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CHAPTER 18 International Accounting Issues 1. The person responsible for providing information to users of financial information is the _____. a. treasurer b. auditor c. financial statement regulator d. controller Answer: d. controller 2. The most important source of influence on accounting in the United States is _____. a. investors b. creditors c. broadly based shareholders who own small blocks of stock d. employees Answer: a. investors 3. Accounting standards are set in the United States by the _____. a. International Accounting Standards Board b. Financial Accounting Standards Board c. Securities and Exchange Commission d. Senate Finance and Accounting Committee Answer: b. Financial Accounting Standards Board 4. Marks & Spencer follows which type of financial statement format? a. assets + liabilities = shareholders' equity b. assets = liabilities + shareholders' equity c. fixed assets + current assets – current liabilities – noncurrent liabilities = capital and reserves d. fixed assets – net current assets = liabilities + capital and reserves. Answer: c. fixed assets + current assets – current liabilities – noncurrent liabilities = capital and reserves 5. The accounting value that relates to issues such as how to present financial information and discuss financial results is known as _____. a. measurement b. conservatisim c. disclosure d. optimism Answer: c. disclosure 6. The degree of caution companies display in valuing assets and recognizing income is known as _____. a. conservatism b. transparency c. measurement d. disclosure Answer: a. conservatism 7. Countries that tend to be more liberal in their recognition of income practice the accounting value of _____. a. conservatism b. optimism c. measurement d. disclosure Answer: b. optimism 8. How would you classify the accounting values of companies from the United States and the United Kingdom in terms of their measurement and disclosure of financial information? a. secret and transparent b. transparent and optimistic c. secret and conservative d. conservative and optimistic Answer: b. transparent and optimistic 9. The accounting principle that relates to more, rather than less, extensive footnotes in reports is known as _____. a. secrecy b. measurement c. conservatism d. transparency Answer: d. transparency 10. Which of the following most accurately reflects the values of secrecy and transparency in accounting? a. Japan is more similar to the United States and the United Kingdom than the Germanic countries in terms of secrecy. b. Germanic countries tend to be less transparent than the United States and the United Kingdom. c. Secrecy and transparency refer to the degree of caution companies display in valuing assets and recognizing income. d. Companies that list on stock exchanges tend to be more secret than those that do not because of the potential adverse impact on stock prices of disclosing information. Answer: b. Germanic countries tend to be less transparent than the United States and the United Kingdom. 11. Which is the quadrant where you are more likely to find less-developed Latin countries in terms of measurement and disclosure of their companies' financial information? a. conservatism and secrecy b. transparency and conservatism c. secrecy and transparency d. optimism and secrecy Answer: a. conservatism and secrecy 12. The Asian financial crisis demonstrated that most Asian countries fit in which quadrant in terms of measurement and disclosure of financial information? a. transparency and optimism b. transparency and conservatism c. secrecy and optimism d. secrecy and transparency Answer: d. secrecy and transparency 13. Which accounting systems are shaped more by government practice? a. macro-uniform accounting systems b. micro-based systems c. pragmatic business practice systems d. business economic theory systems Answer: a. macro-uniform accounting systems 14. Which accounting systems are shaped more by pragmatic business practices? a. macro-uniform accounting systems b. micro-based systems c. law-based systems d. tax-based systems Answer: b. micro-based systems 15. From an accounting perspective, countries with strong equity markets and shareholder orientations tend to be _____. a. macro-uniform systems b. micro-based systems c. law-based systems d. tax-based systems Answer: b. micro-based systems 16. From the perspective of the classification of accounting systems, German and Japanese companies tend to be _____. a. micro-based countries b. strong equity market countries c. weak equity market countries d. pragmatic business countries Answer: c. weak equity market countries 17. Financial statements must include _____. a. the actual financial statements and accompanying footnotes b. translations into the languages of every country where the company lists shares c. different currency results to reflect the different countries where the company has investments or generates revenues d. different reports detailing the differences in generally accepted accounting principles used by the company in different countries Answer: a. the actual financial statements and accompanying footnotes 18. Foreign exchange is a major issue in financial statements, because _____. a. the Internet can handle financial statements in only one currency, not several currencies b. translation software can handle only the currency of the language into which the financial statements are translated c. companies tend to use the currency of the home country for their financial statements issued to the public d. companies that translate their financial statements into English are required by the International Accounting Standards Board to provide financial information in U.S. dollars Answer: c. companies tend to use the currency of the home country for their financial statements issued to the public 19. Underlying GAAP is a problematic area in financial statements, because _____. a. stock exchanges around the world require that all companies that list on their exchanges use the GAAP of their country b. more companies are using the Internet to issue their financial statements c. the United States does not permit foreign companies to reconcile their GAAP to U.S. GAAP when