Exam Prep International Accounting And Financial Management

Module 15 International Accounting and Financial Management

1) The practice of accounting provides investors and lenders with the quantitative information they rely on to make business decisions.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 2 Medium
Learning Objective : 15-01 Outline the major accounting issues international firms face when operating in foreign currencies.
Topic : Major International Accounting Issues

The purpose of accounting in all countries is to provide managers with financial data for use in their decision making and to provide external constituencies (investors, governments, lenders, suppliers, and others) with the quantitative information they seek to inform their decisions.

2) Temporal method of translation would recognize market value of real estate assets.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-01 Outline the major accounting issues international firms face when operating in foreign currencies.

The temporal method translates monetary items such as cash, receivables, and payables at the current exchange rate. Fixed assets and long-term liabilities are translated at the rates in effect the date they were acquired or incurred.

3) When discussing foreign currency, consolidation refers to ensuring that all monies are traded in the same currency, such as the dollar or the euro.

⊚ true
⊚ false

The process of aggregating these various results from foreign subsidiaries into one financial report is called consolidation.

4) The process companies go through to aggregate various results from foreign subsidiaries into one financial report is known as collective bargaining.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Learning Objective : 15-01 Outline the major accounting issues international firms face when operating in foreign currencies.
Topic : Major International Accounting Issues

The process of aggregating these various results from foreign subsidiaries into one financial report is called consolidation.

5) Typically, the functional currency is the local currency.

⊚ true
⊚ false

Usually, the functional currency is the local one, but every once in a while, an IC will use its parent currency in a foreign location.

6) American depository receipts represent the total dollar value of a company’s worth on the stock market.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Learning Objective : 15-03 Compare the capital structure choices open to international firms and their significance.
Topic : Capital Structure Choices for International Firms
Bloom's : Remember

7) Trying to protect against losses due to currency exchange rate fluctuations is called hedging.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Bloom's : Remember
Topic : Functions of the Foreign Exchange Market

Hedging is the process of holding assets (taking a position) in one market in order to offset exposure to price changes in the opposite position.

8) Companies use a fronting loan to set the price of transactions between members of the same business enterprise.

⊚ true
⊚ false

Companies use transfer pricing, not a fronting loan, to accomplish this.

9) An importer accelerates payment of the necessary currency exchange (leads) when it is thought that the currency will devalue in terms of the foreign payment currency.

⊚ true
⊚ false

A lead approach is to collect receivables early when the foreign currency is expected to weaken and to fund payables early when the foreign currency is expected to strengthen. A lag approach is to collect receivables late when the currency is expected to strengthen and to fund payables late when the currency is expected to weaken.

10) When independent, unrelated companies use acceleration or delay of payment to each other, such leading and lagging is generally a win–win situation.

⊚ true
⊚ false

With leading and lagging, one party benefits and the other party misses an opportunity.

11) Objectives of multilateral netting include keeping as much money as is reasonably possible in countries with high interest rates or where credit is difficult to obtain.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Difficulty : 2 Medium
Topic : Foreign Exchange Risks

12) Transfer pricing is a term for the pricing involved when one unit of an IC buys from another.

⊚ true
⊚ false

One additional method of transferring funds within the firm that may serve as a cash management technique is transfer pricing, which sets the price of transactions between members of the same business enterprise.

13) A swap contract is a way to hedge foreign currency exposure.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

Swap contracts are the sixth way to hedge foreign currency exposure. A swap is an agreement to exchange currencies at specified rates and on a specified date or sequence of dates.

14) When using a money market hedge, the hedger will convert the currency borrowed into his or her own currency.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

The money markets also offer an opportunity to hedge a foreign transaction. In a money market hedge, Nucor would borrow euros in the European money market in the amount of the receivables from the Spanish sale. The idea here is to match the balance sheet asset (in this case, the amount of the sale) with a liability in the same currency. Here’s how the money market hedge works. Nucor borrows the equivalent of $20 million in euros, or €13,035,300, for a period that matches the receivable’s due date. Nucor then converts the euros to dollars at the spot rate and invests them.

15) Translation exposure refers to the risks associated with language barriers between home and host countries.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

Translation exposure occurs when subsidiary financial statements are consolidated at the corporate level for companywide financial reports.

16) Exposure netting is the acceptance of closed positions in two or more currencies that are considered to balance one another.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 2 Medium
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

Exposure netting is matching exposures. The firm would run a centralized clearing account that matches and nets out foreign exchange exposures across currencies or across currency families.

