CHAPTER 15 GLOBAL BUSINESS AND ACCOUNTING

OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES

Brief Exercises B. Ex. 15.1 B. Ex. 15.2 B. Ex. 15.3 B. Ex. 15.4 B. Ex. 15.5 B. Ex. 15.6 B. Ex. 15.7 B. Ex. 15.8 B. Ex. 15.9 Learning Objectives 4 4, 5 4 5 5,6 4 2 5, 6 4

Topic Foreign currency translations Purchases in a foreign currency Currency strength Exchange rate fluctuations Currency choice Currency strength and gains and losses Culture effects on business Currency fluctuation effects Exchange rate computation

Skills Analysis Analysis, communication Analysis Analysis, communication Analysis, communication Analysis, communication Analysis, judgment Analysis Analysis

Exercises 15.1 15.2 15.3 15.4 15.5

Topic Global business terminology External financial reports and globalization Understanding exchange rate conversion Locating international business information Real World: Airbus, Nikon, Toyota Currency fluctuations: who wins and who loses? Foreign currency transaction Harmonization around the world

Learning Objectives Skills 18 Analysis 1, 2 Analysis, research, technology 4 Analysis 2, 7, 8 Analysis, research, judgment 2, 5 Analysis, communication

15.6 15.7

4, 5 3

Analysis Analysis, research, technology Analysis, judgment Analysis

15.8 15.9

Real World: adidas AGs International expansion Matching foreign exchange gains and losses

1, 2 5

15.10

Real World: Global sourcing costs for Mattel, Inc.

4, 7

Analysis

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Exercises 15.11 15.12 15.13

Topic Financial statement harmonization Real World: Honda Motor Company Use of U.S. GAAP or IFRS Comparing environmental factors

Learning Objectives Skills 2, 3 Analysis 3 Analysis, judgment 2 Analysis, research, judgment

Problems Sets A, B 15.1 A,B 15.2 A,B 15.3 A,B 15.4 A,B 15.5 A,B 15.6 A,B 15.7 A,B 15.8 A

Topic Exchange rates and export decisions Journalizing exchange rate gains and losses Exchange rates and income effects Exchange rates and production decisions Understanding trade agreements Comprehensive problem journalizing exchange rate effects FCPA violations Real World: adidas AGs globalization

Skills 4, 5, 7 1, 46 47 4, 7 2, 7 46 8 1, 2, 6, 7 Analysis Analysis, communication Analysis, communication Analysis Analysis, research, technology Analysis Analysis, judgment Analysis, judgment, research

Critical Thinking Cases Globalization decisions are complex 15.1 15.2 15.3 Disclosure requirements International demand for corporate governance (Ethics, fraud and corporate governance)

1, 2 2, 3, 5 2, 3

Analysis, judgment Analysis, communication, judgment Analysis, research, communication

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DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES

Below are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers. Problems (Sets A and B) 15.1 A,B Cramer Cookie Company/Monster Cookie Company Demonstrate how differences in costs and exchange rates between countries can impact the profits earned from exportation. The student must calculate the forecasted amount of profits to be earned from two alternative export locations and consider how exchange rate volatility may impact the decision of which export location to choose. 15.2 A,B Europa-West/Euroam Prepare journal entries to record payment of liabilities stated in krona. Involves recognition of both gains and losses from fluctuations in exchange rates. Student is asked to explain a hedging technique that would protect the company from losses from exchange rate fluctuations. Wallerton, Inc./Jelton, Inc. Students investigate the impact of three exchange rate projections on the income statement. Provides insights into how a strengthening foreign currency impacts earnings. Ulsa Company/Alsu Company Students calculate profits to be earned in two different production and selling locations. In addition to differences in production costs, the student must consider the costs of foreign import duties and income taxes. NAFTA vs. ASEAN Initiative /NAFTA vs. CAFTA DR This is an unstructured problem that asks students to research an international trade agreement and compare and contrast its requirements/restrictions with those of NAFTA. Designed to be a group writing assignment or presentation exercise. Wolfe Computer/Fox Games A more comprehensive problem involving gains and losses on both receivables and payables stated in foreign currencies. Student is also asked to explain techniques for hedging against losses on foreign payments and foreign receivables.

30 Medium

25 Easy

15.3 A,B

40 Strong

15.4 A,B

40 Medium

15.5 A,B

90 Strong

15.6 A,B

40 Strong

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15.7 A,B

FCPA Violations Students are asked to assess four business activities for violation of the FCPA. They also consider whether the activities are good business practices and if alternative activities should be considered. Home Depot's Globalization This problem demonstrates how the financial statements of a company can be used to assess its level of globalization. By evaluating the number of countries with operations; the percentage of sales and assets from foreign sources; and the foreign taxes paid, an investor can form an opinion about a firms level of globalization.

30 Medium

15.8 A

40 Medium

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Critical Thinking Cases 15.1 Bristow Limited Presents several options a firm has for increasing its presence in a foreign location. The student considers what factors are useful in deciding the option most beneficial to the firm. Also demonstrates that different options result in different informational needs. 15.2 International Accounting Standards Given a set of arguments for and against harmonization of international accounting practices, the student is asked to write a one-page summary of his/her opinions regarding the issue. Inside Japan Business Week Students will think and write about how environmental variables affect the accounting profession in Japan. In addition, students practice writing and group skills by assessing whether Japanese accounting standards are becoming more like U.S. standards.

40 Medium

50 Medium

15.3

70 Strong

15.4

International Demand for Corporate Governance Ethics, Fraud & Corporate Governance Using the OECD Web site, students are asked to write a short paper about global efforts to create corporate governance.

30 Medium

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1. Different accounting standards have been developed in various countries because of differences in: Legal and political systems Economic environments Levels of stability of the currency 2. The International Accounting Standards Board (IASB) was formed by the major accounting organizations of several countries to develop and promote uniform international accounting standards. The board has been unable to obtain global application of its standards because it has no global enforcement power. 3. a. Japan is a collectivist society, meaning that it places a greater emphasis on interdependence than Germany, who tend to be very individualistic. b. Germany's goals are often very short-term, especially in comparison to the Japanese, who place a great amount of reliance on long-term relationships and tradition. c. The Japanese tend to be more risk-adverse and feel quite uncomfortable with uncertainty and ambiguity, whereas Germans tend to be more at ease with uncertainty.

