International Accounting: A Users Perspective by Shahrokh M. Saudagaran

CHAPTER 6QUESTIONS

TRUE/FALSE

1. The risks of investing in ECMs are associated almost exclusively with structural, political and economic problems in these countries.

2. The capital markets classified as emerging are quite similar in terms of their size and history.

3. In an effort to bolster their domestic stock exchanges, ECMs rarely have stringent listing requirements.

4. In order to promote entrepreneurial ventures, many ECMs have a tiered market system with speculative securities being traded on a secondary or over-the-counter market, while premium securities are traded in the main stock exchange.

5. Despite perceptions that ECM generally provide fewer disclosures compared with those in developed countries, studies do not support this perception.

6. In attempt to bolster the reliability of their financial reports, many ECMs have adopted IFRS as a basis of their domestic financial reporting.

7. ECMs having adequate financial standards are also likely to have adequate enforcement standards.

8. Despite shortages in qualified auditors in many ECMs, the World Trade Organization has not worked to reduce barriers to the free movement of services, including accounting and audit services, across countries.

9. In ECMs, the author argues for a voluntary or laissez-faire approach to regulation, concluding that even government-imposed minimum disclosure requirements would stifle voluntary disclosure.

10. The potpourri of accounting standards used by Chinese firms provides a unique setting in which to study de jure versus de facto harmonization.

MULTIPLE CHOICE

1. For most developing countries, relying on a local stock market to raise large-scale capital is considered:

a. an unreliable approach to enterprise financing

b. a traditional way to raise capital

c. a step upward on the ladder of financial development

d. puts unwanted strain on their financial reporting habits.

2. An indication that investments in emerging capital markets are becoming more acceptable is that:

a. international investors are using their own currency to purchase ECM investments

b. international investors are purchasing securities denominated in local currency

c. financial reporting has become standardized among ECM countries

d. poor financial reporting no longer impacts ECM markets

3. A factor contributing to the weak dissemination of financial information in some ECMs include:

a. lack of interest among investors in such information

b. online systems connected to organized securities

c. weak financial press

d. none of the above

4. International accounting organizations, such as the IASB, OECD and UN, have asserted that uniform rules for measurement and disclosure are necessary to achieve comparability of financial information, but:

a. dont expect it to actually occur in the foreseeable future

b. have settled for accounting harmony

c. are waiting for the United States to embrace IFRS before expecting any harmony among ECMs

d. none of the above

5. A second element of Comparability, the need to understand the contextual significance of financial information, is:

a. much less significant than the specific accounting policies used to prepare financial reports

b. at least as important as achieving a set of international accounting standards

c. important but often over-analyzed to the detriment of the rules themselves

d. both a. and c.

6. Some countries embark on a deliberate approach to reforming their financial reporting systems in response to changes in their environment, such as moving toward market-oriented economies. Recent examples include:

a. China

b. Canada

c. Vietnam

d. both a. and c

7. ECMs, in their early stages of development, should emphasize governmental-defined uniform accounting requirements because:

a. strict governmental control results in the development of a more responsive financial reporting system

b. recent innovations more likely to be adopted in a government-defined system

c. government-defined requirements facilitates compliance with extant requirements and helps to maximize the use of scarce professional accounting personnel

d. all of the above

8. Factors accounting for the differences in enforcement capability with respect to financial reporting regulations in ECMs include:

a. size and quality of the accounting personnel within a particular country

b. attitude of the ECMs government toward financial reporting

c. whether or not a designated governmental agency exists responsible for regulating the securities market

d. all of the above

9. The risks to an ECM of pursuing accounting convergence:

a. are largely outweighed by the greater risk of an ECM becoming uncompetitive because it does not have a sound basis of accounting

b. are negligible

c. relate to the possibility that the accounting standards adopted are inappropriate for the particular ECM

d. both a. and c.

