Chapter 20 Accounting and Finance in the International Business
True / False Questions
1.
Accounting information is the means by which firms communicate their
financial position to the providers of capital.
TRUE
Accounting information is the means by which firms communicate their
financial position to the providers of capital, enabling them to assess the
value of their investments and make decisions about future resource
allocations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: Introduction
2.
Accounting is shaped by the environment in which it operates.
TRUE
Accounting is shaped by the environment in which it operates. Just as
different countries have different political systems, economic systems, and
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards
3.
Banks are the most important source of external capital for business
enterprises in the United States.
FALSE
In countries where there are well-developed capital markets, such as the
United States and Britain, firms typically raise capital by issuing stock or
bonds to investors.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards
4.
Accounting standards are rules for preparing financial statements.
TRUE
Accounting standards are rules for preparing financial statements. They
define what is useful accounting information.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 Discuss the national differences in accounting standards.
5.
Auditing standards are rules that define the accounting principles and
monetary policy of a nation.
FALSE
Auditing standards specify the rules for performing an audit—the technical
process by which an independent person (the auditor) gathers evidence for
determining if financial accounts conform to required accounting standards
and if they are also reliable.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards
6.
IASB is a major proponent of international accounting standards.
TRUE
The International Accounting Standards Board (IASB) has emerged as a
major proponent of standardization. The IASB has 15 members who are
responsible for the formulation of new international financial reporting
standards.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7.
Compliance to IASB standards is mandatory for countries to engage in
international trade.
FALSE
Another hindrance to the development of international accounting
standards is that compliance is voluntary; the IASB has no power to enforce
its standards.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards
8.
The standards of U.S. Financial Accounting Standards Board and IASB are
vastly different.
FALSE
To date, the impact of the IASB standards has probably been least
noticeable in the United States because most of the standards issued by
the IASB have been consistent with opinions already articulated by the U.S.
Financial Accounting Standards Board (FASB).
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
9.
The budget is the main instrument of financial control in an organization.
TRUE
The budget is the main instrument of financial control. The budget is
typically prepared by the subunit, but it must be approved by headquarters
management.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
10.
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.
FALSE
Most international businesses require all budgets and performance data
within the firm to be expressed in the “corporate currency,” which is
normally the home currency.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
11.
A European subsidiary of a U.S. firm will usually prepare its budgets in
Euro.
FALSE
Most international businesses require all budgets and performance data
within the firm to be expressed in the “corporate currency,” which is
normally the home currency. Here the firm would typically prepare budget in
U.S. dollars.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
12.
The initial rate, in the Lessard-Lorange Model, refers to the spot exchange
rate when the budget is adopted.
TRUE
In the Lessard-Lorange Model, the initial rate is the spot exchange rate
when the budget is adopted.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
13.
The ending rate refers to the spot exchange rate forecast for the end of the
budget period in the Lessard-Lorange Model.
FALSE
The ending rate refers to the spot exchange rate when the budget and
performance are being compared in the Lessard-Lorange Model.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
14.
Using the ending rate to translate the budget is a valid practice according to
the Lessard-Lorange Model.
FALSE
Lessard and Lorange ruled out four of the nine combinations they proposed
as illogical and unreasonable. For example, it would make no sense to use
the ending rate to translate the budget and the initial rate to translate
actual performance data.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
15.
Lessard and Lorange recommend that firms use the projected spot
exchange rate to translate both the budget and performance figures into the
corporate currency.
TRUE
Of the five valid combinations they identified, Lessard and Lorange
recommend that firms use the projected spot exchange rate to translate
both the budget and performance figures into the corporate currency.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
16.
The projected rate will typically be the forward exchange rate as determined
by the foreign exchange market when firms use the projected spot
exchange rate to translate both the budget and performance figures into the
corporate currency.
TRUE
Of the five valid combinations they identified, Lessard and Lorange
recommend that firms use the projected spot exchange rate to translate
both the budget and performance figures into the corporate currency. The
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
17.
The price at which goods and services are transferred between subsidiary
companies in a multi-national firm is referred to as minimum retail price.
FALSE
The price at which goods and services are transferred between subsidiary
companies in a multi-national firm is referred to as the transfer price.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
18.
Performance of international subsidiaries depends on the transfer price set-
up by the corporate.
TRUE
The price at which goods and services are transferred between subsidiary
companies in a multi-national firm is referred to as the transfer price. The
profitability of a subsidiary is dependent on this transfer price.
AACSB: Analytic
Blooms: Understand
19.
Most subsidiaries of an international business operate in uniform
environments.
FALSE
Foreign subsidiaries do not operate in uniform environments; their
environments have widely different economic, political, and social
conditions, all of which influence the costs of doing business in a country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
20.
Evaluation of a subsidiary should not be separate from the evaluation of its
manager.