4 . Sweden is an mildly individualistic country. Brazil is a very collectivist society, thus placing more importance on building close relationships and ensuring the success of others. Brazil scores higher on long-term orientation. The Brazilian society places greater emphasis on maintaining tradition and long-term relationships. Brazil scored higher on power distance compared to the Sweden. In Brazil, it is not believed that all people are created equal. Social status plays a key role in the amount of power for an individual in Brazil. 5. The economic system that a company has been operating under determines the type of accounting information collected by the company. Internal accounting information is critical in the valuation of a company. If there are no standards to establish accounting information, then there is no information that can be used in understanding and evaluating the future success of a company and the potential benefits of doing business internationally are highly uncertain. 6. a. Political and legal systems can affect accounting practices because of: Political risk related to unstable governments Changes in regulation or law Changes in taxes, tariffs and fees Different reporting requirement across borders. b. Economic systems affect accounting practices because they: Determine the amount of information available to investors Can be a planned economy (government controlled) Are sometimes industrial organizations, such as the South Korean chaebol

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c.

Culture affects accounting practices because: Peoples perceptions of economic situations differ in different societies Marketing and advertising must be adapted for different cultures Differing mindsets across borders, such as individualistic vs. collectivist societies or large vs. small power distance. d. Technology and infrastructure affect accounting practices because: Without technology, communication between different groups is very difficult Lack of significant infrastructure poses potential problems for international transactions, such as limited communication and unreliable power.

7 In some other countries, it is not explicitly illegal to engage in bribery of foreign officials. As a result, some U.S. companies maintain that they are at a disadvantage in obtaining business when they compete with companies located in countries without a prohibition against such bribes. 8 Two ways that a company making purchases on account from foreign companies can protect itself against the risk of losses from increases in the exchange rate are: (1) Specify the purchase prices in U.S. dollars. (2) Hedge the position of foreign currency indebtedness by acquiring an offsetting position in foreign currency future contracts. Then, any loss resulting from an increase in the foreign exchange rate will be offset by a gain in the value of the future contracts. 9 The globalization of business is a process whereby managers begin to incorporate the impact of international events and activities into their strategic planning. At the most basic level, domestic managers become aware that changes in foreign exchange rates, international technological advances, cultural diversity or international political and economic issues will have an impact on their ability to compete in the future. At higher levels of globalization, firms may become multinational enterprises that produce and sell products in multiple countries. 10 A firms level of globalization determines what types of decisions and strategies it must consider to compete effectively. Management accountants must understand the firms level of globalization in order to know what types of international information is needed to aid in the firms decision making process.

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11. The weakening of the U.S. dollar relative to the euro means that $1 can purchase (or be exchanged for) relatively fewer euros. Likewise, to obtain a given amount of euros will require more U.S. dollars after the weakening. All else equal, a U.S. customer with a fixed amount of dollars to spend will be able to purchase fewer euros, which will lower the quantity of Italian goods that can be acquired. Thus, the overall quantity of Italian goods sold in the U.S. will likely decline. 12. In an international licensing agreement, a domestic firm contractually agrees to allow a foreign firm to use its trademarks, patents, technology, designs, or processes, usually in exchange for a fee. An international joint venture is a company that is owned by two or more firms from different countries. 13. Current IASB members are: Sir David Tweedie (U.K.), Thomas Jones (U.K.), Mary Barth (U.S.), Hans-Georg Bruns (Germany), Anthony Cope (U.S.), Robert Garnett (South Africa), Gilbert Ge'lard (France), John T. Smith (U.S.), James Leisenring (U.S.), Warren McGregor (Australia), Tricia OMalley (Canada), Jay Engstrom (Sweden), Geoffrey Wittington (U.K.), and Tatsumi Yamada (Japan). Brazil's market is emerging and lacks expertise in accounting standard setting. 14. To maintain the highest level of control over production processes and quality, a firm could choose to simply export its domestically produced goods or establish a wholly-owned subsidiary in the target country. 15. Societies described as individualistic tend to place relatively more importance on individual achievement, accountability, and welfare. Collectivist societies tend to focus on group outcomes and welfare. Financial reports in collectivist societies tend to include disclosures related to societal issues. For example, France requires a social balance sheet detailing pay structure, health and safety conditions, hours worked. 16. High power distance societies generally accept greater differences in authority and responsibility across institutional levels. Low power distance societies expect more liberal distribution of power across organizational levels. Firms operating in high power distance countries tend to have fewer hierarchical levels with large power differences between them. Firms in low power distance countries tend to have more levels with less power differences between them. 17. The French furniture maker bears the (transaction) risk of exchange rate gains and losses since it must obtain Singapore dollars. 18. A foreign trade zone is a location in the U.S. where goods can be imported duty free until they are shipped out of the zone. An advantage to operating in a foreign trade zone is that a firm can maintain working capital until later in the production process. For example, firms that import raw materials from a foreign country do not have to pay duty on it until the finished good is shipped out of the zone.

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19. Hedging is the practice of minimizing or eliminating the risk of loss associated with foreign currency fluctuations. Natural hedging occurs when a firm holds similar amounts of receivables and payables denominated in the same foreign currency. In this way, any gains and losses from exchange rate fluctuations will cancel each other out.