17) Swap contracts can be used to hedge foreign currency exposure. They may be undertaken for long periods of time.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

Swap contracts are the sixth way to hedge foreign currency exposure. A swap is an agreement to exchange currencies at specified rates and on a specified date or sequence of dates. Swaps are quite flexible and may be undertaken for long periods, much longer than contracts available in the forward market.

18) Hedging for currency risk is only for large businesses with established international operations.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

When operating across different currencies, MNC managers regularly encounter currency exchange rate movements.

19) Translation risks involve shorter time periods than do transaction risks.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.
Topic : Functions of the Foreign Exchange Market

Translation risks are between periods of consolidation; usually transaction risks would be shorter.

20) Economic exposure is the potential for unanticipated exchange rate movements to affect future cash flows.

⊚ true
⊚ false

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Topic : Foreign Exchange Risks
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.

Economic exposure occurs at the operations level and indicates the potential for the value of future cash flows to be affected by unanticipated exchange rate movements.

21) The financial issues confronting IC management include

A) currency values, taxes, and inflation.
B) market size and capitalization.
C) political issues impacting sales.
D) competitive forces.

22) In their foreign operations, U.S. companies with foreign subsidiaries regularly follow

A) their home-country accounting practices.
B) their host-country accounting practices.
C) both their home- and host-country accounting practices.
D) their choice of accounting practices, being consistent.

International managers regularly face financial challenges in their daily operations. These include fluctuating currency values, currency exchange controls, taxation, and inflation and interest rates. They also must follow the accounting practices of their host government as well as those of the United States, if they work for a U.S.-based company.

23) The process of accounting standards convergence is

A) underway, but deadlines have been extended.
B) not likely, the process is so complex.
C) just about complete.
D) not likely due to the related political issues.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-01 Outline the major accounting issues international firms face when operating in foreign currencies.
Topic : Major International Accounting Issues

Today there is general political agreement to move toward the IASB standards (IFRS), and negotiations have made progress in the areas of business combinations, noncontrolling, and fair value measurement to date. However, although progress has been achieved, the pace has been slower than anticipated. Earlier expectations of a 2015 deadline on convergence have been recognized as unrealistic because the process itself is complex.

24) Lady Sara Tea Company is based in England but chooses to use the U.S. dollar for all pricing, expenses, and finance matters. In this case, the U.S. dollar is an example of

A) the gold standard.
B) a forward exchange.
C) a functional currency.
D) a spot exchange.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 2 Medium
Learning Objective : 15-01 Outline the major accounting issues international firms face when operating in foreign currencies.
Topic : Major International Accounting Issues
Bloom's : Apply

So when is each of these translation methods used? The choice hinges on the currency in which the operation denominates its local cash flows, pricing, expenses, and financing, in other words, its functional currency. Usually, the functional currency is the local one, but every once in a while, an IC will use its parent currency in a foreign location.

25) There are two points at which operating in foreign currencies raises accounting issues—

A) consolidation and bank loans.
B) buying and selling in the host-country currency.
C) bank loans and issuing foreign shares such as American depository receipts (ADRs).
D) transactions in foreign currencies and corporate consolidation.

There are only two points at which operating in a foreign currency raises accounting issues: when transactions are made in foreign currencies, and when branches and subsidiaries operate in foreign currencies and their results need to be made a part of the parent company’s financial reports.

26) An international company would refer to GAAP when

A) applying accounting principles.
B) applying the best methods for firing employees.
C) assessing tariff barriers for exports.
D) making strategic transportation decisions.

FASB’s standards are recognized by the SEC and known as the generally accepted accounting principles (GAAP).

27) Compliance to the International Financial Reporting Standards is

A) a legal requirement in the U.S.
B) based on social obligation.
C) mandatory for all companies.
D) a way to avoid transaction exposure.

One of the major differences between GAAP and the IFRS is their general approaches. GAAP relies on rules and regulations; it is a formal institution, and compliance is based on expedience. That is, we follow GAAP because we don’t want to face the legal outcomes of not following GAAP. In marked contrast, the IFRS relies strongly on shared principles. It is a normative guide, with compliance based on social obligation.

28) In Sidney Gray’s study, the dimension known as secrecy-transparency measures

A) the level of communication between various levels of a company.
B) the amount of government interaction a company faces.
C) the degree to which companies disclose information to the public.
D) public awareness of foreign exchange rates.

