Chapter 15 – Global Business and Accounting
Financial and Managerial Accounting, 17e 15-1
15 GLOBAL BUSINESS
AND ACCOUNTING
Chapter Summary
The chapter focuses on some of the aspects of the global environment that have an
impact on accounting. We begin with a brief introduction to the process of globalization of a
business. Globalization is presented as a continuous process whereby managers become aware
of the impact of international activities on their companies. This process takes place in stages
that include exporting, licensing joint ventures, wholly owned subsidiaries, and global sourcing.
Each stage has implications for the type of accounting information reported.
The process of globalization is shaped by environmental forces including political and
legal systems, economic systems, culture, and technology and infrastructure. Each of these
factors is shown to have an impact on accounting information. For example, planned economic
systems require very different forms of financial reporting than market economies.
Numerous accounting problems follow from the use of multiple currencies in carrying
out transactions internationally. The chapter introduces exchange rates and exchange rate
computations. We then illustrate journal entries to account for a number of credit transactions
with foreign companies. These include explanations of the source of gains and losses on
fluctuations in foreign currency. We also demonstrate the adjustment of foreign receivables and
payables at the balance sheet date. This section of the chapter closes with a brief discussion of
hedging strategies to avoid losses due to currency fluctuations.
The chapter concludes with a brief discussion of global sourcing and the Foreign Corrupt
Practices Act. The FCPA is shown to have important implications for record keeping and
internal control in companies engaged in global sourcing.
Learning Objectives
1. Define four mechanisms companies use to globalize their business activities.
2. Identify how global environmental forces – a) political and legal systems, b) economic
systems, c) culture, and d) technology and infrastructure – affect accounting practices.
3. Explain why there is demand for harmonization of global financial reporting standards.
4. Demonstrate how to convert an amount of money from one currency to another.
5. Compute gains or losses on receivables or payables that are stated in a foreign currency
when exchange rates fluctuate.
6. Describe techniques for “hedging” against losses from fluctuations in exchange rates.
7. Discuss how global sourcing increases product cost complexity.
8. Explain the importance of the Foreign Corrupt Practices Act.
Chapter 15 – Global Business and Accounting
Brief topical outline
A Globalization
B Environmental forces shaping globalization
1 Political and legal systems – see Case in Point (page 689)
2 Economic systems
3 Culture – see Case in Point (page 690)
4 Technology and infrastructure
C Harmonization of financial reporting standards
1 International financial reporting standards: adoption or convergence
D Foreign currencies and exchange rates
1 Exchange rates
a Exchange rate jargon
2 Accounting for transactions with foreign companies
a Credit purchases with prices stated in a foreign currency
b Credit sales with prices stated in a foreign currency
c Adjustment of foreign receivables and payables at the balance sheet date
3 Currency fluctuations –who wins and who loses?
a Strategies to avoid losses from rate fluctuations
b Hedging
c Exchange rates and competitive prices – see Your Turn (page 699)
4 Consolidated financial statements that include foreign subsidiaries
E Global sourcing
1 Foreign Corrupt Practices Act – see Your Turn (page 702) and Ethics, Fraud &
Corporate Governance (page 703)
F Concluding remarks
Topical coverage and suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings on
Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
1
A – C
1, 3, 5, 7
1, 2, 4
1, 2, 3
2
2
D – F
12, 13, 15
5, 6, 7, 9
5, 6, 8
3, 4, 7
Chapter 15 – Global Business and Accounting
Financial and Managerial Accounting, 17e 15-3
Comments and observations
Teaching objectives for Chapter 15
In presenting this material objectives are to:
1 Define the process of globalization.
2 Provide a number of examples of the impact of the global environment on how accounting
information is gathered and reported.
3 Explain the computations necessary to convert an amount from one currency to another.
4 Distinguish between rising and falling exchange rates.
5 Explain the sources of gains and losses form exchange rate fluctuations and illustrate the
journal entries to record these gains and losses.
6 Review the provisions of the Foreign Corrupt Practices Act that have an impact on
accounting and systems of internal control
General comments
The accelerating pace of globalization in business has made it incumbent upon us to introduce
students to some of the accounting issues surrounding the phenomenon. If accounting is the
language of business then like any language it will reflect the environment in which it is
developed and used. The diversity in accounting worldwide is a logical extension of the variety
of business environments throughout the world. The text identifies a small subset of
environmental factors as being highly influential on the evolution of accounting.