FALSE
Foreign subsidiaries do not operate in uniform environments; their
environments have widely different economic, political, and social
conditions, all of which influence the costs of doing business in a country.
Thus, the manager of a subsidiary in an adverse environment that has an
ROI of 5 percent may be doing a better job than the manager of a subsidiary
in a benign environment that has an ROI of 20 percent. Accordingly, it has
been suggested that the evaluation of a subsidiary should be kept separate
from the evaluation of its manager.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems
21.
Capital budgeting is the technique financial managers use to try to quantify
the benefits, costs, and risks of an investment.
Difficulty: 1 Easy
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Topic: Financial Management: The Investment Decision
22.
The theoretical framework for performing capital budgeting for a foreign
project is vastly different from domestic capital budgeting.
FALSE
Capital budgeting for a foreign project uses the same theoretical framework
that domestic capital budgeting uses; that is, the firm must first estimate
the cash flows associated with the project over time.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Topic: Financial Management: The Investment Decision
23.
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
The connection between cash flows to the parent and the source of
financing must be recognized when performing capital budgeting for an
international business.
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Topic: Financial Management: The Investment Decision
24.
Political risk tends to be greater in countries experiencing social unrest or
disorder.
TRUE
Political risk tends to be greater in countries experiencing social unrest or
disorder and countries where the underlying nature of the society makes
the likelihood of social unrest high.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Topic: Financial Management: The Investment Decision
25.
Studies have shown that a country’s relative inflation rates and changes in
exchange rates are not related to each other.
FALSE
There have been extensive empirical studies of the relationship between
countries’ inflation rates and their currencies’ exchange rates. These
studies show that there is a long-run relationship between a country’s
relative inflation rates and changes in exchange rates.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Topic: Financial Management: The Investment Decision
26.
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
The governments of some countries require, or at least prefer, foreign
multinationals to finance projects in their country by local debt financing or
local sales of equity. In countries where liquidity is limited, this raises the
cost of capital used to finance a project.
Learning Objective: 20-05 Discuss the different financing options available to the foreign subsidiary of a multinational
enterprise.
Topic: Financial Management: The Financing Decision
27.
Money management decisions attempt to manage the firm’s working capital
most efficiently.
TRUE
Money management decisions attempt to manage the firm’s global cash
resources—its working capital—most efficiently.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
28.
Pooling the cash of all the subsidiaries reduces the earning potential for
firms.
FALSE
Cash balances are typically deposited in liquid accounts, such as overnight
money market accounts. Because interest rates on such deposits normally
increase with the size of the deposit, by pooling cash centrally, the firm
should be able to earn a higher interest rate than it would if each subsidiary
Difficulty: 2 Medium
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
29.
The total size of a firm’s cash pool increases when it pools cash reserves of
subsidiaries.
FALSE
By pooling its cash reserves, the firm can reduce the total size of the cash
pool it must hold in highly liquid accounts, which enables the firm to invest
a larger amount of cash reserves in longer-term, less liquid financial
instruments that earn a higher interest rate.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
30.
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.
TRUE
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
31.
Every time a firm changes cash from one currency into another currency it
must bear a transaction cost.
TRUE
Transaction costs are the cost of exchange. Every time a firm changes cash
from one currency into another currency it must bear a transaction cost—
the commission fee it pays to foreign exchange dealers for performing the
transaction.
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
32.
The principles of multilateral netting and bilateral netting are different.
FALSE
Multilateral netting is an extension of bilateral netting. Bilateral netting
involves adjustments between two firms whereas multilateral netting
involves adjustments between multiple subsidiaries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
33.
A tax credit allows an entity to reduce the taxes paid to the home
government by the amount of taxes paid to the foreign government.
TRUE
A tax credit allows an entity to reduce the taxes paid to the home
government by the amount of taxes paid to the foreign government.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
34.
A tax treaty between two countries is formed to fix the exchange rates
between the two countries.
FALSE
A tax treaty between two countries is an agreement specifying what items
of income will be taxed by the authorities of country where the income is
earned.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
35.
A deferral principle specifies that parent companies are not taxed on foreign
source income until they actually receive a dividend.
TRUE
A deferral principle specifies that parent companies are not taxed on foreign
source income until they actually receive a dividend.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
36.
A tax heaven is a country that gives income tax exemptions to firms that
export all or part of its products.
FALSE
A tax haven is a country with an exceptionally low, or even no, income tax.
International businesses avoid or defer income taxes by establishing a
wholly owned, non-operating subsidiary in the tax haven.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize
cash balances; transaction costs; and taxation.
Topic: Financial Management: Global Money Management
37.
Payment of dividends is an uncommon method of transferring funds from
foreign subsidiaries to the parent company.
FALSE
Payment of dividends is the most common method by which firms transfer
funds from foreign subsidiaries to the parent company.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Financial Management: Global Money Management