International Accounting: A User Perspective

CHAPTER 4QUESTIONS International Accounting: A User Perspective TRUE/FALSE 1. With the GPLA model, the adjustment factor for non-monetary items is comprised of two CPI numbers, the numerator of which is always the CPI at the financial statement date. 2. The denominator of the adjustment factor for non-monetary items under the GPLA model is always the average CI for the period since revenues and expenses typically occur throughout the period. 3. Holding monetary liabilities results in monetary gain. 4. Under the physical asset approach employed by the Current Cost-Adjusted model, money is deemed to have inherent value. 5. The main weakness of the CCA model is that determining current costs for certain types of fixed assets can be highly subjective. 6. Corporations in equity-oriented capital markets are in favor of the CCA model because it tends to overstate reported earnings. 7. Factors leading to the importance of accounting for intangible assets include the dramatic increase in mergers and acquisitions. 8. Goodwill is generally considered to be the excess of the value of an ongoing business over the value of its net assets. 9. Negative goodwill occurs when the fair value of a company's identifiable net assets is less than the company's purchase price. 10. Under the new geographic segment reporting standards, as set forth by the FAST/AcSB and the IASC/IASB, financial statement users will likely receive the level of disaggregated geographic segment information that they consider essential for their investment decisions. MULTIPLE CHOICE 1. Annual inflation of just five percent over 15 years would result in prices: a. doubling b. tripling c. increasing by five percent d. increasing by 75 percent 2. As one of the two main inflation-adjusted accounting models, the General Price Level Adjusted model: a. uses price indexes to adjust for general changes in the purchasing power of the country's monetary unit b. takes a physical asset perspective to measuring performance and financial position. c. Records expenses based on current replacement cost rather than on historical costs d. b. and c. 3. The Current Cost-Adjusted inflation-adjusted accounting model: a. uses price indexes to adjust for general changes in the purchasing power of the country's monetary unit b. takes a physical asset perspective to measuring performance and financial position c. records expenses based on current replacement cost rather than on historical costs d. b. and c. 4. The GPLA model: a. takes into consideration specific price changes of assets b. takes into consideration that companies are affected differently by inflation depending on their product line c. paints all entities with the same broad brush of general levels of inflation d. considers the specific price changes in the fixed assets, inventories and other physical assets owned by the company 5. All of the following accounting methods take a monetary approach to measuring income and wealth, except: a. the Conventional Historical Cost model b. the Discounted Cash Flow model c. the Current Cost-Adjusted model d. the General Price Level Adjusted model 6. Unrealized holding gains and losses occur: a. when the physical asset has been consumed b. when the physical assets owned by a business at year end have changed in value from the historical cost at which they were originally acquired. c. when the physical asset has been sold for a loss d. when a depreciation expense is recognized 7. Negative goodwill could result from: a. a bargain purchase of the company's assets b. a negative image among consumers or investors of the company's management c. a purchase price in excess of the company's value d. a. and b. 8. Opponents of goodwill amortization argue that: a. goodwill purchased at the time of acquisition has a finite life and will erode over time as conditions change b. the purchased goodwill is replaced by internally generated goodwill that does not meet recognition criteria and, therefore, does not belong in the balance sheet c. there is no clear measure of its decline or of the appropriate period of amortization d. all of the above 9. In the United States, the amortization of goodwill has been required since: a. 2001 b. 1945 c. 1970 d. none of the above 10. The growing demand for environmental disclosure is attributed to: a. unified approach to environmental disclosure among industrialized nations b. lack of high-profile environmental disasters has led to relatively easy reporting c. increasing public concern over environmental issues d. an attempt to please the environmentalist. CHAPTER 5QUESTIONS TRUE/FALSE 1. Reconciliation to a foreign country's GAAP are prepared in response to regulation of a country where the securities are listed. 2. In a tax convenience statement, the annual report is prepared in the foreign language and currency of the preparer's country. 3. Limited restatements provide supplementary disclosures to reconcile selected financial statements from the company's domestic accounting standards to the user's GAAP. 4. A universal secondary statement is prepared in the standards of a particular country. 