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SOLUTIONS TO BRIEF EXERCISES

B. Ex.15.1 a. $1,394,000 = (800,000 $1.7425 per British pound) b. $2,674 = (350,000 $.00764 per yen) c. $73,790 = (50,000 $1.4758 per euro) a. The Malaysian company will determine the dollar cost of this purchase by translating 2 million pounds into the equivalent value in Malaysian Ringgit. This is done by multiplying the foreign currency amount by the foreign exchange rate, stated in Malaysian Ringgit, in effect at the date of the transaction. b. The conversion of one currency to another is handled by banks in an international currency exchange. The Malaysian company can pay the debt in ringgit through its bank. The bank will use these ringgit to purchase the needed foreign currency (pounds) and will arrange delivery of this currency to the foreign companys bank. No. Although the exchange rate for the British pound is much higher than for the yen, this fact does not necessarily mean that the pound is the stronger currency. The higher rate merely indicates the relative size of the basic unit of the currency. A pound is a relatively large denomination, whereas the yen is relatively small. The strength of a currency is determined by the direction in which the exchange rate has been moving recently. Over the last several decades, the exchange rate for the pound has been falling, but the exchange rate for the yen has been rising. Thus, over this time period, the yen has been a stronger currency than the pound. a. Increasing exchange rates will create gains for a company that makes credit sales at prices set in a foreign currency. As the exchange rates rise, the companys foreign accounts receivable will become equivalent to an increasing number of Singapore dollars. b. Increasing exchange rates will cause losses for a company that makes credit purchases in prices stated in a foreign currency. As the exchange rate rises, the company will have to spend more and more singapore dollars in order to purchase the foreign currency needed to pay off its foreign accounts payable. c. A company that sets its sales prices in Singapore dollars will not have receivables affected by fluctuations in foreign exchange rates. These fluctuations will affect the amounts of foreign currency that the companys foreign customers must pay for their purchases, but they will not affect the number of dollars that the Singaporean company receives. However, an increase in foreign exchange rates may cause a Singaporean companys sales to rise as Singapore prices may become cheaper to foreign buyers.

B. Ex.15.2

B. Ex.15.3

B. Ex.15.4

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B. Ex.15.5

The purchasing agent should prefer to buy at prices stated in Mexican pesos. If the exchange rate for the peso falls while the company has accounts payable (in pesos) to its Mexican suppliers, the company will be able to repay these debts with a smaller number of H.K. dollars, thus experiencing gains from the exchange rate fluctuations. Hutchison should experience primarily gains as a result of the strong H.K. dollar. The phrase the H.K. dollar has risen against most foreign currencies is equivalent to saying that most foreign exchange rates have fallen when stated in H.K. dollars. As Hutchison has accounts payable in foreign currencies, it will experience gains from declines in foreign exchange rates. One example of cultural differences provided on the website is between the Middle Eastern countries and the Western countries, especially the United States. When negotiating in Western countries, the objective is to work toward a target of mutual understanding and agreement and shake-hands when that agreement is reacheda cultural signal of the end of negotiations and the start of working together. In Middle Eastern countries much negotiation takes place leading into the agreement, signified by shaking hands. However, the deal is not complete in the Middle Eastern culture. In fact, it is a cultural sign that 'serious' negotiations are just beginning. Imagine the problems this creates when each party in a negotiation is operating under diametrically opposed rules and conventions. This is just one example why it is critical to understand other cultures you may be doing business withwhether on a vacation in a foreign country, or negotiating a multi-million dollar deal for your company. The Mexican peso decreased in dollar value, so that Bell corporation was able to pay back the payable with pesos that were worth fewer dollars. The British pound increased in dollar value so that Bell Corporation received pounds that were worth more dollars than when the receivable in pounds was recorded.

B. Ex.15.6

B. Ex.15.7

B. Ex.15.8

B. Ex.15.9

Students will need to consult an exchange converter on the internet, either www.x-rates.com or www.currency-exchange-rate.com.

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Ex. 15.1

a. None (this describes an exchange rate) b. Exporting c. International licensing d. Hedging e. None (this describes a market economy) f. International Accounting Standards Board

Ex. 15.2

The answers to this exercise will vary greatly depending on the firm chosen for study. Most of the data required can be obtained by carefully reading the firms annual report(s) or locating articles concerning the firm contained in business periodicals or newspapers. The following answers are provided using exchange rates from August 2008. Student responses will vary depending on current exchange rates. a. 15,000 euros = $22,042.50 b. 7,000 Brazilian reals = $4,278.47,047.72 c. $3,000 = 23,640.30 South African rand d. 150 euros = 241.59 Swiss francs The World Fact Book can be located at:
https://www.cia.gov

Ex. 15.3

Ex. 15.4

a. Indonesias primary imports and exports are manufactured goods, followed by fuels (exports) and raw materials (imports). b. The labor force numbers approximately 109.9 million with a high percentage being literate (over 80%). Most of the labor force is engaged in agricultural occupations (43%); 18% in industry and 39% in services. c. Communication and transportation networks are adequate, but not as extensive as in a fully developed country. d. The government has been trying to encourage free market efforts by following a policy of continued deregulation e. Firms considering locating there must take into account the possibility of political unrest.

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Ex. 15.5

a. Weak euro. Companies that export Europe-made products benefit from a weak dollar, because the higher foreign exchange rates make European goods less expensive for foreign customers. b. Strong euro. A strong dollar means low foreign exchange rates, which, in turn, make foreign goods less expensive for European customers. c. Strong euro. A strong euro (low foreign exchange rates) makes foreign-made goods less expensive to European consumers. Therefore, Japanese imports such as Toyotas are more competitive with European products when the euro is strong. d. Weak euro. A weak euro (high foreign exchange rates) makes European products less expensive to customers who buy these products using a foreign currency. Therefore, European products such as MAN SE trucks will sell better in foreign countries when the euro is weak. e. Strong euro. A strong euro allows European tourists traveling abroad to buy more foreign currency and, therefore, more goods and services in foreign countries. f. Weak euro. Even though this small store has no receivables or payables stated in foreign currency, it still competes with stores selling foreign-made products. A weak euro raises the price of foreign goods to European consumers, thereby making the foreign goods less competitive with Europe-made products.

Ex. 15.6

Answers are in italics: Type of Credit Transaction 1 Sales Purchases Purchases Sales Purchases Column Currency Used in Contract 2 Foreign currency U.S. dollars Foreign currency U.S. dollars Foreign currency Exchange Rate Direction 3 Falling Rising Rising Falling Falling Effect on Income 4 Loss No effect Loss No effect Gain

Case a b c d e Ex. 15.7

a. There are many countries listed on the website from which students can choose. Some examples are Hong Kong, Singapore, and Malaysia. b. Again, there are many countries that do not allow only IFRS financial reports. Examples are U.S., China, Russia, and Bolivia.