The economic and legal system, culture, and existing technology and infrastructure have a
powerful effect on the relationship between businesses and the providers of capital. This
relationship in turn determines the type of accounting information that the environment will
demand. In making this argument we particularly like using Exercise 4 and Case 1. The former
requires some straightforward research into the environmental factors identified as crucial to the
success of globalization strategies, while the case requires students to develop arguments that
hinge on the relationship between accounting standards and the environment.
Although the more complex accounting issues surrounding foreign currency transactions are not
appropriate for the first course, we believe that all students should have a fundamental
understanding of the use of exchange rates and currency conversions. Once they have mastered
the basic arithmetic of converting amounts from one currency to another, it is relatively simple
to demonstrate the potential gains and losses from credit transactions denominated in the foreign
currency. To this end, we highly recommend reviewing Problems 2 and 3. These problems
provide the opportunity to introduce hedging strategies to avoid losses on such transactions. We
Chapter 15 – Global Business and Accounting
highly recommend class discussion of hedging, since this will provide one of the few
opportunities in the course to at least touch on the nature of derivative securities.
Supplemental Exercises
Internet Exercise
The International Accounting Standards Board maintains a website at
http://www.iasb.org Visit the site and browse to see what information you can gather.
Check the current projects that the board is considering and write a brief report concerning the
proposal.
Chapter 15 – Global Business and Accounting
Financial and Managerial Accounting, 17e 15-5
CHAPTER 15 NAME #_________
10-MINUTE QUIZ A SECTION____________________________
Indicate the best answer for each question in the space provided.
Use the following data for questions 1 through 3:
Nancy Brown owns an American company that sells music cassettes to Mexican outlets. On
December 10, 2011 , she sold tapes to Music of Mexico for a price of 16,000 pesos, due in 60
days. The foreign currency exchange rates on specific dates are as follows:
Dec. 10, 2011 $0.1600 per peso
Dec. 31, 2011 $0.1596 per peso
Feb. 8, 2012 $0.1599 per peso
1 Refer to the above data. The journal entry to record the sale in Brown’s accounting
records on December 10, 2011, includes:
a A debit to Accounts Receivable for 16,000 pesos.
b A credit to Sales for $2,560.
c A debit to Loss on Fluctuation of Foreign Currency for $260.
d No entry is made until year-end on this type of transaction.
2 Refer to the above data. With regard to this transaction, Brown’s financial statements at
December 31, 2011 include:
a An account receivable of $2,560.
b A gain on fluctuation of foreign currency of $6.40.
c Sales revenue of $2,553.60.
d A loss on fluctuation of foreign currency of $6.40.
3 Refer to the above data. Which of the following is not true regarding the above sales
transaction to Music of Mexico?
a Brown recognizes a loss on fluctuation of foreign currency in the amount of $4.65 in
2011.
b Brown recognizes a gain on fluctuation of foreign currency in the amount of $4.80 in
2012.
c Brown has incurred an overall loss of $1.60 on fluctuation of foreign currency in the
period from December 10, 2011 to February 8, 2012.
d Brown could have avoided any loss due to fluctuations in foreign currency by setting
the sales price of the cassettes in terms of U.S. dollars instead of pesos.
4 Which of the following businesses or individuals would benefit most from a strong U.S.
dollar?
a A small store that sells American-made cameras in St. Louis, Missouri. The store has
no foreign receivables or payables.
b The Cancun, Mexico, outlet for Levi’s jeans (made in the U.S.)
c International Harvester (an American manufacturer of farming machinery that sells
equipment to foreign customers.)
d An American tourist visiting France.
Chapter 15 – Global Business and Accounting
CHAPTER 15 NAME #
10-MINUTE QUIZ B SECTION____________________________________
Utah Ranchers exports beef to Japan. In the space provided below, prepare journal entries to record
the following events.
2010
Nov. 1 Sold beef steaks to a Japanese restaurant chain at a price of 1 million yen, due in 90 days.
The current exchange rate is $0.0101 U. S. dollars per yen. (Utah uses the periodic
inventory method.)
Dec. 31 Utah made a year-end adjusting entry relating to the account receivable from the Japanese
restaurant chain. The exchange rate at year-end is $0.0102 U. S. dollars per yen.
2011
Feb. 1 Received a check for $10,300 from the Universal Bank in full settlement of the receivable
from the Japanese restaurant chain. The exchange rate at this date is $0.0103 U. S. dollars
per yen.
2010
General Journal
Nov. 1
Dec. 31
2011
Feb. 1