The dimension of secrecy-transparency measures the degree to which companies disclose information to the public.

29) FASB 52 requires that companies record foreign currency transactions

A) unless the payment is made in cash.
B) within two days of the transaction.
C) in the foreign currency only.
D) at the spot rate.

FASB 52 calls for use of the spot rate on the day of the transaction.

30) Consolidation is the process of

A) translating results into one financial statement.
B) combining debts for a lower interest rate.
C) trading currencies so that a one-currency ledger can be produced.
D) moving accounting convergence forward.

Consolidation brings the subsidiary results into one firmwide financial statement.

31) The two methods of currency translation are

A) functional and temporal.
B) interlinear and historical.
C) temporal and current.
D) intermediary and vehicle.

The two methods, which designate what rate to use, are temporal and current.

32) In the current rate method, assets and liabilities are translated

A) at the rate in effect the day the balance sheet is produced.
B) at the rate in effect the day the original transaction was posted.
C) using an average of the rate of the preceding 10 days.
D) at the LIBOR rate on the day before the translation is prepared.

The current rate method translates current assets and liabilities at the rate in effect the day the balance sheet is produced, except for the equity accounts such as stockholder’s equity.

33) The functional currency is

A) the currency with the most advantageous interest rate.
B) the primary currency of the business.
C) the currency of the home office.
D) whatever currency the buyer would like to use for the transaction.

34) Accounting standards in the United States are allocated by Congress as the responsibility of

A) a committee of CFOs.
B) the Secretary of the Treasury.
C) a committee of accounting scholars.
D) the Securities and Exchange Commission (SEC).

The SEC holds responsibility for accounting standards in the United States.

35) The SEC established the seven-member Financial Accounting Standards Board to oversee accounting standards. The FASB is

A) a private nonprofit organization.
B) a committee of the Department of the Treasury.
C) a committee of the Department of Commerce.
D) a for-profit public company.

The SEC established a private nonprofit organization to oversee accounting standards.

36) How many accounting standards are there now in operation?

A) two
B) four
C) six
D) three

There are now two main accounting standards at play in the global arena, one followed by most of the world and one followed by the United States.

37) The International Accounting Standards Board (IASB) represents the standards of

A) Europe and parts of Africa.
B) the United States exclusively.
C) most of the world, except the United States.
D) most globally-minded managers.

IASB is European in origin and represents the world—except the United States.

38) Researcher Sidney Gray’s optimism–conservatism measure indicates the degree to which a company

A) exercises caution in valuing of assets and measuring income.
B) is willing to embrace translation exposure.
C) loans money to subsidiaries.
D) interacts with foreign governments to obtain tariff relief measures.

Gray’s second dimension, optimism–conservatism, measures the degree to which a company is cautious in its valuing of assets and measuring of income.

39) According to the Sidney Gray study, in the values related to accounting,

A) transparency and optimism tend to occur together.
B) transparency and conservatism tend to occur together.
C) optimism and secrecy tend to occur together.
D) honesty is found through the accounting systems of the most conservative countries.

The accounting terms for these functions are disclosure practices and accounting measurement. Gray’s study, summarized in Figure 15.2, classifies countries on two dimensions, secrecy–transparency and optimism–conservatism. The dimension of secrecy—transparency measures the degree to which companies disclose information to the public.

40) When taking into account cultural differences, Sidney Gray used the ________ dimension to measure the degree to which companies disclose information to the public.

A) masculinity-femininity
B) mission-vision
C) optimism-conservatism
D) secrecy-transparency

The dimension of secrecy-transparency measures the degree to which companies disclose information to the public.

41) Countries that value privacy or secrecy over transparency in regard to disclosing information to the public include

A) Britain and China.
B) Spain and the United Kingdom.
C) Japan and Germany.
D) the United States and Japan.

This measure suggests higher value on privacy than transparency. Switzerland is also a member of this group, according to Gray's research.

42) The triple concerns of triple bottom-line (3BL) accounting are

A) economic, social, and environmental impacts of business.
B) environmental, political, and economic impacts of business.
C) systems, diversity, and equity in businesses addressing environmental issues.
D) profits, PR, and competitive results of business.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Learning Objective : 15-02 Outline the benefits and limitations of triple-bottom-line accounting.
Topic : Arguments for and Against 3BL

43) When considering triple-bottom-line accounting, currently most businesses measure

A) the economic impact of their activities and ignore the social and environmental.
B) their market share in economic terms but not social or environmental terms.
C) economic and environmental impacts, but not their social impacts.
D) none of their impacts, because economic measures are aggregated.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-02 Outline the benefits and limitations of triple-bottom-line accounting.
Topic : Arguments for and Against 3BL

Most businesses measure only the economic impact of their actions and ignore the other impacts.

