Ch.20 Accounting and Finance in + Test Questions & Answers

Student name:__________

1) Describe the importance of accounting information in business.

2) Identify a key accounting problem that international businesses are confronted with but that does not confront purely domestic businesses. Substantiate with a suitable example.

3) How is a country’s accounting system affected by the providers of capital? Explain with the help of suitable examples.

4) Briefly differentiate accounting standards and auditing standards.

5) What are the shortcomings of IASB?

6) What are the main steps in the control process of a typical firm?

7) Describe the three exchange rates that can be used to translate foreign currencies into the corporate currency in setting budgets and in the subsequent tracking of performance that Lessard and Lorange pointed out.

8) What are the nine possible combinations of the three exchange rates proposed by Lessard and Lorange in the control process?

9) Explain the concept of transfer pricing.

10) Explain why the evaluation of a subsidiary should be kept separate from the evaluation of its manager.

11) Describe three factors that complicate the process of an international business.

12) Describe the problem of blocked earnings.

13) What are the considerations when seeking external financing for international business?

14) Define tax credit and tax treaty.

15) What are the advantages of using royalties and fees to move money across borders?

16) _____ are the most important source of external capital for business enterprises in the United States.

A) Stocks or bonds
B) World Bank loans
C) Banks
D) Venture capitalists

17) What is an accounting problem that only international businesses face?

A) lack of consistency in the accounting standards
B) inaccurate filing of profit-and-loss statements
C) false reporting of income to the government
D) lack of a dedicated accounting function within the firm

18) In countries such as the United States and Britain, firms typically raised capital by

A) obtaining funding from the government.
B) borrowing money from national banks.
C) issuing stock or bonds to investors.
D) borrowing money from international banks.

19) Historically, financial reports prepared by firms in Germany

A) reveal less information than reports of British or U.S. firms.
B) contain detailed information required by individual investors.
C) overvalued assets and undervalued liabilities.
D) made more public disclosures compared to firms in other countries.

20) Which of the following is a country in which banks emerged as the main providers of capital to enterprises?

A) the United States
B) Britain
C) the Philippines
D) Switzerland

21) Accounting standards are

A) rules for preparing financial statements.
B) the levels of tax payments needed.
C) the rules for performing an audit.
D) the technical process of balancing accounts.

22) The technical process by which an independent person gathers evidence for determining if financial accounts conform to required accounting standards is known as

A) standardization.
B) an audit.
C) reporting.
D) a benchmark.

23) Transnational financing occurs when a firm based in one country enters another country to raise capital

A) by borrowing from financial institutions.
B) from the sale of stocks or bonds.
C) by borrowing from banks.
D) through exchange policies of governments.

24) Three sets of related decisions are involved in financial management in an international business. Which of these involves making decisions about how to fund the chosen activities?

A) investment decisions
B) financing decisions
C) bilateral decisions
D) money management decisions

25) Financial management in an international business includes three sets of related decisions. Which of these involves making decisions about how to manage the firm’s financial resources most efficiently?

A) multilateraldecisions
B) financingdecisions
C) investmentdecisions
D) moneymanagement decisions

26) A German firm raising capital by selling stock through the London Stock Exchange is an example of

A) transnational financing.
B) service exporting.
C) indirect financing.
D) transnational investment.

27) Financial management in an international business includes three sets of related decisions. Which of these involves making decisions about what activities to finance?

A) investmentdecisions
B) moneymanagement decisions
C) multilateraldecisions
D) financingdecisions

28) Which of the following was formed in March 2001 to replace the International Accounting Standards Committee (IASC)?

A) U.S. Securities and Exchange Commission
B) International Accounting Standards Board
C) Office of Economic Analysis
D) Financial Accounting Standards Board

29) The _____ has 16 members who are responsible for the formulation of new international financial reporting standards.

A) U.S. Securities and Exchange Commission
B) International Accounting Standards Board
C) Office of Economic Analysis
D) Financial Accounting Standards Board

30) Compliance to IASB standards is

A) mandatory for countries that want to engage in international trade.
B) enforced through the World Trade Organization.
C) voluntary.
D) enforced through the United Nations.

31) The International Accounting Standards Board

A) can issue a new accounting standard if the majority of the board members agree.
B) was formed to replace the Financial Accounting Standards Board.
C) develops standards but has no power to enforce the standards.
D) was formed to supervise the accounting practices that U.S. firms follow.

32) The _____ writes the generally accepted accounting principles (GAAP) that govern the preparation of U.S. firms’ financial statements.

A) U.S. Securities and Exchange Commission
B) Office of Economic Analysis
C) International Accounting Standards Board
D) Financial Accounting Standards Board

33) The _____ is the main instrument of financial control in an organization.

A) chief financial officer
B) corporate accounting
C) audit
D) budget

34) A European subsidiary of a U.S. firm will usually prepare its budgets in

A) U.S. dollars.
B) euros.
C) a third-party currency.
D) Eurocurrency.

35) The projected rate will typically be the _____ 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.

A) transfer price
B) forward exchange rate
C) carrying cost
D) foreign exchange rate

36) The price at which goods and services are transferred between subsidiary companies in a multinational firm is referred to as

A) minimum retail price.
B) deferral price.
C) transfer price.
D) transaction price.