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Ex. 15.8

a. The note of goodwill indicates that adidas AG operates in Greater China, Western Europe, Asia and other countries. b. adidas AG needs to comply with legal requirements and consider political risks in each country. Culture will be important in determining what to sell in each country. Each countrys available infrastructure will determine where to open new stores. Finally, the economic environment will affect where new stores will be opened.

Ex. 15.9 Transaction Export Sale Import Purchase Foreign Currency Receivable Payable in Foreign Currency Matching Transaction Letter b a d c Foreign Currency Effect Appreciates Appreciates Depreciates Depreciates Foreign Exchange Gain or Loss Loss Gain Gain Loss

a. b. c. d.

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Ex. 15.10 Ex. 15.11

Answers will vary depending on the current exchange rates.

a. The adjustments to U.S. GAAP were related to revaluations of fixed assets. Revaluations are acceptable under U.K. GAAP, but not under U.S. GAAP where historical costs are required. Thus, profit increases because the revaluations have increased the depreciation expense under U.K. GAAP and thus reduced profit. So to adjust to U.S. GAAP profit the depreciation associated with revaluation must be added back to increase the profit. b. The additions to shareholders equity are associated with the total accumulated depreciation for revaluations, over all the years that revaluations have taken place. c. The deduction to shareholders equity is to reverse the revaluations of the fixed assets.

Ex. 15.12

Honda Motor Company might choose to report their financial results using IFRS because they operate in several countries around the world and thus are interested in raising capital in many locations throughout the world. IFRS is accepted in more countries than U.S. GAAP. However, the U.S. capital market is the largest capital market in the world and thus access to that market is critical. If Honda uses IFRS, they will have to reconcile their statements to U.S. GAAP in order to access U.S. capital markets. Although U.S. GAAP is widely accepted in other capital markets, more and more pressure is being put on the U.S. to converge to IFRS so that they will be compatible. China differs from the U.S. on many environmental factors. First, the U.S. has a market economy and China has a planned economy, although it is moving toward a market economy. In China, the culture tends to be low on individualism, high on uncertainty avoidance and high on power distance. The Chinese communist party controls the political-legal system in China. Finally, the Chinese infrastructure is being modernized, but still lags the U.S. in terms of transportation, education, and technology availability. Accounting practice in China are only recently being developed to support an active capital market. Because China is a planned economy, management accounting practices have not focused on ensuring that companies are profitable. Finally, tax accounting in China is still in its infancy.

Ex. 15.13

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SOLUTIONS TO PROBLEMS SET A

30 Minutes, Medium

PROBLEM 15.1A CRAMER COOKIE COMPANY

a. Profit if sold in the U.S.: Total sales revenue in Danish kroner ($5,200 6.80 kroner/dollar*) Materials and labor costs Shipping costs in kroner ($3,000 6.80 kroner/dollar) Misc. costs in kroner ($400 6.80 kroner/dollar) Profit in kroner *1 0.147 b. Profit if sold in Great Britain: Total sales revenue in Danish kroner (2,800 pounds 11.36 kroner/pound*) Materials and labor costs Shipping costs in kroner ($2,000 6.80 kroner/dollar) Misc. costs in kroner (480 pounds 11.36 kroner/pound) Profit in kroner *1 0.088

kr 35,360 (8,500) (20,400) (2,720) kr 3,740

kr 31,808 (8,500) (13,600) (5,453) kr 4,255

c. Large fluctuations in exchange rates can affect the level of realized profits. Although the original estimates show a higher level of profits are expected from exporting to Great Britain, a substantial strengthening of the krone relative to the pound could result in significantly lower profits. The risk of lower profits from Great Britain may make exporting to the U.S. more attractive.

The McGraw-Hill Companies, Inc., 2010 P15.1A

25 Minutes, Easy

PROBLEM 15.2A EUROPA-WEST

General Journal

a.

Nov

12 Inventory Accounts Payable (Stockholm Motors) To record purchase of automobiles from Stockholm Motors for sk20,000,000 when exchange rate is AUD.12745 per krona (sk20,000,000 AUD.12745 = $2,549,000). 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Payable (Stockholm Motors) To adjust balance of sk20,000,000 account payable to amount indicated by year-end exchange rate: AUD 2,549,000 Original account balance Adjusted balance 2,574,800 (sk20,000,000 AUD.12874) (AUD 25,800.00) Required 11 Accounts Payable (Stockholm Motors) Cash Gain on Fluctuations in Foreign Exchange Rates To record payment of sk20,000,000 account to Stockholm Motors and to recognize gain from fall in exchange rate since Dec. 31: AUD 2,574,800 Account payable, adjusted balance 2,566,800 Amount paid, Jan. 11 AUD 8,000 Gain from decline in exchange rate

AUD 2,549,000

Dec

AUD 25,800

Jan

AUD 2,574,800

b.

Computation of exchange rate on Jan. 11: Amount paid, AUD2,566,800, divided by liability in Swedish kronor, sk20,000,000 = exchange rate, AUD.12834 per krona.

c.

On November 12, Europa-West could have purchased 60-day future contracts on 20 million kronor. These future contracts would have created a krona receivable of the same size as the companys krona payable to Stockholm Motors. Any gain or loss on the payable as a result of exchange rate fluctuations would then have been offset by a corresponding loss or gain on the future contracts.