44) Critics of 3BL claim that

A) measuring impacts on social and environmental contexts will not get us closer to the desired state.
B) business has no business paying attention to social and environmental impacts; economic impact is what counts.
C) measuring is a waste of time and has no impact on the bottom line.
D) such concerns are beyond the competency of most managers and are best left to government.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 15-02 Outline the benefits and limitations of triple-bottom-line accounting.
Topic : Arguments for and Against 3BL
Difficulty : 2 Medium

There is no disagreement about the goals, but rather, that 3BL is not the way to reach them.

45) Criticism of 3BL suggests 3BL is comparable to

A) a public confession.
B) a code of ethics hanging on the wall in every office: it does not lead to ethical behavior.
C) PR rather than organizational values.
D) a marketing campaign rather than a product.

3BL is compared to a code of ethics—the artifact does not lead to the desired behavior.

46) 3BL data are not comparable across companies; an alternative is

A) a Greenpeace reporting matrix.
B) an FASB approach.
C) the Global Reporting Initiative (GRI).
D) the Environmental and Social Index (ESI).

GRI is comparable; the measures and methodology are standardized. GRI is independent and collaborates with the United Nations Environment Programme (UNEP).

47) The three components of triple-bottom-line accounting are environmental results, financial results, and

A) liability results.
B) physical results.
C) foreign results.
D) social results.

As environmental sustainability increasingly becomes important to businesses and consumers, companies have made efforts to report to their stakeholders on their environmental, social, and financial results. The focus of this reporting framework has been termed the triple bottom line (3BL), a term credited to John Elkington. In his 1997 book, Cannibals with Forks: The Triple Bottom Line of 21st Century Business, Elkington argued that capitalism can become civilized.

48) Offshore financial centers are also known as

A) tax havens.
B) money market hedges.
C) currency swaps.
D) fronting loans.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Learning Objective : 15-03 Compare the capital structure choices open to international firms and their significance.
Bloom's : Remember
Topic : Major International Accounting Issues

49) What decisions will a financial manager make in the process of raising capital?

A) what risk profile to assume and for what period.
B) whether to sell parts of the company and reduce wages.
C) what currency will be used and how it should be structured between equity and debt.
D) what accounting approach and what operating currency to use.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-03 Compare the capital structure choices open to international firms and their significance.
Topic : Capital Structure Choices for International Firms

Among the decisions that must be made in the process of raising capital are what currency will be used and how it should be structured between equity and debt.

50) A company that raises capital through retained earnings is relying on what kind of source for the capital?

A) internal
B) external
C) developed
D) developing

The firm raises capital from two sources: internally, through retained earnings, and externally, through either equity (issuing of shares) or debt (leveraging). When equity securities (stock shares) are issued, part of the firm’s ownership is being sold. No money is being borrowed that must be repaid, as is the case when debt securities (bonds) are issued.

51) American depository receipts are denominated in

A) dollars.
B) euros.
C) the currency of the host country.
D) the currency of the home country.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 15-03 Compare the capital structure choices open to international firms and their significance.
Topic : Capital Structure Choices for International Firms
Difficulty : 3 Hard

Sometimes foreign shares are traded directly on the U.S. stock markets, but many times they are traded in the form of American depository receipts (ADRs). These receipts represent shares that are held by a custodian, usually a U.S. bank, in the stock’s home market. They are denominated in dollars and traded on the U.S. exchange, eliminating the need to have a broker in the country of issue and to make a currency exchange.

52) Tax havens are financial centers in which

A) banking regulations are strict.
B) tax levels are comparable to the U.S. market.
C) banking regulations are loose.
D) tax levels are high.

53) There are two basic sources of capital for the firm—

A) banks and sovereign wealth funds.
B) internal equity and external sources, either debt or equity.
C) capital markets and banks.
D) domestic and international funders.

The firm raises capital from two sources: internally, through retained earnings, and externally, through either equity (issuing of shares) or debt (leveraging).

54) What occurs when a company relies on external equity to raise capital?