5. According to the Choi and Levich study, non-U.S. firms had to incur greater costs for entering U.S. capital markets than did U.S. firms entering non-U.S. markets. 6. Responses of preparers to non-domestic users of their financial statements are a result of cost-benefit analysis. 7. In an international financial statement analysis, for investors to make a relevant comparison of firms in different countries, investors are better off using the impairment approach with respect to goodwill in the analysis. 8. In comparing companies from different countries, a financial ratio analysis alone provides a relevant comparison. 9. The term \"cash and cash equivalents\" is one term that has the same definition in the accounting principles of different countries. 10. In order to conduct a sensible comparison of firms globally, investors must adjust financial statements to include the cost of health care and pensions without deferrals and treat the companies' net obligations as debt. MULTIPLE CHOICE 1. In a convenience translation: a. the tax preparer translates the language of the annual report to that of the user's country b. the tax preparer does not translate the language of the annual report to the user's country c. the currency principles are those of the user's country and the accounting principles are those of the preparer's country d. the currency and accounting principles are those of the user's country 2. A secondary statement: a. translates the company's home-country annual report into the foreign user's language, currency and accounting principles b. are provided when there is sizeable investor interest in the company c. both a. and b. d. none of the above 3. According to the Choi and Levich study, firms in the following countries are relatively less affected by international accounting diversity: a. the United States and Japan b. Japan and the United Kingdom c. the United States and the United Kingdom d. the United States and Germany 4. According to the Choi and Levich study, the following users of financial statements found international accounting diversity to be a problem: a. underwriters b. institutional investors c. market regulators d. all of the above 5. According to the Morgan Stanley Dean Witter reports, the following accounting issues need the most attention in conducting comparisons of firms in different countries: a. depreciation b. foreign exchange c. consolidation and group reporting d. all of the above 6. It is generally easier to obtain annual reports and from companies: a. purely domestic companies in debt-oriented economies b. in equity-oriented economies c. multinational companies with the need for investors abroad d. both a. and c. 7. Variables affecting the overall quality of financial statements for individual companies include: a. the integrity of corporate management b. the financial position of the company c. the attest value of its auditors d. all of the above 8. At a minimum. individual investors making decisions based on foreign financial statements should keep in mind the following national characteristics: a. the scope of audit b. the general level of enforcement of capital market regulations in the country c. both a. and b. d. none of the above 9. Which is the most typical timeframe for countries worldwide to publish their annual reports after year end: a. 30-60 days b. 61-90 days c. 91-120 days d. 121-150 days 10. The following help to explain lower profitability ratios in Japan than the United States: a. Japanese companies often do business in competitive export markets b. Japan has a debt-oriented economy c. sales growth and achievement rather than short-term profits and stock market gains are more important variables in the performance evaluation of Japanese managers. d. all of the above Problems 1) The following is the balance sheet for Company ABC2010 annual report in Euros. Assume all assets were acquired on January 1, 2010. General price level index: January 1, 2010 Average for 2010 December 31, 2010 Assets Cash and cash equivalents Accounts Receivable Prepaid expenses Inventory Supplies Equipment l ess depreciation Total Assets 100 105 111 Company ABCBalance Sheet Y End December 31, 2010 ear Equity and L iabilities 2,000 Accounts Payable 12,000 Accrued Liabilites 1,000 Bank Loan Payable 19,000 500 Paid in Capital 25,000 Retained Earnings (4,000) 55,500 Total Equity and L iabilities Using the information above, adjust Company ABCs 2010 balance sheet for inflation using the GPLA model. What is Company ABCs basis retained earnings balance in Euros? 14,000 4,500 19,500 9,000 8,500 55,500 2) Company ABCIncome Statement (in E uros) Year End December 31, 2010 Net Sales 10,000 Cost of Goods Sold 4,000 S elling E xpenses 500 Advertising 700 E quipment Depreciation 1,200 Utilities 90 Taxes 1,100 Net Operating Income 2,410 General price level index: January 1, 2010 Average for 2010 December 31, 2010 100 105 111 Assume the equipment was acquired at the beginning of the year and the net monetary gain for the year was 850 Euros. What is Company ABCs adjusted GPLA net income for the year ending December 31, 2010? Using the GPLA model, calculate the net monetary gain or loss. What is Company ABCs GPLA-based net income for the year ending December 31, 2010