Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 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 cash and 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
15-2 Instructor’s Resource Manual
Brief Topical Outline
A. Globalization
B. Environmental forces shaping globalization
1. Political and legal systems—see International Case in Point (page 689)
2. Economic systems—see Pathways Connection (page 689)
3. Culture—see International Case in Point (page 691)
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
Class
Meetings on
Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
Critical
Thinking
Cases
1
A – C
1, 3, 5, 7
1, 2, 4
1, 2, 3
2
1
2
D – F
12, 13, 15
5, 6, 7, 9
5, 6, 8
3, 4, 7
*Homework assignment (to be completed prior to class)
Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 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 factors, influences, and information that management should consider when making
international business decisions.
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 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.
Chapter 15—Global Business and Accounting
15-4 Instructor’s Resource Manual
Supplemental Exercises
Internet Exercise
The International Accounting Standards Board maintains a website: ifrs.org. Visit the
IFRS site and browse to see what information you can gather.
Check the current projects that the board is considering by clicking on the tab labeled
“Project updates” on the International Accounting Standards Board website and write a brief
report concerning the proposal.
Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 15-5
CHAPTER 15 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question.
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,
2018, 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, 2018 $0.1600 per peso
Dec. 31, 2018 $0.1596 per peso
Feb. 8, 2019 $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, 2018, 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, 2018 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 2018.
b Brown recognizes a gain on fluctuation of foreign currency in the amount of $4.80 in 2019.
c Brown has incurred an overall loss of $1.60 on fluctuation of foreign currency in the period
from December 10, 2018 to February 8, 2019.
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
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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.
2017
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.
2018
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.
2017
General Journal
Nov. 1
Dec. 31
2018
Feb. 1
Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 15-7
CHAPTER 15 NAME #
10-MINUTE QUIZ C SECTION
The following table summarizes the facts of five independent cases (labeled a through e) of American
companies engaging in credit transactions with foreign corporations while the foreign exchange rate is
fluctuating:
Column
Case
Type of Credit
Transaction
1
Currency Used in
Contract
2
Exchange Rate
Direction
3
Effect on
Income
4
A
Sales
Foreign currency
Rising
B
Purchases
Rising
No effect
C
Purchases
Foreign currency
Loss
D
Sales
U.S. dollars
Falling
E
Foreign currency
Falling
Gain
Instructions
After evaluating the information about each case, fill the blank space that has been left in one of the four
columns denoted by a yellow color. The content of each column and the word or words that you should
enter in the blank spaces are described below:
Column 1 indicates the type of credit transaction in which the American company engaged with the
foreign corporations. The answer entered in this column should be either “Sales” or “Purchases.”
Column 2 indicates the currency in which the invoice price is stated. The answer may be either “U.S.
dollars” or “Foreign currency.”
Column 3 indicates the direction in which the foreign currency exchange rate has moved between the
date of the credit transaction and the date of settlement. The answer in this column may be either
“Rising” or “Falling.”
Column 4 indicates the effect of the exchange rate fluctuation upon the income of the American
company. The answers entered in this column are to be selected from the following: “Gain,” “Loss,”
or “No effect.”
Chapter 15—Global Business and Accounting
15-8 Instructor’s Resource Manual
CHAPTER 15 NAME #
10-MINUTE QUIZ D SECTION
Listed below are nine global business terms introduced in this chapter:
Foreign exchange risk
Future contracts
International Accounting
Standards Board
Loss on fluctuation in foreign
exchange rates
Hedging
Exporting
Planned economy
International licensing
Foreign Corrupt Practices Act
Each of the following statements may (or may not) describe one of these terms. In the space provided
below each statement, indicate the accounting term described, or answer “None” if the statement does not
correctly describe any of the terms.
a The strategy of creating offsetting positions so that losses from currency fluctuations will be offset
by gains resulting from the same fluctuations.
______________________________
b Selling a good or service to a foreign customer.
______________________________
c Government allocates resources and determines output through central planning.
______________________________
d The organization responsible for developing uniform worldwide accounting standards.
______________________________
e Distinguishes between illegal influence peddling and legal facilitating payments.
______________________________
f A cross-border contractual agreement allowing one company to use trademarks, patents, or
technology of another company.
______________________________
g The impact on the value of a company of unexpected fluctuations in the exchange rate.
______________________________
Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 15-9
SOLUTIONS TO CHAPTER 15 10-MINUTE QUIZZES
QUIZ A
1 B
QUIZ B
2017
General Journal
Nov. 1
Accounts receivable
10,100
Sales
10,100
To record the sale of beef steaks to Japanese restaurant for
1 million yen when the exchange rate is $0.0101 U. S.
dollars per yen (1 million yen x $0.0101 = $10,100).
Accounts receivable
Gain on fluctuations in foreign exchange rates
To adjust balance of 10,000 dollar account receivable
to amount indicated by year-end exchange rate:
Cash
10,300
Gain on fluctuations in foreign exchange rate
Accounts receivable
10,200
and to recognize gain from exchange rate since Dec. 31
(1 million yen x $0.0103 = $10,300)
Accounts receivable, adjusted balance $10,200 $10,100
Gain from increase in exchange rate $100 $ 100
Chapter 15—Global Business and Accounting
15–10 Instructor’s Resource Manual
QUIZ C
Column
Type of Credit
Transaction
Currency Used in
Contract
Exchange Rate
Direction
Effect on
Income
QUIZ D
Chapter 15—Global Business and Accounting
Financial and Managerial Accounting, 18e 15–11
Assignment Guide to Chapter 15
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
4
3
Time estimate (in minutes)
< 15
< 15
30
25
30
40
90
40
30
40
40
50
30
40
Difficulty rating
E
E
M
E
S
M
S
S
M
M
M
M
M
M
Learning Objectives:
1, 2, 9
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.
7
1, 2, 4, 5,
9, 13, 15
financial reporting
standards.
13, 14
1, 2, 3, 6, 10
are stated in a foreign
hedging against losses from
fluctuations in exchange
5, 8
Chapter 15—Global Business and Accounting
15–12 Instructor’s Resource Manual
Brief
Exercises
Exercises
Problems
Cases
Net
7. Discuss how global sourcing
increases product cost
complexity.
1, 4, 12
8.
Explain the importance of the
Foreign Corrupt Practices
Act.
9
1, 4