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PROBLEM 15.2A EUROPA-WEST

AUD 2,549,000

AUD 25,800

AUD 2,566,800 AUD 8,000

0,000,000 = exchange rate,

tracts on 20 million kronor. These as the companys krona payable to ge rate fluctuations would then

The McGraw-Hill Companies, Inc., 2010 P15.2A

40 Minutes, Strong

PROBLEM 15.3A WALLERTON, INC.

a. Complete the following ProForma Income Statements: C$ = $.75 Sales: (1) U.S. (2) Canadian (3) Total Cost of Goods Sold: (4) U.S. (5) Canadian (6) Total (7) Gross Profit Operating Expenses: (8) U.S. Fixed (9) U.S. Variable 10% of Sales (10) Total (11) Operating Earnings Interest Expenses: (12) U.S. (13) Canadian (14) Total Earnings before Tax $300.00 3.00 303.00 C$ = $.80 $304.00 3.20 307.20 C$ = $.85 $307.00 3.40 310.40

50.00 150.00 200.00 $103.00

50.00 160.00 210.00 $97.20

50.00 170.00 220.00 $90.40

30.00 30.30 60.30 $42.70

30.00 30.72 60.72 $36.48

30.00 31.04 61.04 $29.36

3.00 7.50 10.50 $32.20

3.00 8.00 11.00 $25.48

3.00 8.50 11.50 $17.86

b. Wallerton expects more foreign costs (Canadian Cost of Goods Sold = $150) than it expects in foreign revenues (Canadian Sales = $3.00). Therefore, Wallertons Earnings Before Tax is negatively affected by the stronger foreign currency. Thus, its earnings decline as the U.S. Dollar purchases fewer and fewer Canadian dollars (i.e., as the Canadian Dollar gets stronger).

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40 Minutes, Medium

THE ULSA COMPAN

a. Sales revenue per unit Cost of components Import duties (.05 215; .15 20) Assembly costs Pretax profit per unit Income tax per unit (20%; 10%) Profit per unit b. Profit per unit in Singapore dollars (175.40 ringgits .465 singapore dollars/ringgit; 19.80 liri 5 singapore dollars/lira) The highest profits per unit will be earned by assembling and selling product Y in Malta. c. Total profit in singapore dollars ($81.56 12,000 units; $99 8,000 units) On a total profit basis, the highest total profits will be earned by assembling and selling product Y in Malaysia. Malaysia 645.00 Ringgits (215.00) (10.75) (200.00) 219.25 (43.85) 175.40 Ringgits

SGD 81.56

SGD 4,978,720

The McGraw-Hill Companies, Inc., 2010 P.15.4A

PROBLEM 15.4A THE ULSA COMPANY

Malta 70.00 Liri (20.00) (3.00) (25.00) 22.00 (2.20) 19.80 Liri

SGD 99

SGD 792,000

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90 Minutes, Strong

PROBLEM 15.5A GLOBAL TRADE AGREEMENTS

Answers to the assignment will vary depending on what differences are highlighted. For example the countries that have signed the agreements differ as well as the stipulations about what goods are covered, how disputes are resolved, and how the accounting for costs and tariffs are determined. Trade agreements allow goods to flow more freely across borders at lower costs (lower tariffs) while simultaneously encouraging investment in the countries involved in the agreements. Trade agreements can allow a business to access markets that were previously unreachable, can expedite technology transfer between countries and create jobs in the countries that are party to the agreement. The ASEAN countries are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. One important difference between NAFTA and the ASEAN Initiative is that NAFTA's focus is on the economic benefit all parties to the agreement will receive, but the ASEAN agreement has significant political objectives. ASEAN is designed to strengthen integration of these countries and create a set of bilateral Free Trade Agreements between the U.S. and each of these countries.

The McGraw-Hill Companies, Inc., 2010 P.15.5A

40 Minutes, Strong

PROBLEM 15.6A WOLFE COMPUTER

a. General Journal 28 Inventory of Raw Materials Accounts Payable (Mitsutonka) To record purchase of 20,000 disk drives from Mitsutonka for 180,000,000 due in 30 days. Exchange rate, AUD.0105 (180,000,000 AUD.0105 = AUD1,890,000). 9 Accounts Receivable (Bank of England) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 700 computers to Bank of England for 604,500, due in 30 days. Exchange rate AUD1.65 (604,500 AUD1.65 = AUD997,425). 27 Accounts Payable (Mitsutonka) Gain on Fluctuations in Foreign Exchange Rates Cash To record payment of 180,000,000 liability to Mitsutonka and to recognize gain from decline in exchange rate: AUD 1,890,000 Original account balance 1,836,000 Amount paid AUD 54,000 Gain from decline in exchange rate Dec 2 Inventory of Raw Materials Accounts Payable (German Optical) To record purchase of 10,000 monitors from German Optical for 1,200,000, due in 60 days. Exchange rate, AUD.7030 (1,200,000 AUD.7030 = AUD843,600). 9 Cash Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (Bank of England) Collected 604,500 receivable from Bank of England when exchange rate was AUD1.63 per British pound: AUD 997,425 Original receivable 985,335 Amount collected (604,500 AUD1.63) AUD 12,090 Loss from fall in exchange rate 11 Accounts Receivable (Computique) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 10,000 computers to Computique for SFr23,750,000, due in 30 days. Exchange rate AUD.6000 per franc (SFr23,750,000 AUD.6000 = AUD14,250,000).

Oct

AUD 1,890,000

Nov

AUD 997,425 AUD 518,000

AUD 1,890,000

AUD 843,600

AUD 985,335 AUD 12,090

AUD 14,250,000 AUD 7,400,000

The McGraw-Hill Companies, Inc., 2010 P.15.6A

PROBLEM 15.6A WOLFE COMPUTER

AUD 1,890,000

AUD 518,000 AUD 997,425

AUD 54,000 AUD 1,836,000

AUD 843,600

AUD 997,425

AUD 7,400,000 AUD 14,250,000

The McGraw-Hill Companies, Inc., 2010 P.15.6A

PROBLEM 15.6A WOLFE COMPUTER (continued)

General Journal Adjusting Entries 31 Accounts Payable (German Optical) Gain on Fluctuations in Foreign Exchange Rates To adjust balance of 1,200,000 liability to German Optical to amount indicated by year-end exchange rate: AUD 843,600 Original account balance 840,000 Adjusted balance (1,200,000 AUD.7000) AUD 3,600 Required adjustment (gain) 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (Computique) To adjust balance of SFr23,750,000 receivable from Computique to amount indicated by year-end exchange rate: AUD 14,250,000 Original Adjusted balance (SFr23,750,000 14,202,500 AUD.5980) AUD 47,500 Required adjustment (loss) Computation of unit sales price: Sales price, 700 units, in British pounds Sales price, 700 units, in Australian dollars (604,500 AUD1.65 per pound) Sales price per unit (AUD997,425 700 units) Alternative computation, using sale in francs: Sales price, 10,000 units, in Swiss francs Sales price in Australian dollars (SFr23,750,000 AUD.6000 per franc) Sales price per unit (AUD14,250,000 10,000 units) d. Computation of exchange rate for yen on Nov. 27: Amount paid, AUD1,836,000, divided by liability in yen, 180,000,000, equals exchange rate, AUD.0102 per yen.

b. Dec

AUD 3,600

Dec

AUD 47,500

c.

