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59) Money management decisions attempt to manage a firm’s ____________ most
efficiently.
A) equity capital.
B) fixed costs.
C) working capital.
D) equipment costs.
60) By pooling cash resources centrally, firms can
A) better handle short-term cash needs of subsidiaries.
B) increase liquidity of independent subsidiaries.
C) reduce the total size of the cash pool it must hold in liquid accounts.
D) avoid government-imposed restrictions on capital flows.
61) Multilateral netting is used primarily to
A) reduce transaction costs between subsidiaries.
B) avail tax credit from governments.
C) establish a tax treaty among multiple countries.
D) reduce the fixed costs of establishing a subsidiary.
62) A _____ between two countries is an agreement specifying which items of income will
be taxed by the authorities of the country where the income is earned.
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A) tax deferral agreement
B) fixed-rate treaty
C) tax treaty
D) free trade agreement
63) A deferral principle specifies that parent companies are not taxed on foreign source
income until
A) the subsidiary providing income makes some profit.
B) they actually receive a dividend.
C) they acquire a majority stake in the subsidiary.
D) the subsidiary providing income is listed in the United States.
64) A tax haven is a country
A) where companies benefit from establishing fully operating subsidiaries.
B) that does not charge local companies for importing products from other countries.
C) that does not charge taxes on the purchase or sale of any items.
D) with an exceptionally low, or even no, income tax.
65) Which of the following statements is true of tax havens?
A) Firms that export to tax havens get special tax concessions from home governments.
B) Firms would require huge capital investments to start business in tax havens.
C) Nations such as the United States are widely regarded as tax havens.
D) Firms can save taxes by establishing a nonoperating subsidiary in the tax haven.
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66) Most banks charge _____ for moving cash from one location to another.
A) a transfer fee
B) an internal forward rate
C) an accounting service fee
D) an audit fee
67) _____ is the most common method by which firms transfer funds from foreign
subsidiaries to the parent company.
A) Issuance of long-term loans
B) Payment of annual fee
C) Issuance of bonds
D) Payment of dividends
68) A _____ is compensation for professional services or expertise supplied to a foreign
subsidiary by the parent company or another subsidiary.
A) fronting loan
B) fee
C) royalty
D) transfer price
69) Part of the tax credit benefit that a parent company receives can be lost if the subsidiary’s
A) combined tax rate is higher than the parent’s.
B) local government views royalties as an expense.
C) local tax rates on profits are extremely high.
D) managers are controlled directly by the parent.
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70) Funds can be moved out of a particular country in which a parent country has set up a
subsidiary by
A) setting high transfer prices for the goods supplied.
B) removing royalties imposed on the subsidiary.
C) charging a discounted fee on the subsidiary.
D) issuing loans to the subsidiary at discounted rates.
71) Which of the following is a disadvantage of pursuing a transfer pricing policy?
A) It is not useful in shifting earnings from a high-tax country to a low-tax one.
B) Transfer pricing does not treat each subsidiary as a profit center.
C) It is not effective when significant currency devaluation is expected.
D) A transfer price policy cannot be used to move funds when dividends are restricted.
72) _____ is a loan between a parent and its subsidiary channeled through a financial
intermediary, usually a large international bank.
A) A fronting loan
B) An equity loan
C) A direct loan
D) A security loan
73) Firms use fronting loans to
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A) avoid host-country restrictions on the remittance of funds from a foreign subsidiary.
B) implement a cost-based and fair pricing policy across an international business.
C) increase the profit center revenue of a subsidiary functioning in another country.
D) implement a market-driven and fair pricing policy across an international business.
74) _____ is a term used to describe the mix of techniques used to transfer liquid funds from
a foreign subsidiary to the parent company.
A) Deferral principle
B) Bilateral netting
C) Unbundling
D) Multilateral netting
75) The age of a foreign subsidiary
A) has no influence on payment of dividends.
B) indicates the number of capital investment needs; older subsidiaries have higher
needs.
C) influences dividend policy in that younger subsidiaries tend to remit a higher
proportion of their earnings in dividends to the parent company.
D) influences dividend policy in that older subsidiaries tend to remit a higher proportion
of their earnings in dividends to the parent company.
76) _____ represent the remuneration paid to the owners of technology, patents, or trade
names for the use of the technology or the right to manufacture and/or sell products under patents
or trade names.