10. The most distinctive feature of Mexican accounting is its:

a. use of Mexican GAAP, which if virtually identical to US GAAP

b. abandonment of inflation accounting, along with the US and UK.

c. continued requirement that companies adjust their financial statements to show the effect of inflation

d. requirement that all companies use a fiscal year running from April 1 to March 31

CHAPTER 7QUESTIONS

1. The budget sets the performance criteria on which the operating units in the company will be evaluated at the end of the budget period.

2. Non-financial criteria can be used in lieu of financial criteria to measure performance.

3. In a study comparing budgeting and performance evaluation systems between the United States and Japan, return on investment was more highly rated as a performance measure in Japan.

4. The disadvantage of a currency futures contract compared to a futures contract is the risk of default.

5. A foreign exchange option is an obligation to buy or sell a currency on or before a given date at an agreed price.

6. A cost-based transfer price is most reflective of arms-length pricing.

7. Taxpayers may use any transfer pricing method that is reasonable under the facts and circumstances, only if the specified methods cannot be reasonably applied.

8. Transfer pricing is the price at which goods and services are transferred between unrelated entities.

9. The preparation of consolidated financial statements is one example of the demands placed on the information systems of multinational corporations.

10. Language and technology differences are the main issues in IT system design for multinational corporations.

MULTIPLE CHOICE

1. For multinational corporations with a number of subsidiaries, the following factor or factors can adversely impact the use of comparability in a performance evaluation system:

a. inflation

b. political turmoil

c. labor conditions

d. all of the above

2. Studies that have compared budgeting and performance evaluation practices in Japan and the United States have found:

a. more time is spent in the United States preparing budgets

b. compensation and promotion of U.S. managers was more likely to be impacted by their budget performance than was those of Japanese manager.

c. both a. and b.

d. none of the above

3. In choosing the appropriate currency to measure a foreign subsidiarys performance, the following factor or factors are considered:

a. which country has the strongest currency

b. the subsidiarys role in the companys overall strategy

c. whether foreign currency risk management is decentralized

d. both b. and c.

4. A forward contract and a currency futures are similar in that:

a. they both are accompanied by a risk of default

b. they both involve an agreement to exchange currencies at a set price in the future

c. they both are standardized in terms of amount and delivery dates

d. the cash flow happens at maturity

5. The following are objectives in transfer pricing:

a. minimizing taxes

b. minimizing tariffs

c. avoiding foreign currency restrictions

d. all of the above

PROBLEM

1) Company ABC manufactures TVs and Computers. The company is evaluating expanding

production overseas to take advantage of lower production costs. Two possible locations

include China and Mexico.

Below is the summary of the expected cash flows for the first 5 years of operations.

Even though most of the operating cash flows will be in Yuan or Pesos, the company

also anticipates some expenses in US dollar denominated expenses.

China (in millions) Year 1 Year 2 Year 3 Year 4 Year 5

CNY cash inflows 5,000 10,000 14,000 19,000

CNY cash outflows 10,000 2,000 3,500 6,000 8,500

US $ cash outflows 500 850 1,000 1,100

Mexico (in millions) Year 1 Year 2 Year 3 Year 4 Year 5

MXN cash inflows 10,000 14,000 19,000 24,000

MXN cash outflows 25,000 2,500 3,500 5,000 8,000

US $ cash outflows 200 400 750 1,000

Exhange rates for year 1 are 5.9 Chinese Yuan (CNY) = US$1 and 15.8 Mexican Pesos

(MXN) = US$1. It is expected the Chinese Yuan will appreciate 2.5% a year against

the dollar and the Mexican Peso will depreciate 1.5% against the dollar. Company

ABC's weighted cost of capital for both projects is 8%.

A) Determine the net present value of both projects.

B) If you were an advisor, which location would you choose and why?

CHAPTER 1QUESTIONS

TRUE /FALSE

1. Among the environmental factors that shape accounting development in a country is the countrys rate of inflation.

2. A countrys capital market may be characterized as being either equity-oriented or debt-oriented.

3. In countries with dual rules for financial and tax reporting, a country may legally portray itself as highly profitable in its financial reports and less successful in its tax reports.