listing on U.S. stock exchanges d. a major hurdle in raising capital in different countries is dealing with widely varying accounting and disclosure requirements Answer: d. a major hurdle in raising capital in different countries is dealing with widely varying accounting and disclosure requirements 20. The United Kingdom is based primarily on which of the following types of accounting systems? a. tax based b. legal based c. macro based d. micro based Answer: d. micro based 21. A major force leading to convergence of accounting standards is _____. a. a shareholder orientation b. the global separation of capital markets c. MNEs' needs for foreign capital d. the need to increase accounting and reporting costs due to accounting differences worldwide Answer: c. MNEs' needs for foreign capital 22. The global integration of capital markets _____. a. is a major force leading to the convergence of accounting standards b. is a counterforce to regional political and economic harmonization c. is being led by the strengthening of worldwide unions rather than investors d. is highlighting the importance of maintaining differences in accounting worldwide Answer: a. is a major force leading to the convergence of accounting standards 23. The most ambitious effort to converge accounting standards worldwide is being led by the _____. a. European Union b. International Accounting Standards Board c. U.N. Centre on Accounting Harmonization d. U.S. Securities and Exchange Commission Answer: b. International Accounting Standards Board 24. Which of the following is true concerning the International Accounting Standards Board? a. It is an institution of the European Union designed to harmonize accounting in EU member countries. b. The EU has voted to not adopt IFRS issued by the IASB so that it will not hurt its own convergence efforts. c. The IASB and the FASB of the United States are working closely to harmonize accounting standards. d. FASB has been ordered by the SEC to not work with the IASB in setting accounting standards. Answer: c. The IASB and the FASB of the United States are working closely to harmonize accounting standards. 25. For U.S. companies, foreign currency denominated receivables and payables give rise to exchange gains and losses _____. a. at the end of each accounting period b. only when the dollar strengthens against the foreign currency c. only when the dollar weakens against the foreign currency d. whether the transactions are denominated in dollars or the foreign currency Answer: a. at the end of each accounting period 26. Assume that a U.S. company exports merchandise to Canada and that the transaction is denominated in U.S. dollars. How would the company account for the receivable if the U.S. dollar changes against the Canadian dollar? a. It would recognize a gain if the U.S. dollar weakens. b. It would recognize a gain if the Canadian dollar weakens. c. It would recognize a loss if the Canadian dollar weakens. d. It would recognize neither a gain nor a loss. Answer: d. It would recognize neither a gain nor a loss. 27. How do U.S. companies recognize transaction gains and losses in the financial statements? a. They are recognized as gains and losses in the income statement. b. They are recognized as gains and losses in owners' equity. c. Gains are recognized in the income statement, but losses are not. d. Losses are recognized in the income statement, but gains are recognized in owners' equity. Answer: a. They are recognized as gains and losses in the income statement. 28. At which exchange rate does a firm initially record a foreign currency transaction according to U.S. GAAP? a. at the forward rate b. at the spot rate at the date of the transaction c. at the spot rate at the time the money is paid d. at the average exchange rate for the period Answer: b. at the spot rate at the date of the transaction 29. The process of restating foreign currency financial statements from one currency into another is known as _____. a. consolidation b. translation c. conversion d. recognition Answer: b. translation 30. The process of combining financial statements of different subsidiaries into one statement is known as _____. a. conversion b. translation c. consolidation d. recognition Answer: c. consolidation 31. According to the translation process in the United States, _____. a. companies first translate their statements into dollars, and then recast their financial statements consistent with U.S. GAAP b. companies recast their financial statements consistent with U.S. GAAP, and then translate them into U.S. dollars c. companies need to worry about only the translation process because local operations take place in a local GAAP environment d. companies translate foreign currency financial statements only if the dollar is weakening against the local currency Answer: b. companies recast their financial statements consistent with U.S. GAAP, and then translate them into U.S. dollars 32. Translation of foreign currency financial statements is _____. a. the process of restating foreign currency financial statements from one currency into another b. the process of combining financial statements of different subsidiaries into one statement c. the conversion of foreign currencies into the U.S. dollar d. easier when the foreign currency is the euro Answer: a. the process of restating foreign currency financial statements from one currency into another 33. The translation method used when the functional currency is the local currency is the _____. a. current-rate method b. temporal method c. translate-restate method d. consolidation method Answer: a. current-rate method 34. The translation method used when the functional currency is the parent currency is the _____. a. current-rate method b. temporal method c. translate-restate method d. consolidation method Answer: b. temporal method 35. Assume that a U.S.-based MNE has operations in Germany and that the revenues and expenses are mostly incurred in euros. Which translation method do you think they should use? a. current-rate method b. temporal method c. translate-restate method d. consolidation method Answer: a. current-rate method 36. If a U.S.