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A) Royalties
B) Transfer costs
C) Fees
D) Licensing costs
77) It is common for a parent company to charge its foreign subsidiaries _____ for the
technology, patents, or trade names it has transferred to them.
A) transfer fees
B) royalties
C) an internal forward rate
D) usage fees
78) Royalties and fees have certain tax advantages over _____, particularly when the
corporate tax rate is higher in the host country than in the parent’s home country.
A) transaction costs
B) deferrals
C) dividends
D) transfer fees
79) Which of the following is one of the gains derived by adjusting transfer prices?
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A) The firm can reduce its tax liabilities by using transfer prices to shift earnings from a
low-tax country to a high-tax one.
B) The firm can use transfer prices to move funds out of a country where a significant
currency appreciation is expected.
C) The firm can use transfer prices to move funds from a parent company to the
subsidiary (or a tax haven) when financial transfers in the form of dividends are restricted or
blocked by host-country government policies.
D) The firm can use transfer prices to reduce the import duties it must pay when an ad
valorem tariff is in force—a tariff assessed as a percentage of value.
80) Accounting information is the means by which firms communicate their financial
position to the providers of capital.
⊚ true
⊚ false
81) Accounting is shaped by the environment in which it operates.
⊚ true
⊚ false
82) Accounting standards are rules for preparing financial statements.
⊚ true
⊚ false
83) Auditing standards are rules that define the accounting principles and monetary policy of
a nation.
⊚ true
⊚ false
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84) The standards of U.S. Financial Accounting Standards Board and IASB are vastly
different.
⊚ true
⊚ false
85) The IASB is made up of 24 members, and to issue a new standard, 51 percent of them
must agree.
⊚ true
⊚ false
86) The IASB has the power to enforce its standards, so it has considerable power in the
industry.
⊚ true
⊚ false
87) Most international businesses require all budgets and performance data within the firm to
be expressed in the currencies of the countries where its subunits are located.
⊚ true
⊚ false
88) The initial rate, in the Lessard-Lorange model, refers to the spot exchange rate when the
budget is adopted.
⊚ true
⊚ false
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89) The ending rate, in the Lessard-Lorange model, refers to the spot exchange rate forecast
for the end of the budget period.
⊚ true
⊚ false
90) Using the ending rate to translate the budget is a valid practice according to the Lessard-
Lorange model.
⊚ true
⊚ false
91) Lessard and Lorange recommend that firms use the projected spot exchange rate to
translate both the budget and performance figures into the corporate currency, combination PP.
⊚ true
⊚ false
92) Performance of international subsidiaries depends on the transfer price set up by the
corporation.
⊚ true
⊚ false
93) Most subsidiaries of an international business operate in uniform environments.
⊚ true
⊚ false
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94) Evaluation of a subsidiary should be separate from the evaluation of its manager.
⊚ true
⊚ false
95) Capital budgeting is the technique financial managers use to try to quantify the benefits,
costs, and risks of an investment.
⊚ true
⊚ false
96) The connection between cash flows to the parent and the source of financing must be
recognized when performing capital budgeting for an international business.
⊚ true
⊚ false
97) The governments of some countries require or prefer foreign multinationals to finance
projects in their country by local debt financing or local sales of equity.
⊚ true
⊚ false
98) By pooling its cash reserves, the firm can increase the total size of the cash pool it must
hold in highly liquid accounts.
⊚ true
⊚ false
99) A firm’s ability to establish a centralized depository that can serve short-term cash needs
might be limited by government-imposed restrictions on capital flows across borders.
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⊚ true
⊚ false
100) The principles of multilateral netting and bilateral netting are different.
⊚ true
⊚ false
101) A tax treaty between two countries is formed to fix the exchange rates between the two
countries.
⊚ true
⊚ false
102) A tax haven is a country that gives income tax exemptions to firms that export all or part
of its products.
⊚ true
⊚ false
103) Payment of dividends is an uncommon method of transferring funds from foreign
subsidiaries to the parent company.
⊚ true
⊚ false
104) A fee is compensation for professional services or expertise supplied to a foreign
subsidiary by the parent company or another subsidiary.
⊚ true
⊚ false
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105) Firms cannot use transfer prices to move funds from a subsidiary to the parent company
when financial transfers in the form of dividends are blocked by host-country government
policies.
⊚ true
⊚ false
106) A fronting loan is a loan between a parent and its subsidiary channeled through a
financial intermediary.
⊚ true
⊚ false
Answer Key
Test name: chapter 20
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