4. In countries with a single reporting system for financial and tax reporting, companies tend to exaggerate earnings.

5. International accounting standards are rooted in common law and have not been widely adopted by code-law countries.

MULTIPLE CHOICE

1. Companies in debt-oriented countries treat their annual report

a. as an tool for attracting investors

b. as an expensive but necessary means of enticing favorable treatment from banks

c. as a public relations requirement for projecting a positive image

d. as a Spartan, matter-of-fact document

2. In debt-oriented countries, companies tend to:

a. fear that the market will punish poor performance numbers

b. underreport earnings

c. make their numbers as positive as possible

d. both a. and c.

3. In equity-oriented countries, companies tend to:

a. fear that the market will punish poor performance numbers

b. underreport earnings

c. make their numbers as positive as possible

d. both a. and

4. The notions of true and fair and fairly presented financial statements are associated with the use of accounting methods that reflect:

a. economic substance

b. the legal form of the transaction

c. both a. and b.

d. generally accepted principles

5. Major challenges facing accounting globally include:

a. environmental and social impact of business decisions

b. quality of financial reporting in emerging countries

c. single currency movement in the European Union

d. both a. and b

CHAPTER 2QUESTIONS

TRUE/FALSE

1. Accounting harmonization, according to its critics, is a form of accounting colonialism.

2. The Multijurisdictional Disclosure System negotiated between the SEC in the United States and Canadian regulators has proven the viability of the bilateral approach to harmonization.

3. Both US GAAP and IFRS require improvements in a number of important areas.

4. The FASB favors the creation of a US variant to IFRS by adjusting IFRS to fit with existing US GAAP.

5. The FASB advocates creating a long term period during which US companies may choose between US GAAP and IFRS.

MULTIPLE CHOICE

1. The term accounting harmonization refers to the reduction of differences in financial reporting practices among countries, while accounting convergence:

a. refers to moving toward a single set of global standards

b. means moving to two sets of standards, one for developed and another for developing nations

c. has same definition as harmonization

d. none of the above

2. Pressures to harmonize are driven by:

a. feelings of nationalism

b. investors concerned about the reliability of financial statements from foreign countries

c. debate about rules-based versus principles-based accounting standards

d. b. and c.

3. Obstacles to harmonization are driven by:

a. feelings of nationalism

b. investors concerned about the reliability of financial statements from foreign countries

c. debate about rules-based versus principles-based accounting standards

d. b. and c.

4. The organization that has emerged as the main vehicle for global accounting harmonization is:

a. the PCAOB

b. the FASB

c. the IASB

d. the IOSCO

5. The transitioning from US GAAP to IFRS in the United States is being done through a two-pronged approach referred to as:

a. improve and converge

b. improve and adjust

c. improve and harmonize

d. none of the above

CHAPTER 3

Problems:

1) Information related to Company ABC (British subsidiary) include the following:

British pound sterling (millions)

a) Net Sales 12,051

b) Gross Profit 4,891

c) Income before taxes 2,015

d) Net Income 1,252

Assume the following exchange rates for the year (US dollars per British pound

sterling):

1st qtr $1.73

2nd qtr $1.62

3rd qtr $1.55

4th qtr $1.52

Using each exchange rate, convert the financial metrics above into US dollars.

Determine which exchange rates produce the most and least favorable results

in US dollars

2) Company ABC purchased equipment worth 11.1M Euros from an Italian co

at the beginning of the year. The transaction was denominated in Euros. The

exchange rate at the time was US $1.40 = 1 Euro. However, due to a weaker

economy, the dollar strengthened against the Euro resulting in an exchange

rate of US $1.31 = 1 Euro at year end.

a) Determine the transaction gain/loss that Company ABC will report in its

year-end income statement

b) Determine the transaction gain/loss that the Italian company will report

in the year-end income statement