-based MNE translates its German subsidiary's financial statements from euros into dollars using the current rate method, how would it recognize translation gains and losses? a. Gains and losses would be taken to the income statement. b. Gains and losses would be recognized on the balance sheet in owners' equity. c. Gains and losses are not recognized since the financial statements are in dollars. d. There are transaction gains and losses but not translation gains and losses. Answer: b. Gains and losses would be recognized on the balance sheet in owners' equity. 37. Environmental reports issued by companies typically cover _____. a. how to increase the emission of greenhouse gases b. ways that the company avoids recycling waste products in order to increase shareholder value c. the use of natural resources d. all of the ways that companies harm the environment Answer: c. the use of natural resources 38. Company reports that focus on the use of natural resources are _____. a. known as environmental reports b. required to be issued by the Securities and Exchange Commission c. contained in the financial statements and footnotes of companies' annual reports d. relatively standardized due to a recent ruling by the International Accounting Standards Board Answer: a. known as environmental reports 39. Efforts that companies undertake to reduce the emission of greenhouse gases are usually found in the _____. a. financial statements b. footnotes to the financial statements c. social income statements d. environmental report Answer: d. environmental report 40. Stora Enso, the large Finnish timber company, _____. a. provides little concrete information about the impact of the firm in its sustainability report b. notes in its sustainability report that it is good to preserve the environment, but it is not possible to formulate targets that can be reliably measured c. discusses the sustainability of fibre sources, but it is strangely silent on the company's efforts to combat climate change d. issues a fairly comprehensive sustainability report that includes information on environmental and social issues Answer: d. issues a fairly comprehensive sustainability report that includes information on environmental and social issues 41. When using a budget to measure performance of a foreign subsidiary, companies must _____. a. use the U.S. dollar to set the budget and monitor performance b. decide which currency to use to set the budget and monitor performance c. translate actual results into dollars, no matter what currency is used to set the budget d. determine what the target is for ROI in order for the budget to be effective Answer: b. decide which currency to use to set the budget and monitor performance 42. It is good to set the budget at a projected exchange rate, because _____. a. that is a rate determined by the market b. the projected rate is usually the same as the spot rate on the date the projection is made c. the projected rate is more likely to be closer to the actual rate at the end of the period than the original spot rate is d. it is the only rate that can be used to compare with the actual exchange rate at the end of the period Answer: c. the projected rate is more likely to be closer to the actual rate at the end of the period than the original spot rate is 43. Using the same exchange rate to set the budget and monitor results _____. a. allows management to focus on operating variances instead of exchange-rate variances b. allows management to focus on both operating and exchange-rate variances c. is not used very often because the FASB does not permit that method for external reporting purposes d. is the only method that can be used in Europe Answer: a. allows management to focus on operating variances instead of exchange-rate variances 44. The most widely used approach to translate budgets and compare with performance _____. a. uses the actual rate at the beginning of the budget period b. uses the forecast of the exchange rate c. uses the actual rate at the end of the period and continuously updates the rate for changes that take place d. avoids taking into consideration exchange rates Answer: b. uses the forecast of the exchange rate 45. The price on the sale of goods from one member of a corporate family to another is known as _____. a. a transfer price b. a sale/resale price c. a global price d. a multidomestic price Answer: a. a transfer price 46. Transfer prices are _____. a. always based on production costs b. the prices on goods transferred from one country to another c. regulated by the United Nations so as to avoid manipulation d. can influence performance evaluation if a manager has no control over them Answer: d. can influence performance evaluation if a manager has no control over them 47. Due to conflicting reasons for setting transfer prices, _____. a. it is important for companies to establish prices at the headquarters level so that local managers cannot influence them b. it is difficult for top management to select the correct prices c. it is always best to set prices that permit funds to travel from headquarters to the local countries d. it is best to set prices that permit funds to travel from the local countries to headquarters where better decisions can be made over their use Answer: b. it is difficult for top management to select the correct prices 48. When a parent company wishes to lower the apparent profitability of a subsidiary, _____. a. it is best to set an arms'-length transfer price b. it is easier to let local management set the transfer price c. high transfer prices should be set on goods shipped to the subsidiary d. high transfer prices should be set on goods shipped from the subsidiary to headquarters Answer: c. high transfer prices should be set on goods shipped to the subsidiary 49. A measurement technique that closely links the strategic and financial perspectives of a business is known as _____. a. transfer pricing b. auditing c. the balanced scorecard d. operational budgeting Answer: c. the balanced scorecard 50. The balanced scorecard is _____. a. when a company strikes a balance between high and low transfer prices b. an approach to performance measurement c. used widely by U.S. firms but not European firms d. not very successful at linking financial and nonfinancial performance Answer: b. an approach to performance measurement 51. Which of the following is one of the benefits of using the balanced scorecard approach? a. It helps managers avoid using only one measure of performance b. It avoids using financial drivers so that it can focus on nonfinancial drivers. c. It avoids using nonfinancial drivers so that it can focus on financial drivers. d. It is separate from the strategic management system so that it can focus on financial measures. Answer: a. It helps managers avoid using only one measure of performance 52. In the balanced scorecard, the perspective that focuses on the priorities to create a climate supporting organizational change and initiative is known as the _____. a. financial perspective b. customer perspective c. internal business process perspective d. learning and growth perspective Answer: d. learning and growth perspective 53. The controller does not need to worry about different currencies and accounting systems, because the company always reports to the external public in the parent currency. Answer: False 54. Both the form and content of financial statements are the same in both countries due to the convergence of accounting implemented by the International Accounting Standards Board. Answer: False 55. Germanic and Japanese companies tend to be more optimistic than U.S. and U.K. companies. Answer: False 56. European companies that adopt International Financial Reporting Standards are becoming more transparent and optimistic in their financial reporting. Answer: True 57. U.S. and U.K. companies tend to be more transparent than Japanese companies. Answer: True 58. Germanic companies tend to be more secretive than U.S. companies in terms of the disclosure of financial information. Answer: True 59. The Netherlands is an example of a country that is micro-based from an accounting perspective, as opposed to macro-uniform based. Answer: True 60. Countries that are macro-uniform based from an accounting perspective tend to rely more on pragmatic business practice to set accounting standards. Answer: False 61. Mutual recognition means that when a company lists its shares on a foreign stock exchange, it must reconcile its financial statements to the GAAP of that country. Answer: False 62. Currency is a major issue in financial reporting, because companies must decide in which currency to present their financial information to the general public. Answer: True 63. The International Accounting Standards Board comprises professional accounting bodies and is attempting to harmonize accounting standards through issuing International Financial Reporting Standards. Answer: True 64. FASB and the IASB are not trying to converge their accounting standards due to a difference of opinion as to what constitutes accounting. Answer: False 65. According to U.S. GAAP, companies recognize transaction gains and losses in the income statement. Answer: True 66. Foreign exchange losses are recognized in the income statement, but foreign exchange gains are not. Answer: True 67. Translation of foreign currency financial statements is the process of restating foreign currency financial statements from one currency into another. Answer: True 68. Conversion is the process of combining financial statements of different subsidiaries into one statement. Answer: False 69. If a U.S.-based company has a subsidiary in France, and its cash flows are primarily in euros, it would translate its financial statements using the temporal method. Answer: False 70. The Financial Accounting Standards Board and International Accounting Standards Board allow firms to use the current-rate method or the temporal method to translate foreign currency financial statements into the currency of the parent company. Answer: True 71. Environmental reports are not typically contained in the financial statements and footnotes. Answer: True 72. Environmental reports are standardized worldwide due to an accounting standard issued by the Financial Accounting Standards Board and accepted by the International Accounting Standards Board. Answer: False 73. U.S.-based MNEs are not permitted to set budgets and monitor results using the same exchange rate. Answer: False 74. The most widely used approaches to translate budgets and compare with performance use forecasts of the exchange rate. Answer: True 75. A transfer price is a price set on the transfer of goods and services between members of a corporate family. Answer: True 76. The challenge with setting an optimal transfer price is that there could be conflicting conditions in the local country. Answer: True 77. The balanced scorecard is an approach to performance measurement that closely links the strategic and financial perspectives of a business. Answer: True 78. A major problem with the balanced scorecard is that it does not link financial performance with a firm's nonfinancial drivers. Answer: False 79. What is the role of the controller in an MNE, and what are some of the challenges that a controller faces in an international environment? Answer: The controller is responsible for providing information to financial decisionmakers. He/she falls under the responsibility of the chief financial officer of a company and generates reports for internal consideration, local government needs, creditors, employees, suppliers, stockholders, and prospective investors. The controller has to worry about accounting requirements in different countries as well as inflation and exchange rates. 80. How do the cultural values of optimism versus conservatism and transparency versus secrecy affect country differences in accounting systems? Answer: A major source of influence on accounting standards and practices is culture. Of special interest to international inventors are the differences in measurement and disclosure practices among countries. With respect to accounting, secrecy and transparency indicate the degree to which companies disclose information to the public. Countries such as Germany, Switzerland, and Japan tend to have less disclosure than do the United States and the United Kingdom. Optimism and conservatism are the degree of caution companies exhibit in valuing assets and recognizing income. Countries more conservative from an accounting point of view tend to understate assets and income, whereas optimistic countries tend to be more liberal in their recognition of income. 