaluating, and selecting projects that require substantial amounts of resources and expected to generate benefits for years to come
What is financial risk?
possibility of loss due to unexpected changes in currency values or interest rates`
What is corporate governance?
Relationships between a company’s management, board, shareholders, and other stakeholders that create a structure where objectives are set, attained and monitored
Who are external auditors response to?
Stockholders
What does OECD stand for?
Organization for Economic Cooperation and Development
What is the responsibilities of an Audit Committee?
- oversee internal control system 2. oversee internal auditing and independent public accounting function 3. monitor financial reporting process
What is the role of internal auditing?
provide assurance and consulting services to improve organization’s operations
What does the SEC require of all companies?
They have an internal audit function
What are audit reports?
primary tool used to communicate with financial statement users about results of audit function.
