International Business Ch. 20 Vocab/Ideas Flashcards
Accounting and Finance in the International Business (32 cards)
What Is Financial Management?
Investment decisions –what to finance
Financing decisions –how to finance those decisions
Money management decisions –how to manage the firm’s financial resources most efficiently
What Is Accounting?
Accounting is more complex for international firms because of differences in accounting standards from country to country
differences make it difficult for investors, creditors, and governments to evaluate firms
It is difficult to compare financial reports from country to country because of national differences in accounting and auditing standards
What Determines National Accounting Standards?
Several variables influence the development of a country’s accounting system including:
the relationship between business and the providers of capital
political and economic ties with other countries
the level of inflation
the level of a country’s economic development
the prevailing culture in a country
How Do Providers Of Capital Influence Accounting?
A country’s accounting system reflects the relative importance of each constituency as a provider of capital
accounting systems in the U.S. and Great Britain are oriented toward individual investors
Switzerland and Germany focus on providing information to banks
How Do Political And Economic Ties Influence Accounting?
Similarities in accounting systems across countries can reflect political or economic ties
the U.S. accounting system influences the systems in the Philippines
in the European Union, countries are moving toward common standards
the British system of accounting is used by many former colonies
How Do Levels of Development Influence Accounting?
Developed nations tend to have more sophisticated accounting systems than developing countries
larger, more complex firms create accounting challenges
providers of capital require detailed reports
Many developing nations have accounting systems that were inherited from former colonial powers
lack of trained accountants
What Are Accounting And Auditing Standards?
Accounting standards are rules for preparing financial statements
they define useful accounting information
Auditing standards specify the rules for performing an audit
the technical process by which an independent person gathers evidence for determining if financial accounts conform to required accounting standards and if they are also reliable
Why Are International Accounting Standards Important?
The growth of transnational financing and transnational investment has created a need for transnational financial reporting
many companies obtain capital from foreign providers who are demanding greater consistency
Standardization of accounting practices across national borders is probably in the best interests of the world economy
will facilitate the development of global capital markets
Why Are International Accounting Standards Important?
The International Accounting Standards Board (IASB) is a major proponent of standardization of accounting standards
most IASB standards are consistent with standards already in place in the U.S.
by 2011, 100 nations have adopted IASB standards or permitted their use in reporting financial results
the EU has mandated harmonization of accounting principles for members
there soon could be only two major accounting bodies with substantial influence on global reporting
FASB in the U.S. and IASB elsewhere
How Does Accounting Influence Control Systems?
The control process in most firms is usually conducted annually and involves three steps:
Subunit goals are jointly determined by the head office and subunit management
The head office monitors subunit performance throughout the year
The head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary
How Do Exchange Rates Influence Control?
Budgets and performance data are usually expressed in the corporate currency
normally the home currency
facilitates comparisons between subsidiaries
but, can create distortions in financial statements
How Do Exchange Rates Influence Control?
The Lessard-Lorange Model
Firms can deal with the problems of exchange rates and control in three ways
- The initial rate
the spot exchange rate when the budget is adopted - The projected rate
the spot exchange rate forecast for the end of the budget picture - The ending rate
the spot exchange rate when the budget and performance are being compared
Why Separate Subsidiary and Managerial Performance?
Subsidiaries operate in different environments which influence profitability
-the evaluation of a subsidiary should be kept separate from the evaluation of its manager
-A manager’s evaluation should
consider the country’s environment for business
take place after making allowances for those items over which managers have no control
What Is Financial Management?
Good financial management can create a competitive advantage
reduces the costs of creating value and adds value by improving customer service
Decisions are more complex in international business
different currencies, tax regimes, regulations on capital flows, economic and political risk, etc.
How Do Managers Make Investment Decisions?
Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign country
To do this, managers use capital budgeting
involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value
If the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project
Why Is Capital Budgeting More Difficult For International Firms?
Capital budgeting is more complicated in international business because:
a distinction must be made between cash flows to the project and cash flows to the parent company
of political and economic risk
the connection between cash flows to the parent and the source of financing must be recognized
What Is The Difference Between Project And Parent Cash Flows?
Cash flows to the project and cash flows to the parent company can be quite different -
Parent companies are interested in the cash flows they will receive, not the cash flows the project generates
received cash flows are the basis for dividends, other investments, repayment of debt, and so on
Cash flows to the parent may be lower because of host country limits on the repatriation of profits, host country local reinvestment requirements, etc.
How Does Political Risk Influence Investment Decisions?
Political risk - the likelihood that political forces will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business
higher in countries with social unrest or disorder, or where the nature of the society increases the chance for social unrest
Political change can result in the expropriation of a firm’s assets, or complete economic collapse that renders a firm’s assets worthless
How Does Economic Risk Influence Investment Decisions?
Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business
The biggest economic risk is inflation
reflected in falling currency values and lower project cash flows
How Can Firms Adjust For Political And Economic Risk?
Firms analyzing foreign investment opportunities can adjust for risk by:
raising the discount rate in countries where political and economic risk is high
lowering future cash flow estimates to account for adverse political or economic changes that could occur in the future
How Do Firms Make Financing Decisions?
Firms must consider two factors:
How the foreign investment will be financed
the cost of capital is usually lowest in the global capital market
but, some governments require local debt or equity financing
firms that anticipate a depreciation of the local currency, may prefer local debt financing
How the financial structure (debt vs. equity) of the foreign affiliate should be configured
need to decide whether to adopt local capital structure norms or maintain the structure used in the home country
Most experts suggest that firms adopt the structure that minimizes the cost of capital, whatever that may be
What Is Global Money Management?
Money management decisions attempt to manage global cash resources efficiently
Firms need to:
Minimize cash balances - need cash balances on hand for notes payable and unexpected demands
cash reserves are usually invested in money market accounts that offer low rates of interest
when firms invest in money market accounts they have unlimited liquidity, but low interest rates
when they invest in long-term instruments they have higher interest rates, but low liquidity
Reduce transaction costs - the cost of exchange
every time a firm changes cash from one currency to another, they face transaction costs
What Is Global Money Management?
Key Considerations:
Most banks also charge a transfer fee for moving cash from one location to another
Multilateral netting can reduce the number of transactions between subsidiaries and the number of transaction costs
How Can Firms Limit Their Tax Liability?
Every country has its own tax policies
most countries feel they have the right to tax the foreign-earned income of companies based in the country
Double taxation occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country government