A) the firm is stronger because control is diffused
B) interest rates are a critical obligation
C) part of the firm's ownership is being sold
D) shareholders can add management strength to the firm

When equity securities (stock shares) are issued, part of the firm’s ownership is being sold.

55) When firms issue stock to raise capital, they

A) may tap foreign as well as domestic markets.
B) are limited to domestic markets, due to local legislation.
C) are foregoing the use of domestic debt markets.
D) are making a commitment to adopt 3BL.

Markets are local and often have a global span (NYSE).

56) How does issuing stocks in foreign markets affect firms?

A) extends the firm's investor pool and often reduces cost of capital
B) supports international debt markets
C) influences local legal systems
D) causes currency problems

The firm extends its investor pool through issuing stock in foreign markets.

57) American depository receipts (ADRs) function to

A) eliminate a foreign firm's need to have a broker in the United States and to make currency exchanges.
B) protect U.S. citizens from U.S. taxes.
C) support international capital markets.
D) separate the stock issuer from the stockholder.

ADRs are foreign shares held by a custodian, usually a U.S. bank, in the issuer’s home market and traded in dollars on the U.S. exchange.

58) Who developed ADRs and where?

A) LSE in the United Kingdom for Selfridges to list in the United States.
B) J. P. Morgan in the United States for a Selfridge's listing.
C) Donald Trump in the United States.
D) J. F. Kennedy for Cuban listings in the United States.

Morgan developed them for his fellow American, Selfridge, who established Selfridges in London.

59) When assessing debt markets as a source of capital, there is an increasing tendency among companies to

A) tap local markets first.
B) look globally for lowest rates.
C) commit to the markets of major customers first.
D) use as much debt as possible to maintain control.

The present financing approach with debt is to tap local markets first.

60) What is a source for debt financing used by some companies?

A) subsidiaries
B) local lines of credit
C) other businesses
D) offshore financial markets

Offshore financial markets offer an additional source of debt financing.

61) Many companies take advantage of banking opportunities in the Cayman Islands where there are low taxes and less strict banking regulations. The banking centers in the Cayman Islands are an example of

A) ADRs
B) tax havens.
C) fronting loans.
D) 3BL.

They also have access to offshore financial centers, also known as tax havens, locations that specialize in financing by nonresidents, where the taxation levels are low and the banking regulatory environment is loose. Hong Kong, Switzerland, the Cayman Islands, and the Bahamas are examples of offshore financial centers.

62) A loan that is made through an intermediary like a bank from a parent company to a subsidiary is called a

A) transfer price.
B) personal loan.
C) fronting loan.
D) tariff barrier.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Topic : Capital Structure Choices for International Firms
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Bloom's : Remember

A fronting loan is an approach that achieves the same objective for the firm with much less risk. In a fronting loan, the parent company deposits money in an international bank, which then lends to the subsidiary, fronting for the parent company.

63) With regard to currency, it is not uncommon for an international firm such as Nestlé to operate in

A) more than 20 local currencies.
B) only U.S. dollars.
C) a combination of hard and soft currencies.
D) less than 5 local currencies.

It’s not uncommon for an international firm such as Procter & Gamble or Nestlé to operate in 25 local currencies.

64) Transfer pricing is a method of moving funds that represents intrafirm sales, which actually make up what percentage of world trade?

A) 60 percent
B) 12 percent
C) 2 percent
D) 20 percent

Trade that increases the opportunity for transfer pricing, intrafirm trade, makes up 60 percent of world trade.

65) A fronting loan would typically be made by

A) the host country government.
B) the home country government.
C) the parent company.
D) a bank.

In a fronting loan, the parent company deposits money in an international bank, which then lends to the subsidiary, fronting for the parent company.

66) Multilateral netting is best represented by a

A) straight line.
B) graduated pyramid.
C) wheel-and-spoke model.
D) continuous circle.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Topic : Why ICs Move Funds

One common strategy finance centers use to manage and optimize these flows is multilateral netting. This is a centralized approach in which subsidiaries transfer their net cash flows within the company to a cash center that disperses cash to net receivers. A single transaction to or from each member settles the net result of all cash flows. The structure is essentially the wheel-and-spoke model.

67) Transfer pricing may be used to

A) decrease IC taxes.
B) fund exports only.
C) move goods within a region.
D) support debt equity.

Because the sale that creates the transfer is internal, its costs are somewhat flexible. In this flexibility lies the potential to move funds from high-tax, weak-currency environments in ways that are beneficial to the firm. Transfer pricing can also circumvent host-country currency transfer controls and tariffs.