The McGraw-Hill Companies, Inc., 2010 P.15.6A (p.2)

PROBLEM 15.6A OMPUTER (continued)

AUD 3,600

AUD 47,500

604,500 AUD 997,425 AUD 1,425

SFr23,750,000 AUD 14,250,000 AUD 1,425

The McGraw-Hill Companies, Inc., 2010 P.15.6A (p.2)

PROBLEM 15.6A WOLFE COMPUTER (concluded)

e. (1) Wolfe Computers could have hedged its position in foreign accounts payable by purchasing an equivalent amount of future contracts in these currencies, maturing at the same time as the liabilities must be paid. These contracts are essentially receivables in foreign contracts. Any gains or losses on the foreign payables would then be offset by a counterbalancing loss or gain on the future contract.

(2) Wolfes position in its foreign receivables (payables) could be hedged by selling (buying) future contracts in those currencies. From the viewpoint of the seller (or buyer) of a future contract, the contract is a liability to pay (receive) a fixed amount of foreign currency at a future date. Thus, Wolfe would be creating foreign payables (receivables) to offset its foreign receivables (payables).

The McGraw-Hill Companies, Inc., 2010 P.15.6A (p.3)

30 Minutes, Medium

PROBLEM 15.7A FCPA VIOLATIONS

Under the amended Foreign Corrupt Practices Act, only activity c would be considered illegal since it is intended to help the firm garner business it may not otherwise obtain. Activities a , b and d would be considered facilitating payments as these are intended to speed up the provision of government services (a and d ) or result in a higher level of services (b ). From an operations standpoint, all items (a through d ) could be considered bad management practices. These practices encourage a climate that expects extra payments to complete a job that should be paid for by the government. Company A should work with government officials to prevent government workers from accepting facilitating payments. In addition, company A could encourage the government to pay workers a living-wage so that facilitating payments would not be necessary to maintain an adequate standard of living.

The McGraw-Hill Companies, Inc., 2010 P.15.7A

40 Minutes, Medium

ADIDAS AGS GLOBALIZATION

a. adidas AG operates in Greater China, Western Europe, Asia and other countries.

b. Assets and liabilities of adidas AGs non-euro functional currency subsidiaries are translated into the reporting currency, the euro, which is also the functional currency of adidas AG, at closing exchange rates at the balance sheet date. c. The note of adidas AG suggests that adidas AG uses derivative financial instruments, such as currency options, forward contracts as well as interest rate swaps and cross-currency interest rate swaps, to hedge its exposure to foreign exchange and interest rate risks. d. adidas AG is a multinational company and its cash-generating units are located in Greater China, Western Europe, Asia and other countries.

The McGraw-Hill Companies, Inc., 2010 P.15.8A

PROBLEM 15.8A ADIDAS AGS GLOBALIZATION

Europe, Asia and other countries.

unctional currency subsidiaries are translated s also the functional currency of adidas AG, at

uses derivative financial instruments, such as nterest rate swaps and cross-currency interest hange and interest rate risks.

ash-generating units are located in Greater es.

The McGraw-Hill Companies, Inc., 2010 P.15.8A

SOLUTIONS TO PROBLEMS SET B

30 Minutes, Medium

PROBLEM 15.1B MONSTER COOKIE COMPANY

a. Profit if sold in the U.S.: Total sales revenue in Danish kroner ($6,000 6.25 kroner/dollar*) Materials and labor costs Shipping costs in kroner ($2,800 6.25 kroner/dollar) Misc. costs in kroner ($420 6.25 kroner/dollar) Profit in kroner *1 .16 b. Profit if sold in Great Britain: Total sales revenue in Danish kroner (2,600 pounds 11.11 kroner/pound*) Materials and labor costs Shipping costs in kroner ($1,900 6.25 kroner/dollar) Misc. costs in kroner (500 pounds 11.11 kroner/pound) Profit in kroner *1 .09 kr 28,886 (9,000) (11,875) (5,555) kr 2,456 kr 37,500 (9,000) (17,500) (2,625) kr 8,375

c. Large fluctuations in exchange rates can affect the level of realized profits. However, the estimates in parts a. and b. show a higher level of profits are expected from exporting to the U.S. In addition, substantial fluctuations of the krone relative to the pound add addtional uncertainties. Without some analysis of the likely direction of the fluctuations, shipping to the U.S. appears to be the correct decision.

The McGraw-Hill Companies, Inc., 2010 P.15.1B

25 Minutes, Easy

PROBLEM 15.2B EUROAM

General Journal

a.

Dec

1 Inventory Accounts Payable (WMB Motors) To record purchase of automobiles from WMB Motors for SFr4,000,000 when exchange rate is AUD.75 per mark (SFr4,000,000 x AUD.75 = AUD3,000,000). 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Payable (WMB Motors) To adjust balance of SFr4,000,000 account payable to amount indicated by year-end exchange rate: Original account balance Adjusted balance (SFr4,000,000 x AUD.78) Required adjustment (loss) 15 Accounts Payable (WMB Motors) Cash Gain on Fluctuations in Foreign Exchange Rates To record payment of SFr4,000,000 account to WMB Motors and to recognize gain from fall in exchange rate since Dec. 31: Account payable, adjusted balance Amount paid, Jan. 15 Gain from decline in exchange rate

3,000,000

Dec

120,000

AUD 3,000,000 3,120,000 (AUD 120,000) 3,120,000

Jan

AUD 3,120,000 3,080,000 AUD 40,000

b.

