Chapter 1: Introduction to International Accounting

Why didn't Magnum use the British pound to record its sales to NMUK? a. Because Magnum wanted to keep its sales recorded in a depreciating currency b. Because Magnum wanted to keep its sales recorded in an appreciating currency c. Because Magnum follows U.S. GAAP, which requires companies to keep their accounting records in U.S. dollars d. Because the U.S. dollar was the personal preference of the accountants at Magnum

c. Because Magnum follows U.S. GAAP, which requires companies to keep their accounting records in U.S. dollars

The acquisitions of existing foreign companies and the creation of new foreign subsidiaries are the two most common forms of _________________________________

foreign direct investment

One of the reasons for Magnum to minimize the total amount of taxes it pays worldwide is that doing so will ______. increase its revenue maximize its income before tax reduce its operational risk maximize its after-tax cash flows

maximize its after-tax cash flows

An internal auditor must do all of the following except ______. uncover financial reporting errors detect any inefficiencies make sure that the company's policies and procedures are being followed prepare financial statements

prepare financial statements

To get the benefit of international transfer pricing, multinational companies ______. shift profit between two low-tax countries through discretionary transfer pricing shift profits from low-tax countries to high-tax countries through discretionary transfer pricing shift profits from high-tax countries to low-tax countries through discretionary transfer pricing shift profits between two high-tax countries through discretionary transfer pricing

shift profits from high-tax countries to low-tax countries through discretionary transfer pricing

To reduce the total taxes paid in both the United States and Portugal, Magnum could transfer parts to Portugal at low prices to shift gross profit to Portugal. However, the expected benefit of transfer pricing can only be achieved when ______. the income tax rates do not matter the income tax rate in Portugal is lower than that in the United States the income tax rate in the United States is lower than that in Portugal the income tax rate in Portugal is equal to that in the United States

the income tax rate in Portugal is lower than that in the United States

Possible issue(s) unique to the performance evaluation of foreign operations include(s): 1. Currency used as the basis of performance 2. Translation from one currency to another currency, which affects performance measures Only 2 Only 1 Neither 1 or 2 1 and 2

1 and 2

The procedure(s) to consolidate financial statements of a U.S. parent company with foreign operations involve(s): 1. When foreign GAAP accounting rules differ from U.S. GAAP, amounts calculated under the foreign GAAP must be converted to a U.S. GAAP basis. 2. After the account balances have been converted to a U.S. GAAP basis, they must be translated from foreign currency to U.S. dollars. Only 1 1 and 2 Only 2 Neither 1 nor 2

1 and 2

Reasons for Foreign Direct Investment

1. increased sales and profits 2. enter rapidly growing or emerging markets 3. reduce costs 4. gain a foothold in economic blocs 5. protect domestic markets 6. protect foreign markets 7. acquire technological and managerial know how

Factors to measure multinationality of a company

1. the ratio of foreign sales to total sales 2. the ratio of foreign assets to total assets 3. the ratio of foreign employees to total employees

What is a greenfield investment in foreign direct investment (FDI)? A type of foreign direct investment where a parent company purchases an existing operation in a foreign country A type of foreign direct investment where a parent company acquires a profitable company in a foreign country A type of foreign direct investment where a parent company constructs a brand-new operation in a foreign country A type of foreign direct investment where a parent company invests in an established farming business

A type of foreign direct investment where a parent company constructs a brand-new operation in a foreign country

Why didn't Magnum use the British pound to record its sales to NMUK? Because Magnum wanted to keep its sales recorded in an appreciating currency Because the U.S. dollar was the personal preference of the accountants at Magnum Because Magnum follows U.S. GAAP, which requires companies to keep their accounting records in U.S. dollars Because Magnum wanted to keep its sales recorded in a depreciating currency

Because Magnum follows U.S. GAAP, which requires companies to keep their accounting records in U.S. dollars

Which hedging instrument could Magnum adopt to deal with its exposure to foreign exchange risk because of the foreign sales to NMUK? Purchasing an option to sell British pounds for U.S. dollars Selling an option to buy British pounds and pay by U.S. dollars Purchasing an option to buy British pounds and pay by U.S. dollars Selling an option to sell British pounds for U.S. dollars

Purchasing an option to sell British pounds for U.S. dollars

Which exchange rate did Magnum use to convert the sales to NMUK into U.S. dollars? The exchange rate between the British pound and the U.S. dollar at the end of the fiscal year The exchange rate between the British pound and the U.S. dollar at the beginning of the year The exchange rate between the British pound and the U.S. dollar at the time of the sale transaction The annual average of the exchange rates between the British pound and the U.S. dollar

The exchange rate between the British pound and the U.S. dollar at the time of the sale transaction

According to U.S. GAAP, in which currency must the consolidated financial statements be presented? U.S. dollars U.S. dollars and a foreign currency, side by side A foreign currency U.S. dollars only if the domestic sales and expenses are larger than foreign sales and expenses

U.S. dollars

Multinational Corporation

a company that is headquartered in one country but has operations in other countries

The way(s) to recognize the difference of US$5,000 between the original US$ of the receivable and the actual number of US$ received in the accounting records include(s): 1. Treating the difference as a reduction in sales revenue. 2. Recording it as a separate loss resulting from a change in the foreign exchange rate. 3. Recording the difference as a bad debt expense. a. 2 and 3 b. 1 and 2 c. 1, 2 and 3 d. 1 and 3

b. 1 and 2

Besides options, what could be another hedging technique that Magnum could adopt to deal with its exposure to foreign exchange risk? a. The accounting requirements are too complicated to allow Magnum to use any other type of hedging technique. b. Another hedging technique would be to use foreign currency forward contracts. c. U.S. GAAP does not allow companies to use hedging techniques to hedge foreign currency risk. d. Using options to hedge the exposure to foreign exchange risk is the only way.

b. Another hedging technique would be to use foreign currency forward contracts.

The procedure(s) to consolidate financial statements of a U.S. parent company with foreign operations involve(s): 1. When foreign GAAP accounting rules differ from U.S. GAAP, amounts calculated under the foreign GAAP must be converted to a U.S. GAAP basis. 2. After the account balances have been converted to a U.S. GAAP basis, they must be translated from foreign currency to U.S. dollars. a. Neither 1 nor 2 b. Only 2 c. 1 and 2 d. Only 1

c. 1 and 2

What does "double taxation" mean? a. Income taxes doubled in the home country b. Income taxes doubled in a foreign country c. Income taxes paid twice on the same source of earned income d. Income taxes doubled with foreign operations

c. Income taxes paid twice on the same source of earned income

Determination of net present value (NPV) involves: 1. Forecasting future profits and cash flows. 2. Aggregating past profits and cash flows. 3. Discounting the future cash flows back to present value and then comparing this present value amount with the amount of investment. a. Only 3 b. 1, 2, and 3 c. Only 2 d. 1 and 3

d. 1 and 3

Income earned by foreign operations can be subject to ____________________

double taxation