68) Tartan Publishing is concerned about changing currency values. To minimize risk, the company policy is to collect payments from foreign vendors as early as possible. What is this an example of?

A) exposing
B) lagging
C) swapping
D) leading

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Difficulty : 2 Medium
Topic : Functions of the Foreign Exchange Market
Bloom's : Apply

This is actually a simple technique that you may practice already: collect payments as early as possible (lead) and pay out as late as possible (lag).

69) Rather than loan funds directly to its subsidiary, Heritage Mfg. deposited the funds in an international bank and the bank then loaned that money to the subsidiary. What is this an example of?

A) transfer pricing
B) fronting loan
C) money market hedge
D) currency swap

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Learning Objective : 15-04 Describe why ICs move funds and the utility of an international finance center.
Topic : Why ICs Move Funds
Difficulty : 2 Medium
Bloom's : Apply

70) Multilateral netting is used to

A) loan money to foreign subsidiaries.
B) administer human resource benefits.
C) optimize cash flow.
D) capture spot exchange rates.

There are many possible types of cash flows between subsidiaries and their parent company and among subsidiaries. The parent company makes loans to the subsidiary and may increase investment in the form of equity capital. In the other direction, cash from sales, dividends, royalties, and fees move from the subsidiary to the parent. Flows also exist among subsidiaries. One common strategy finance centers use to manage and optimize these flows is multilateral netting.

71) Currency fluctuations create risks categorized as

A) transaction, translation, and economic exposures.
B) domestic and foreign.
C) independent and dependent exposures.
D) hedging exposures.

These are the three exposures discussed in the text.

72) Transaction exposure is a foreign exchange risk that

A) occurs when subsidiary financial statements are consolidated at the corporate level.
B) arises when future payment in a foreign currency is involved.
C) results from translating values in foreign currencies to the home-country currency.
D) cannot be protected against.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 2 Medium
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.
Topic : Functions of the Foreign Exchange Market

Transaction exposure occurs when the firm has transactions denominated in a foreign currency and the exchange rate changes between the time the commitment is made and the time it is payable.

73) A forward market hedge can be described as

A) a simple transaction.
B) a way to translate foreign currency to parent company currency.
C) a situation that should be avoided.
D) a response to risk that is rarely used.

A forward market hedge is a simple transaction. The company sells forward (contracts today to deliver currency at a specified rate on a specified future date) its foreign currency receivables for its home currency, matching the future date to the due date of the receivables.

74) Keller Beef Products Inc. hopes to limit transaction exposure by contracting today to deliver currency at a specified rate on a specified future date. What type of strategy is the company using?

A) money market hedge
B) forward market hedge
C) swap contract
D) currency option hedge

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 2 Medium
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.
Topic : Functions of the Foreign Exchange Market
Bloom's : Apply

Third, a forward market hedge is a simple transaction. The company sells forward (contracts today to deliver currency at a specified rate on a specified future date) its foreign currency receivables for its home currency, matching the future date to the due date of the receivables.

75) One characteristic of a currency option hedge is that it

A) is of limited use.
B) uses specific amounts and settlement dates.
C) offers options in currencies hedged.
D) is seldom used.

With a currency option hedge, you purchase an option to buy or sell a specific amount of currency at a specific time. These contracts are solicited through social media networks as well as through banks. The hedges are calls for, or contracts with an option to buy, foreign currency payables and puts for, or contracts to sell, foreign currency receivables. Because they are options, if the market works against you, you can exercise the contract. If the market works for you, you don’t need to exercise the option.

76) Swap contracts are used to hedge

A) derivatives.
B) foreign currency exposure.
C) covered positions.
D) sales performance.

Swap contracts are the sixth way to hedge foreign currency exposure.

77) A covered position occurs when

A) you have hedged a transaction exposure.
B) you can cover your short position with another currency.
C) you are covered by insurance against loss in your short.
D) you have recovered your basic investment.

The risks are usually categorized into three types: transaction exposure, translation exposure, and economic exposure. These exposures describe positions that are either uncovered or covered; that is, hedged or unhedged.

78) Westward Wood Products Inc. borrowed euros in the European market in the amount of receivables the company has from a sale in France. The period of the loan matches the due date of the receivables. Westward converts the euros to dollars at the spot rate and invests them. The company uses the euros it receives from the French company to pay off the euro loan. Then the invested dollars plus their earned interest provide Westward a dollar amount for the French sale. Which type of hedge is the company using?

