chapter 21- accounting and finance in Int business

Question 1

international accounting

Answer 1

• accounting is the language of business
• it is a way firms communicate their financial positions
• income statements are critical within a company and to investors/management… provide insights on profitability

Question 2

accounting is more complex for international firms bc of:

Answer 2

• differences in accounting standards from country to country
• differences make it difficult for investors, creditors, and govs to evaluate firms

*it is difficult to compare financial reports from country to country bc of national difference in accounting and auditing standards

Question 3

accounting standards

Answer 3

• rules for preparing financial statements (income statement, balance sheet, etc)
• they define useful accounting info

Question 4

auditing standards

Answer 4

• specify the rules for performing an audit
• the practice to evaluate and verify the accounting standards are being upheld/reliable
• the technical process by which an independent person gathers evidence for determining if financial accounts conform to required accounting standards and also re reliable

*accounting standards and auditing standards go hand in hand

Question 5

describe the international differences in accounting standards

Answer 5

• the relationship between business and the providers of capital (banks/lendors)
• political and economic ties with other countries- moving toward standardization
• the level of inflation impacts financial reporting
• the level of a country’s economic development
• the prevailing culture in a country- business practices, corruption, etc

Question 6

accounting standards reality

Answer 6

• developed nations have sophisticated accounting systems
• while developing nations have systems inherited from former colonial partners

Question 7

the growth of transnational financing and transnational investment:

Answer 7

• many companies obtain capital from foreign providers who are demanding greater consistency

Question 8

standardization of accounting practice across national borders is probably in the best interest of the world economy:

Answer 8

• it will facilitate the development of global capital markets
• international accounting standards board (IASB)

Question 9

international accounting standards board (IASB)

Answer 9

• trying to move everyone to one standardized approach and the IASB is instrumental in this process
• slow process bc most counties want to keep their practices

Question 10

control process in most firms:

Answer 10

• usually conducted annually and involves three steps:
  1.) subunit goals are jointly determined by the head office and subunit management
  2.) the head office monitors subunit performance throughout the year
  3.) the head office intervenes if the subsidiary fails to achieves its goal and takes corrective actions if necessary

Question 11

budgets and performance data:

Answer 11

• usually expressed in the corporate currency
• normally converted back into the home currency
  - facilitates comparisons between subsidiaries but,
  - can create distortions in financial statements bc fails to take in account currency exchange rate

Question 12

subsidiaries

Answer 12

• operate in different environments, which influence profitability
• the evolution of a subsidiary should be kept separate from the evolution of its manager

Question 13

a managers evolution

Answer 13

• should consider the country’s environment for business
• take place after making allowances for those items which managers have no control

Question 14

financial management involves:

Answer 14

1.) investment decisions: WHAT to finance
2.) financing decisions: HOW to finance those decisions
3.) money management decisions: how to manage the firms financial resources most EFFICIENTLY

Question 15

good financial management:

Answer 15

• can create a competitive advantage
• reduces the costs of creating value and adds value by improving customer service

Question 16

decisions in international business:

Answer 16

• are more complex
• different currencies, tax regimes, regulations on capital flows, economic and political risk etc

Question 17

making investment decisions- spending money

Answer 17

• financial managers must quantify the benefits, costs, risks associated with an investment in a foreign country
• capital budgeting
• political and economic risks
• cash flows to the parent may be lower bc of host country limits on the repatriation of profits, host country local reinvestment requirements etc

Question 18

capital budgeting

Answer 18

• involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value

Question 19

political and economic risks

Answer 19

• expropriation of firms assets (dispossessing someone of property)
• economic mismanagement- biggest risk is inflation

Question 20

adjusting for political and economic risks

Answer 20

• firms analyzing foreign investment opportunities can adjust for risk by:
  1.) raising the discount rate (discounting the cash flow) in countries where political and economic risk is high
  2.) lowering future cash flow estimates to account for adverse political or economic changes that could occur in the future

Question 21

making financial decisions- how will the foreign investment be financed?

Answer 21

• the cost of capital (interest rates from diff banks) is usually lowest in the global capital market (opportunity cost)
• but, some govs require local debt or equity financing
• firms that anticipate a depreciation of the local currency

Question 22

making financial decisions- how the financial structure (debt vs. equity) of the foreign affiliate should be configured

Answer 22

need to decide whether to adopt local capital structure norms or maintain the structure used in the home country

Question 23

transfer price

Answer 23

• the price at which goods and services are transferred
• often used to maximize tax liabilities, import duties, avoid gov restrictions
• the cost paid within a firm for goods/services

Question 24

value of intrafirm transactions is high

Answer 24

firms are continually shipping component parts and finished goods between subsidiaries in diff countries
- want to minimize (bc of currency exchange rates) the amount of interactions (intrafirm)

Question 25

money management

Answer 25

• decisions attempt to manage global cash resources efficiently
• want to minimize number of transactions bc every transactions involves price associated with converting the currency (multilateral netting)

Question 26

multilateral netting

Answer 26

reducing the number of transactions between the subsidiary and firm to reduce transaction costs

Question 27

sample questions

Answer 27

T/F: financial decisions made by international businesses are more complex due to currency exchange rates among other reasons

ANSWER: TRUE

Question 28

what is an accounting problem that many int businesses face that domestic businesses may not?

Answer 28

A.) lack of consistency in the auditing standards
B.) inaccurate filing of profit-and-loss statements
C.) false reporting of income to the gov
D.) lack of a dedicated accounting function within the firm

ANSWER: A