MGT 302 FINAL EXAM QUESTIONS AND ANSWERS

MGT 302 FINAL EXAM QUESTIONS AND ANSWERS Chapter 20 Accounting and Finance in the International Business Answer Key True / False Questions 1. Accounting information is the means by which firms communicate their financial position to the providers of capital. TRUE Accounting information is the means by which firms communicate their financial position to the providers of capital, enabling them to assess the value of their investments and make decisions about future resource allocations. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Discuss the national differences in accounting standards. Topic: Introduction 2. Accounting is shaped by the environment in which it operates. TRUE Accounting is shaped by the environment in which it operates. Just as different countries have different political systems, economic systems, and cultures, historically they have also had different accounting systems. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Discuss the national differences in accounting standards. Topic: National Differences in Accounting Standards 3. Banks are the most important source of external capital for business enterprises in the United States. FALSE In countries where there are well-developed capital markets, such as the United States and Britain, firms typically raise capital by issuing stock or bonds to investors. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Discuss the national differences in accounting standards. Topic: National Differences in Accounting Standards 4. Accounting standards are rules for preparing financial statements. TRUE Accounting standards are rules for preparing financial statements. They define what is useful accounting information. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Discuss the national differences in accounting standards. Topic: National Differences in Accounting Standards 5. Auditing standards are rules that define the accounting principles and monetary policy of a nation. FALSE Auditing standards specify the rules for performing an audit—the technical process by which an independent person (the auditor) gathers evidence for determining if financial accounts conform to required accounting standards and if they are also reliable. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Discuss the national differences in accounting standards. Topic: National Differences in Accounting Standards 6. IASB is a major proponent of international accounting standards. TRUE The International Accounting Standards Board (IASB) has emerged as a major proponent of standardization. The IASB has 15 members who are responsible for the formulation of new international financial reporting standards. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 Explain the implications of the rise of international accounting standards. Topic: International Accounting Standards 7. Compliance to IASB standards is mandatory for countries to engage in international trade. FALSE Another hindrance to the development of international accounting standards is that compliance is voluntary; the IASB has no power to enforce its standards. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 Explain the implications of the rise of international accounting standards. Topic: International Accounting Standards 8. The standards of U.S. Financial Accounting Standards Board and IASB are vastly different. FALSE To date, the impact of the IASB standards has probably been least noticeable in the United States because most of the standards issued by the IASB have been consistent with opinions already articulated by the U.S. Financial Accounting Standards Board (FASB). AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 Explain the implications of the rise of international accounting standards. Topic: International Accounting Standards 9. The budget is the main instrument of financial control in an organization. TRUE The budget is the main instrument of financial control. The budget is typically prepared by the subunit, but it must be approved by headquarters management. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 10. 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. FALSE Most international businesses require all budgets and performance data within the firm to be expressed in the "corporate currency," which is normally the home currency. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 11. A European subsidiary of a U.S. firm will usually prepare its budgets in Euro. FALSE Most international businesses require all budgets and performance data within the firm to be expressed in the "corporate currency," which is normally the home currency. Here the firm would typically prepare budget in U.S. dollars. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 12. The initial rate, in the Lessard-Lorange Model, refers to the spot exchange rate when the budget is adopted. TRUE In the Lessard-Lorange Model, the initial rate is the spot exchange rate when the budget is adopted. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 13. The ending rate refers to the spot exchange rate forecast for the end of the budget period in the Lessard-Lorange Model. FALSE The ending rate refers to the spot exchange rate when the budget and performance are being compared in the Lessard-Lorange Model. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 14. Using the ending rate to translate the budget is a valid practice according to the Lessard-Lorange Model. FALSE Lessard and Lorange ruled out four of the nine combinations they proposed as illogical and unreasonable. For example, it would make no sense to use the ending rate to translate the budget and the initial rate to translate actual performance data. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 15. Lessard and Lorange recommend that firms use the projected spot exchange rate to translate both the budget and performance figures into the corporate currency. TRUE Of the five valid combinations they identified, Lessard and Lorange recommend that firms use the projected spot exchange rate to translate both the budget and performance figures into the corporate currency. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 16. The projected rate will typically be the forward exchange rate 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. TRUE Of the five valid combinations they identified, Lessard and Lorange recommend that firms use 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 forward exchange rate as determined by the foreign exchange market. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 17. The price at which goods and services are transferred between subsidiary companies in a multi-national firm is referred to as minimum retail price. FALSE The price at which goods and services are transferred between subsidiary companies in a multi-national firm is referred to as the transfer price. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 18. Performance of international subsidiaries depends on the transfer price set-up by the corporate. TRUE The price at which goods and services are transferred between subsidiary companies in a multi-national firm is referred to as the transfer price. The profitability of a subsidiary is dependent on this transfer price. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 19. Most subsidiaries of an international business operate in uniform environments. FALSE Foreign subsidiaries do not operate in uniform environments; their environments have widely different economic, political, and social conditions, all of which influence the costs of doing business in a country. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 20. Evaluation of a subsidiary should not be separate from the evaluation of its manager. FALSE Foreign subsidiaries do not operate in uniform environments; their environments have widely different economic, political, and social conditions, all of which influence the costs of doing business in a country. Thus, the manager of a subsidiary in an adverse environment that has an ROI of 5 percent may be doing a better job than the manager of a subsidiary in a benign environment that has an ROI of 20 percent. Accordingly, it has been suggested that the evaluation of a subsidiary should be kept separate from the evaluation of its manager. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise. Topic: Accounting Aspects of Control Systems 21. Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and risks of an investment. TRUE Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and risks of an investment. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise. Topic: Financial Management: The Investment Decision 22. The theoretical framework for performing capital budgeting for a foreign project is vastly different from domestic capital budgeting. FALSE Capital budgeting for a foreign project uses the same theoretical framework that domestic capital budgeting uses; that is, the firm must first estimate the cash flows associated with the project over time. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise. Topic: Financial Management: The Investment Decision 23. 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 The connection between cash flows to the parent and the source of financing must be recognized when performing capital budgeting for an international business. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise. Topic: Financial Management: The Investment Decision 24. Political risk tends to be greater in countries experiencing social unrest or disorder. TRUE Political risk tends to be greater in countries experiencing social unrest or disorder and countries where the underlying nature of the society makes the likelihood of social unrest high. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise. Topic: Financial Management: The Investment Decision 25. Studies have shown that a country's relative inflation rates and changes in exchange rates are not related to each other. FALSE There have been extensive empirical studies of the relationship between countries' inflation rates and their currencies' exchange rates. These studies show that there is a long-run relationship between a country's relative inflation rates and changes in exchange rates. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise. Topic: Financial Management: The Investment Decision 26. 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 The governments of some countries require, or at least prefer, foreign multinationals to finance projects in their country by local debt financing or local sales of equity. In countries where liquidity is limited, this raises the cost of capital used to finance a project. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-05 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise. Topic: Financial Management: The Financing Decision 27. Money management decisions attempt to manage the firm's working capital most efficiently. TRUE Money management decisions attempt to manage the firm's global cash resources—its working capital—most efficiently. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 28. Pooling the cash of all the subsidiaries reduces the earning potential for firms. FALSE Cash balances are typically deposited in liquid accounts, such as overnight money market accounts. Because interest rates on such deposits normally increase with the size of the deposit, by pooling cash centrally, the firm should be able to earn a higher interest rate than it would if each subsidiary managed its own cash balances. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 29. The total size of a firm's cash pool increases when it pools cash reserves of subsidiaries. FALSE By pooling its cash reserves, the firm can reduce the total size of the cash pool it must hold in highly liquid accounts, which enables the firm to invest a larger amount of cash reserves in longer-term, less liquid financial instruments that earn a higher interest rate. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 30. 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 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. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 31. Every time a firm changes cash from one currency into another currency it must bear a transaction cost. TRUE Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into another currency it must bear a transaction cost—the commission fee it pays to foreign exchange dealers for performing the transaction. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 32. The principles of multilateral netting and bilateral netting are different. FALSE Multilateral netting is an extension of bilateral netting. Bilateral netting involves adjustments between two firms whereas multilateral netting involves adjustments between multiple subsidiaries. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 33. A tax credit allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government. TRUE A tax credit allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 34. A tax treaty between two countries is formed to fix the exchange rates between the two countries. FALSE A tax treaty between two countries is an agreement specifying what items of income will be taxed by the authorities of country where the income is earned. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 35. A deferral principle specifies that parent companies are not taxed on foreign source income until they actually receive a dividend. TRUE A deferral principle specifies that parent companies are not taxed on foreign source income until they actually receive a dividend. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 36. A tax heaven is a country that gives income tax exemptions to firms that export all or part of its products. FALSE A tax haven is a country with an exceptionally low, or even no, income tax. International businesses avoid or defer income taxes by establishing a wholly owned, non-operating subsidiary in the tax haven. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances; transaction costs; and taxation. Topic: Financial Management: Global Money Management 37. "Unbundling" is a term used to describe the practice of transferring liquid funds from a foreign subsidiary to the parent company. TRUE International businesses use a number of techniques to transfer liquid funds across borders. These include dividend remittances, royalty payments and fees, transfer prices, and fronting loans. Some firms rely on more than one of these techniques to transfer funds across borders—a practice known as unbundling. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 38. Payment of dividends is an uncommon method of transferring funds from foreign subsidiaries to the parent company. FALSE Payment of dividends is the most common method by which firms transfer funds from foreign subsidiaries to the parent company. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 39. The age of a foreign subsidiary has no influence on payment of dividends. FALSE The age of a foreign subsidiary influences dividend policy in that older subsidiaries tend to remit a higher proportion of their earnings in dividends to the parent company, presumably because a subsidiary has fewer capital investment needs as it matures. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 40. Royalties represent the remuneration paid to the owners for the use of technology or the right to manufacture and/or sell products under patents or trade names. TRUE Royalties represent the remuneration paid to the owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 41. It is uncommon for a parent company to charge its foreign subsidiaries royalties for the technology, patents, or trade names it has transferred to them. FALSE It is common for a parent company to charge its foreign subsidiaries royalties for the technology, patents, or trade names it has transferred to them. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 42. A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary. TRUE A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 43. Dividends have certain tax advantages over royalties and fees. FALSE Royalties and fees have certain tax advantages over dividends, particularly when the corporate tax rate is higher in the host country than in the parent's home country. Royalties and fees are often tax deductible locally (because they are viewed as an expense), so arranging for payment in royalties and fees will reduce the foreign subsidiary's tax liability. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 44. 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. FALSE A firm can use transfer prices to move funds from a subsidiary to the parent company (or a tax haven) when financial transfers in the form of dividends are restricted or blocked by host-country government policies. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management 45. A fronting loan is a loan between a parent and its subsidiary channeled through a financial intermediary. TRUE A fronting loan is a loan between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank. AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-07 Understand the basic techniques for global money management. Topic: Financial Management: Global Money Management Multiple Choice Questions