A) currency option
B) swap contract
C) money market
D) forward market

This is an example of a hedge using the money market.

79) Companies pursue swap contracts in order to

A) limit currency exposure.
B) reward expatriate workers.
C) validate accounting operations.
D) eliminate unwanted suppliers.

Swap contracts are the sixth way to hedge foreign currency exposure. A swap is an agreement to exchange currencies at specified rates and on a specified date or sequence of dates.

80) In a currency option hedge, “puts” are

A) contracts with an option to buy foreign currency payables.
B) contracts to sell foreign currency receivables.
C) also known as spot exchange rates.
D) used to replace the hedge with a swap contract.

The hedges are calls for, or contracts with an option to buy, foreign currency payables and puts for, or contracts to sell, foreign currency receivables.

81) Carlson Industries has subsidiaries in 12 countries. Each of these subsidiaries prepares its financial reports in its particular currency, and the company’s bottom line is affected when these currencies are exchanged into U.S. dollars. What type of exposure does this reflect?

A) translation
B) economic
C) transaction
D) political

Take a U.S. company that has subsidiaries in Brazil, Japan, Spain, and the United Kingdom. Each subsidiary will prepare financial reports in its own currency, so amounts in four currencies will need to be translated. Any changes in the exchange rates will affect the dollar values of these results. Such changes, either gains or losses, are not reflected in cash flow; they are paper or unrealized changes.

82) For the parent company in an IC group, translation of assets and liabilities as well as payables and receivables of subsidiaries from the currencies of their host countries to the currency of the parent's home country is

A) not a common practice for industrial groups.
B) prohibited by laws of most host countries.
C) necessary to understand how well subsidiaries are doing and for companywide financial reports.
D) required by the laws of most home countries.

The home currency usually functions as the measure of performance.

83) Swaps may be used to

A) hedge foreign currency exposure.
B) level out human resource issues.
C) establish international experience in the finance function.
D) acquire valuable local resources.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Remember
Learning Objective : 15-05 Identify foreign exchange risks the IC faces and ways to address them.
Topic : Functions of the Foreign Exchange Market

Swap contracts are the sixth way to hedge foreign currency exposure. A swap is an agreement to exchange currencies at specified rates and on a specified date or sequence of dates.

84) Workers in the United States have a direct tax levied on their earnings. What is this tax called?

A) pension
B) income tax
C) dividend
D) withholding tax

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Topic : Capital Structure Choices for International Firms
Bloom's : Remember
Learning Objective : 15-06 Describe taxation as an international financial force.

Income tax is a direct tax levied on earnings.

85) Taxes that are levied on royalties and dividends are called

A) withholding taxes.
B) income taxes.
C) personal property taxes.
D) value-added taxes.

The withholding tax is also an indirect tax, levied on passive income such as royalties, dividends, and interest. It is paid by the business that makes the royalty, dividend, or interest payment.

86) An international business would use inversion as a way to

A) avoid taxes.
B) create economies of scale.
C) duplicate competitor products.
D) promote products.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Topic : Capital Structure Choices for International Firms
Difficulty : 2 Medium
Learning Objective : 15-06 Describe taxation as an international financial force.

Reduction of taxes was also one of the reasons for the U.S. pharmaceutical company Pfizer’s recent aborted attempt to buy the British firm AstraZeneca PLC. Pfizer planned to move its headquarters abroad and leave New York, saving at least $1 billion in taxes every year. This process, called inversion, would have meant moving at least 20 percent of the company’s shares to foreign ownership and then establishing a legal home in a low-tax area.

87) Kwik Foods Inc. is based in Western Europe. It is considered a legal extension of the parent company, Portable Meals Group, based in Ohio and because of this the parent company can deduct economic losses at Kwik Foods from its U.S. taxable income. This means that Kwik Foods Inc. is a

A) charter.
B) subsidiary.
C) greenfield investment.
D) branch.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Topic : Capital Structure Choices for International Firms
Difficulty : 2 Medium
Learning Objective : 15-06 Describe taxation as an international financial force.
Bloom's : Apply

The way the foreign operations of a company are organized is key to its U.S. tax liability on foreign earnings. If the operation is a branch, that is, an extension of the parent company and not a separate legal entity incorporated in the foreign country, the parent company can deduct its losses from its U.S. taxable income.

88) The process of translating and aggregating the subsidiary reports into one company report is ________.

Consolidation involves FX translation.