Computation of exchange rate on Jan. 15: Amount paid, AUD3,080,000, divided by liability in Swiss francs SFr4,000,000 = exchange rate, AUD0.77 per Swiss franc.

c.

On December 1, Euroam could have purchased 45-day future contracts on 4 million Swiss francs. These future contracts would have created a Swiss franc receivable of the same size as the company's Swiss franc payable to WMB. Any gain or loss to the payable as a result of exchange rate fluctuations would have been offset by a corresponding loss or gain on the future contracts.

The McGraw-Hill Companies, Inc., 2010 P.15.2B

PROBLEM 15.2B EUROAM

3,000,000

120,000

3,080,000 40,000

0 = exchange rate, AUD0.77 per

million Swiss francs. These as the company's Swiss franc fluctuations would have been

The McGraw-Hill Companies, Inc., 2010 P.15.2B

40 Minutes, Strong

PROBLEM 15.3B JELTON, INC.

C$ = $.70 C$ = $.80 $400.00 4.00 404.00 C$ = $.90 $405.00 4.50 409.50

a. Sales: (1) U.S. (2) Canadian (3) Total Cost of Goods Sold: (4) U.S. (5) Canadian (6) Total (7) Gross Profit Operating Expenses: (8) U.S. Fixed (9) U.S. Variable 10% of Sales (10) Total (11) Operating Earnings Interest Expenses: (12) U.S. (13) Canadian (14) Total Earnings before Tax
b.

$395.00 3.50 398.50

100.00 70.00 170.00 $228.50

100.00 80.00 180.00 $224.00

100.00 90.00 190.00 $219.50

30.00 39.85 69.85 $158.65

30.00 40.40 70.40 $153.60

30.00 40.95 70.95 $148.55

5.00 7.00 12.00 $146.65

5.00 8.00 13.00 $140.60

5.00 9.00 14.00 $134.55

Jelton expects more foreign costs than it expects in foreign revenues. Therefore, Jelton's Earnings Before Tax is negatively affected by the stronger foreign currency. Thus, its earnings decline as the U.S. Dollar purchases fewer and fewer Canadian dollars (i.e. as the Canadian Dollar gets stronger).

The McGraw-Hill Companies, Inc., 2010 P.15.3B

40 Minutes, Medium

a. Sales revenue per unit Cost of components Import duties (.04 200; .12 18) Assembly costs Pretax profit per unit Income tax per unit (25%; 12%) Profit per unit b. Profit per unit in dollars (181.50 ringgits .44 singapore dollars/ringgits; 21.86 liri 5 singarpore dollars/lira) The highest profits per unit will be earned by assembling and selling product X in Malta. c. Total profit in dollars (S$79.86 14,000 units; S$109.3 10,000 units) On a total profit basis, the highest total profits will be earned by assembling and selling product X in Malaysia.

Malaysia 700.00 Ringgits (200.00) (8.00) (250.00) 242.00 (60.50) 181.50 Ringgits

$79.86

S$1,118,040

The McGraw-Hill Companies, Inc., 2010 P.15.4B

PROBLEM 15.4B Ulsa Company

Malta 75.00 Liri (18.00) (2.16) (30.00) 24.84 (2.98) 21.86 Liri

$109.30

S$1,093,000

The McGraw-Hill Companies, Inc., 2010 P.15.4B

90 Minutes, Strong

PROBLEM 15.5B NAFTA vs CET

Answers to the assignment will vary depending on what differences are highlighted. For example the countries that have signed the agreements differ as well as the stipulations about what goods are covered, how disputes are resolved, and how the accounting for costs and tariffs are determined. Trade agreements allow goods to flow more freely across borders at lower costs (lower tariffs) while simultaneously encouraging investment in the countries involved in the agreements. Trade agreements can allow a business products to access markets that were previously unreachable, can expedite technology transfer between countries and create jobs in the countries that are party to the agreement. The South American countries that have signed the initiative are Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States (CAFTA-DR). The agreement contains provisions that require the countries to improve labor laws and their enforcement, install anti-corruption legislation and increase transparency. While the CAFTA-DR is still being developed, NAFTA is a mature economically sound agreement between the U.S., Canada, and Mexico.

The McGraw-Hill Companies, Inc., 2010 P.15.5B

40 Minutes, Strong

PROBLEM 15.6B FOX GAMES

General Journal

a.

Oct 25

Inventory of Raw Materials Accounts Payable (Sutaki) To record purchase of 15,000 parts from Sutaki for 120,000,000 due in 30 days. Exchange rate, $.01 (120,000,000 x $.01 = $1,200,000). Accounts Receivable (British Vibes) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 500 consoles to British Vibes for 200,000, due in 30 days. Exchange rate $1.60 (200,000 x $1.60 = $320,000). Accounts Payable (Sutaki) Gain on Fluctuations in Foreign Exchange Rates Cash To record payment of 120,000,000 liability to Sutaki and to recognize gain from decline in exchange rate: $ 1,200,000 Original account balance 1,150,000 Amount paid $ 50,000 Gain from decline in exchange rate Inventory of Raw Materials Accounts Payable (Swiss Plastics) To record purchase of 5,000 black cases from Swiss Plastics for SFr80,000, due in 60 days. Exchange rate, $.70 (SFr80,000 x $.70 = $56,000). Cash Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (British Vibes) Collected 200,000 receivable from British Vibes when exchange rate was $1.55 per British pound: $ 320,000 Original receivable 310,000 Amount collected (200,000 x $1.55) $ 10,000 Loss from fall in exchange rate Accounts Receivable (Sounds) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 6,000 consoles to Sounds for NOK40,000,000, due in 30 days. Exchange rate $.20 per krone (NOK40,000,000 x $.20 = $8,000,000).