37) Most international businesses require all budgets and performance data within the firm to be expressed in the “corporate currency,” which is normally

A) a common currency such as the U.S. dollar.
B) the home currency.
C) a foreign currency.
D) the currency of the country where products are sold.

38) According to Lessard and Lorange, the _____ rate refers to the spot exchange rate when the budget is adopted.

A) ending
B) initial
C) ideal
D) projected

39) According to Lessard and Lorange, the _____ rate is the spot exchange rate forecast for the end of the budget period.

A) projected
B) initial
C) ideal
D) ending

40) According to Lessard and Lorange, the ending rate is the spot exchange rate

A) forecast for the end of the budget period.
B) when the budget is adopted.
C) when no formal exchange rate exists.
D) when the budget and performance are being compared.

41) Of the five combinations, Lessard and Lorange recommend that firms use the _____ spot exchange rate to translate both the budget and performance figures into the corporate currency.

A) ending
B) initial
C) final
D) projected

42) When using the projected spot exchange rate to translate both the budget and performance figures into the corporate currency, the projected rate in such cases will typically be the

A) forward exchange rate as determined by the foreign exchange market.
B) exchange rate that exists at the start of a project.
C) exchange rate when the budget was prepared.
D) transfer price that a firm will offer to one or more of its subsidiaries.

43) Lessard and Lorange refer to the company-generated forecast of future spot rates as the _____ rate.

A) forward exchange
B) internal forward
C) initial exchange
D) ending exchange

44) Transfer price refers to the

A) price at which goods and services are transferred to a subsidiary.
B) price at which the title of products is transferred to a customer.
C) price at which a supplier provides raw materials to a firm.
D) cost incurred when goods or services are transferred from one place to another.

45) Which of the following is a disadvantage of comparing managers in different countries only on the basis of return on investment (ROI)?

A) The managers are not responsible for increasing the ROI of an organization.
B) Managerial actions do not have a significant impact on firms’ profitability.
C) Return on investment is not a valid indicator of organizational profitability.
D) Environmental factors also contribute to ROI of firms and these factors differ.

46) Capital budgeting for a foreign project

A) begins with an audit of the current cash flows.
B) is vastly different from domestic capital budgeting.
C) begins with converting all cash flow to Eurocurrency.
D) uses the same theoretical framework that domestic capital budgeting uses.

47) Political risk tends to be

A) greater in countries experiencing social unrest or disorder.
B) negligible for large multinational companies.
C) less in countries experiencing social unrest or disorder.
D) a consideration only for companies operating in third world countries.

48) Extensive empirical studies have shown that

A) there is only a short-run relationship between a country’s relative inflation rates and changes in exchange rates; no long-run relationship exists.
B) there is a long-run relationship between a country’s relative inflation rates and changes in exchange rates.
C) that there exists both short-run and long-run relationships between a country’s relative inflation rates and changes in exchange rates.
D) a country’s relative inflation rates and changes in exchange rates are not related to each other.

49) _____ is the technique financial managers use to try to quantify the benefits, costs, and risks of an investment.

A) Capital budgeting
B) External audit
C) Transfer pricing
D) Control system analysis

50) Which of the following statements is true of the capital budgeting used in international businesses?

A) Capital budgeting does not provide a connection between cash flows to the parent and subsidiaries.
B) Its basic framework is vastly different from the framework of domestic capital budgeting.
C) Capital budgeting does not consider the cash flows between subsidiaries of a firm.
D) It enables top managers to compare different investment alternatives in an objective fashion.

51) The problem of blocked earnings is not as serious now as it once was because

A) fixed exchange rates have become more common.
B) governmental intervention in earnings is more frequent.
C) there is greater acceptance of free market economics.
D) political risk within the economy is very low in modern times.

52) Critics of adjusting discount rates to reflect a location’s riskiness argue that it

A) does not penalize either distant or early cash flows enough.
B) penalizes distant cash flows too heavily.
C) does not penalize early cash flows enough.
D) penalizes early cash flows too heavily.

53) Which of the following is an observation about the cost of capital?

A) The cost of capital is typically higher in the global capital market.
B) Domestic capital markets have more liquidity than global markets.
C) Local debt financing raises the cost of capital if liquidity is limited.
D) A local sale of equity is preferred to global sale by international firms.

54) Money management decisions attempt to manage the firm’s _____ most efficiently.

A) cash flow
B) corporate expenses
C) working capital
D) corporate revenues

55) Pooling the cash of all the subsidiaries centrally

A) lowers the interest rate earned.
B) reduces the earning potential for firms.
C) increases the interest rate paid.
D) increases the earning potential for firms.

56) Every time a firm changes cash from one currency into another currency it must bear

A) a transaction cost.
B) a tax.
C) a transfer fee.
D) an audit.

57) A _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

A) tax amnesty
B) tax credit
C) waiver
D) tax treaty

58) A _____ specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.

A) bilateral agreement
B) tax credit
C) deferral principle
D) tax treaty

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.

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.

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.

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

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.

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?

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

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

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

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.

⊚ 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

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