89) The primary currency of a business is called its ________ currency.

The functional currency is the one the subsidiary operates in.

90) The ________ method of foreign currency consolidation translates monetary items such as cash, receivables, and payables at the current exchange rate.

91) John Elkington introduced the concept of ________, arguing that corporate capitalism can become sustainable capitalism.

Elkington is credited with the term 3BL.

92) The main source of capital from within the firm is ________.

93) ________ is pricing that is established for transfers between members of the enterprise.

94) ________ is holding assets in one market to offset price changes to exposure in another market.

There are many forms of hedging; this is the basic concept.

95) Collecting receivables early when currencies are expected to weaken is an example of ________.

Leading limits FX risk.

96) Collecting receivables late when a currency is expected to strengthen is an example of ________.

Lagging limits FX risk.

97) A ________ loan, made through an intermediary, usually a bank, can be used when the host country has currency exchange restrictions.

A fronting loan is a useful way around FX restrictions.

98) ________ are payments made for the use of a company's name, trade name, consulting, and technology.

Dividends result from the parent company’s equity interest in the subsidiary, while royalties and fees are payments made for the use of company assets such as trade names, technology, consulting, and management systems.

99) ________ is taking a position in one market to offset exposure to price changes in another market.

Hedging is an important risk control process.

100) ________ exposure occurs when there is a time lag between when a transaction takes place in a foreign currency and when payment is made.

Transaction exposure occurs because the FX rates may change between the transaction and its payment in the foreign currency.

101) In a ________, the company sells forward its foreign currency receivables for its home currency, matching the forward date with the due date of the receivable.

Forward market hedges are the most widely used of the hedging approaches, but it eliminates the possibility of a gain if the currency moves in the company's favor.

102) ________ contracts are agreements to exchange currencies at specified times and rates.

Swaps are flexible and can be long term.

103) Exposure at the operations level caused by FX changes on projected cash flows is known as ________ exposure.

Economic exposure is firmwide and long term.

104) ________ tax is an indirect tax levied on added value to the product.

Question Details
AACSB : Analytical Thinking
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : 1 Easy
Learning Objective : 15-06 Describe taxation as an international financial force.
Topic : The Influence of Taxation and Inflation Rates on International Business

VAT is indirect in that it is collected from the parties who add value along the value chain, not from the owner of the taxed item.

105) A ________ is an extension of the parent company, not a separate legal entity.

106) A ________ is a separate legal entity owned by the parent company.

Subsidiary earnings are taxed when repatriated in the United States.

107) The ________ tax is an indirect tax paid by the payor, usually on passive income.

The withholding tax is paid by the party that makes the royalty, dividend, or interest payment.

108) Compare and contrast the current rate method and temporal method of foreign currency consolidation.

109) Discuss the benefits and limitations of triple-bottom-line accounting.

110) Discuss the benefits a company has from using leading and lagging strategies.

111) Discuss the risks associated with transaction exposure and how to hedge them.

112) Discuss the risks associated with translation exposure and how to hedge them.

Document Information

Document Type:

DOCX

Chapter Number:

All in one

Created Date:

Aug 21, 2025

Chapter Name:

Module 15 International Accounting And Financial Management

Author:

Michael Geringer, Jeanne McNett, Donald Ball

Connected Book

International Business 2e | Test Bank with Answer Key by Geringer and McNett

By Michael Geringer, Jeanne McNett, Donald Ball

Test Bank General

View Product →

Explore recommendations drawn directly from what you're reading

Module 13 Marketing Internationally

DOCX Ch. All in one

Module 14 Managing Human Resources In An International Context

DOCX Ch. All in one

Module 15 International Accounting And Financial Management

DOCX Ch. All in one Current

Module A International Institutions From A Business Perspective

DOCX Ch. A

Module B Export And Import Practices

DOCX Ch. B

$24.99

100% satisfaction guarantee

Buy Full Test Bank

Quick Navigation

Preview Document Info Connected Book Recommendations

Benefits

Immediately available after payment

Answers are available after payment

ZIP file includes all related files

Files are in Word format (DOCX)

Check the description to see the contents of each ZIP file

We do not share your information with any third party

Exam Prep International Accounting And Financial Management

Document Information

Connected Book

International Business 2e | Test Bank with Answer Key by Geringer and McNett

Explore recommendations drawn directly from what you're reading

$24.99

Quick Navigation

Benefits

Report Unauthorized Use

Added to Cart