1,200,000 $ 1,200,000

Nov 15

320,000 160,000 $ 160,000 320,000

24

1,200,000 $ 50,000 1,150,000

Dec 4

56,000 $ 56,000

15

310,000 10,000 $ 320,000

21

8,000,000 5,000,000 $ 5,000,000 8,000,000

The McGraw-Hill Companies, Inc., 2010 P.15.6B

PROBLEM 15.6B FOX GAMES (concluded)

General Journal Adjusting Entries b. Dec 31 Accounts Payable (Swiss Plastics) Gain on Fluctuations in Foreign Exchange Rates To adjust balance of SFr80,000 liability to Swiss Plastics to amount indicated by year-end exchange rate: $ 56,000 Original account balance 54,400 Adjusted balance (SFr80,000 x $.68) $ 1,600 Required adjustment (gain) Dec 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (Sounds) To adjust balance of NOK40,000,000 receivable from Sounds to amount indicated by year-end exchange rate: $ 8,000,000 Original Adjusted balance 7,200,000 (NOK40,000,000 x $.18) $ 800,000 Required adjustment (loss) Computation of unit sales price: Sales price, 500 units, in British pounds Sales price, 500 units, in U.S. dollars (200,000 x $1.60 per pound) Sales price per unit ($320,000 500 units) Alternative computation, using sale in kroner: Sales price, 6,000 units, in Norwegian kroner Sales price in U.S. dollars (NOK40,000,000 x $.20 per krone) Sales price per unit ($8,000,000 6,000 units) d. Computation of exchange rate for yen on Nov. 24: Amount paid, $1,150,000, divided by liability in yen, 120,000,000, equals exchange rate, $.0096 per yen.

1,600 $ 1,600

800,000 $ 800,000

c.

$ $

200,000 320,000 640

NOK40,000,000 $ $ 8,000,000 1,333

e.

(1) Fox Games could have hedged its position in foreign accounts payable by purchasing and equivalent amount of future contracts in these currencies, maturing at the same time as the liabilities must be paid. These contracts are essentially receivables in foreign contracts. Any gains or losses on the foreign payables would then be offset by a counterbalancing loss or gain on the future contract. (2) Foxs position in its foreign receivables could be hedged by selling future contracts in those currencies. From the viewpoint of the seller of a future contract, the contract is a liability to pay a fixed amount of foreign currency at a future date. Thus, Fox would be creating foreign payables to offset its foreign receivables.

The McGraw-Hill Companies, Inc., 2010 P.15.6B (p.2)

20 Minutes, Medium

PROBLEM 15.7B FCPA VIOLATIONS

Under the amended FCPA, activities a and d are illegal because both payments are intended to help company P obtain business it may not otherwise have been awarded. Activities b and c would be considered facilitating payments to speed up governmental service b or to encourage a higher level of service c . All activities are bad management practices because they allow country Qs government and its employees to continue to believe that bribery and facilitating payments are an acceptable business practice. Alternative solutions the manager should consider include showing the government that company P is invested in the future of country Q and its people. Making long-run commitments to help Qs economy and invest in the education of its population may make the government more amenable to doing business with company P.

The McGraw-Hill Companies, Inc., 2010 P.15.7B

SOLUTIONS TO CRITICAL THINKING CASES

40 Minutes, Medium

CASE 15.1 BRISTOW LIMITED

There are many factors that must be taken into account when faced with multiple globalization strategy choices. These factors include (but are not limited to) control issues, feasibility issues, cost, and fit between a particular choice and the firms long-term global strategy. If Bristow chooses to simply export to Country Y to satisfy the needs of Kale, it will maintain strict control over production and quality, but will face high shipping costs and longer delivery times. If Bristow chooses to export, information on more efficient shipping options would be of greater importance. To maintain a high level of control and reduce shipping times, Bristow may opt to purchase the local company and operate it as a wholly-owned subsidiary. This option would likely involve a substantial outlay of capital to update the facilitys existing technology. Bristow would need to do an extensive analysis of this option to determine if the return on the investment in the subsidiary would be satisfactory. Bristow would need to address the questions of whether it had the necessary capital (or how to obtain it), how the subsidiary would be staffed, and whether enough business could be obtained to make operating the facility profitable. Bristow would also need information regarding taxes and other governmental laws and regulations. Given Bristows lack of experience in international activities, establishing a wholly-owned subsidiary may prove very difficult. If issues of control are not of primary importance, Bristow should consider licensing its technology to a domestic firm or establishing a joint venture with Kale. A licensing agreement would allow Kale to be supplied with Bristow products on a timely basis, but without a substantial investment of capital and with less risk. Before entering into such an agreement, Bristow would need to ensure that the licensed firm would not take away its regular business by selling its products to Bristows customers in Malaysia. If Bristow intends to pursue a more aggressive globalization strategy, entering into a joint venture with Kale may prove beneficial even though it involves some relinquishment of control. Having operations in other foreign locations, Kale will likely be familiar with the complexities of doing business in other countries. Bristows managers would have an opportunity to learn from Kale, allowing Bristow to more easily establish foreign operations in the future.

The McGraw-Hill Companies, Inc., 2010 Case 15.1

50 Minutes, Medium

CASE 15.2 INTERNATIONAL ACCOUNTING STANDARDS

Student opinions will vary on the topic. Interesting background information can be located by browsing the IOSCO web site at:
www.iosco.org

The McGraw-Hill Companies, Inc., 2010 Case 15.2

30 Minutes, Medium

CASE 15.3 INTERNATIONAL CORPORATE GOVERNANCE ETHICS, FRAUD & CORPORATE GOVERNANCE

Many countries around the world have different standards for disclosure, timeliness of reporting, and accuracy. Importantly, only recently has corporate governance become an important issue for international companies. The OECD Web site says: Corporate governance deals with the rights and the responsibilites of a companys management, its board, shareholders and various stakeholders. How well companies are run affects market confidence as well as company performance. Good corporate governance is therefore essential for companies that want access to capital and for countries that want to stimulate private sector investment. If companies are well run, they will prosper. This in turn will enable them to attract investors whose support can help to finance faster growth. Poor corporate goverance on the other hand weakens a companys potential and at worst can pave the way for financial difficulties and even fraud (www.oecd.org)

The McGraw-Hill Companies, Inc., 2010 Case 15.3