81. Discuss five major forces that influence accounting practices. Answer: Pick from among the following list of factors: enterprise users, accounting profession, international influences, government, academic influences, characteristics of the local environment, the nature of the enterprise, and other external users. 82. Explain the difference between macro-uniform based and micro-based accounting systems. What are some examples of countries that fit in each system? Answer: Macro-uniform systems are shaped more by governmental influence than are micro-based systems. The major accounting influences on countries that fit into the macro-uniform category are a strong legal system, specifically a codified legal system, and tax law. These systems also tend to be more conservative and secretive about disclosure. Japan and Germany are legal-based systems, and Spain and France are tax-based systems. The former and current centrally planned economies would also fit in the macro category. Micro-based systems include features that support pragmatic business practice and have evolved from the British system. The United States is an example of a country that fits in the "micro" category. It exhibits more optimism and transparency than countries in the "macro" category, and it also relies less on legal and tax requirements than Germany, France, and Japan. 83. What are some of the major ways that financial statements of one country differ from those in another country? Answer: Some of the ways that financial statements differ is language; currency; type of financial statements (income statement, balance sheet, etc.); financial statement format; extent of footnote disclosures; and underlying GAAP on which the financial statements are based. 84. In a short essay, discuss the major forces leading to a harmonization of differences in accounting standards. Answer: Despite the many differences in accounting standards and practices, a number of forces are leading to harmonization, such as: a. a movement to provide information compatible with the needs of investors. b. the global integration of capital markets, which means that investors have easier and faster access to investment opportunities around the world and therefore need financial information that is more comparable. c. the need of MNEs to raise capital outside of their home-country capital markets while generating as few different financial statements as possible. d. regional, political, and economic harmonization, such as the efforts of the EU, which affects accounting as well as trade and investment issues. e. pressure from MNEs for more uniform standards to allow greater ease and reduced costs in general reporting in each country. 85. What are the two major approaches used to translate foreign currency financial statements, and how are translation gains and losses reported under these two approaches? Answer: Statement No. 52 allows companies to use either of two methods when translating foreign currency financial statements into dollars: the current-rate method or the temporal method. The method that the company chooses depends on the functional currency of the foreign operation, which is the currency of the primary economic environment in which that entity operates. If the functional currency is that of the local operating environment, the company must use the current-rate method. The current-rate method provides that companies translate all assets and liabilities at the current exchange rate, which is the spot exchange rate on the balance sheet date. All income statement items are translated at the average exchange rate, and owners' equity is translated at the rates in effect when the company issued capital stock and accumulated retained earnings. If the functional currency is the parent's currency, the MNE must use the temporal method. The temporal method provides that only monetary assets and liabilities are translated at the current exchange rate. The company translates inventory and property, plants, and equipment at the historical exchange rates, the exchange rates in effect when the assets were acquired. In general, the company translates most income statement accounts at the average exchange rate, but it translates cost of goods sold and depreciation expenses at the appropriate historical exchange rates. 86. Explain how companies prepare and investors use environmental reports. Answer: Typically, the environmental report is separate from the annual report and is not part of the financial statements or footnotes. Although it provides a general statement on its environmental programs, it does not provide a significant amount of quantitative information. Environmental reporting varies from company to company and country to country, especially because it is voluntary information. 87. How do exchange rates affect budgets used to evaluate performance in MNEs? Answer: The major challenge is currency. Companies need to determine which exchange rate to use to set the initial budget, and which rate to use to evaluate performance. If the company uses the actual rate at the time the budget is set, it can use that same rate to evaluate performance or use the actual rate in effect during the actual period. In the first case, it will not have an exchange-rate variance. In the second case, it will have a variance that is the difference between the initial exchange rate and the actual rate during the relevant period. Or, the company can use a forecast rate to set the budget so that it can more closely anticipate what the actual rate will be. If it uses a forecast rate, it can use the same rate to translate results, which means it will not have an exchange-rate variance. Or it can use actual rate at the end of the period to translate actual results, which will result in a foreign exchange variance, the difference between the forecast rate and the end-of-period actual rate. Test Bank for International Business: Environments and Operations John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan 9780131869424, 9780201846188, 9780130308016, 9780201566260, 9780201107135, 9780132668668
