Accounting is a fundamental tool of financial management. Because accounting practices and standards
vary across national borders, we examine these differences and the move toward convergence of
standards in international accounting. We use the U.S. MNC for the sake of simplicity, remembering that
MNCs can be any nationality and increasingly are headquartered in emerging market economies such as
India and China.
After accounting, we move into how the company’s capital is structured, then to cash
management, including techniques such as multilateral netting and approaches to managing
The lack of a global currency creates foreign exchange risk for international companies. International
businesses have contracts, investments, assets and liabilities in more than one currency, many of which
fluctuate in terms of each other. It is this fluctuation that causes risk. Due to this risk the companies may
gain or lose depending on what currencies they hold.
Finance and accounting managers have tools to help mitigate various risks associated with transaction or
translation risk. Some of the tools available to management include hedging, exposure netting price
adjustment, balance sheet neutralizing, and swaps.
Management must manage currency risk while making investment decisions and decisions regarding the
acquisition of capital. Financial management must determine what currency to use, the relative strength
or weakness of that currency, whether to use equity or debt, sources of capital, where to source capital,
how much money and for how long and if there are other capital sources like governmental program or
joint ventures. The other financial management issue that has direct impact on the financial
management of the firm is taxation.
4 Suggestions and Comments
1. The topics covered in this chapter tend to unnerve students who lack confidence in their
quantitative skills. To address this issue, you might focus on the logic and goals of the specific
techniques and from there move to application.
2. From an international perspective, accounting is in a state of flux. By focusing on this situation,
you can help your students understand that globalization class for new ways of thinking and
3. Illustrate a transaction loss with an example of an obligation of an American importer to pay a
Finnish exporter five million Finnish markka (Fm) in 180 days. Assume the exchange rate on the
date of sale to be Fm 8 = US$ 1. Show the financial result if the rate changes during the 180 days to
Fm9 = US$1 or to Fm 7 = US$ 1.
4. Explain that importers and exporters usually do not want to bear currency exchange risks but that
others are in the business of doing so. Banks or currency market makers or traders take such risks.
5. Show how the importers and exporters can use hedging and other devices to avoid currency
6. Illustrate how currency rate changes can affect a firm’s profit and loss statement. When assets and
liabilities or payables and receivables within an IC group of companies are denominated in