Ea 2009625202530

Test Bank for Chapter 1
Multiple Choice Questions

1.
Which of the following variables play a role in shaping accounting development?

a. nature of capital markets
b. type of reporting regime
c. type of business entities
d. All of the above.
e. Both a and c.
2.
High levels of financial disclosure are generally found in countries

a. where businesses raise their capital from a large and diverse investor/creditor group.
b. where businesses raise their capital from the government.
c. where there is a limited number of owners.
d. where the sophistication of the financial community is not very high.
e. where the cost of publishing financial statements is high.
3.
In countries where business capital needs are provided by only a few very large banks
a. the level of disclosure in financial statements tends to be high.
b. companies tend to devote significant resources to make their annual reports attractive.
c. companies tend to use income-increasing accounting methods.
d. companies tend to understate reported earnings.
e. All of the above.
4.
Which of the following does not affect a country's financial accounting orientation?
a. The level of inflation.
b. Political and economic ties with other countries.
c. Status of the accounting profession.
d. Quality of accounting education.
e. All of the above affect a country's financial accounting orientation.
5.
In countries with micro-oriented accounting systems, the role of accounting is

a. to provide investors with information on the true position of companies.
b. to reflect the effect of government economic policies in company accounts.
c. to provide inputs for industry or national accounting reports.
d. to determine the tax liability of business entities.
6.
Which of the following is not true about accounting's role in a macro-oriented environment,
a. to provide investors with information on the true position of companies.
b. to reflect the effect of government economic policies in company accounts.
c. to provide inputs for industry or national accounting reports.
d. to determine the tax liability of business entities.
7.
Which of the following is not an environmental factor affecting accounting?

a. Level of enforcement of regulations
b. Nature of capital markets
c. Type of legal system
d. Language
e. Level of inflation
8.
Companies in which country produce annual reports to attract potential investors:

a. Germany
b. Switzerland
c. United States
d. Japan
e. France
9.
In which pair of countries is there a strong private sector influence on financial accounting
standard setting?
a. France and Germany.
b. China and Russia.
c. France and the United Kingdom.
d. Germany and Japan.
e. The United Kingdom and the United States.
10. Which of the following is an impetus for international accounting standards?

a. The linkage of capital markets worldwide.
b. Emerging democracies in Latin America
c. The new activist role of the OECD
d. The collapse of communism in the former Soviet Union
e. The emergence of the World Trade Organization (WTO)
11. Among the factors affecting accounting development are the economic and political ties
between countries. Which of the following pairs of countries do not have such ties with each
other?
a. Philippines and the United States
b. Singapore and the United Kingdom
c. Malaysia and Argentina
d. Indonesia and the Netherlands
e. France and Germany
12. The status of the accounting profession is a factor that affects accounting development in
countries. In which of the following countries is accounting not regarded favorably as a
career choice?
a. United States
b. New Zealand
c. Russia
d. Australia
e. Canada
13. Which of the following is not typically included in an accounting conceptual framework?
a. a statement of objectives of financial accounting
b. targeted users of financial statements
c. limitations of financial statements
d. licensing criteria for public accountants
e. characteristics of good financial accounting
14. Which of the following countries have conceptual frameworks for accounting?
a. Singapore
b. Malaysia
c. Indonesia
d. Canada
e. All of the above
15. Identify the benefit(s) of classifying countries according to their accounting systems.
a. Countries can learn from the accounting experiences of other countries in their group.
b. Countries can use other countries in their group as models for setting standards.
c. Global standard-setters can anticipate the reaction to their proposed standards.
d. MNCs can plan on the type of disclosure they need to provide in various countries.
16. Which of the following accounting patterns did Mueller [1967] identify in his pioneering
classification study on Western, market-oriented economies?
a. Macroeconomic pattern
b. Microeconomic pattern
c. Independent discipline approach
d. Uniform approach
e. All of the above
17. Which of the following was not among the accounting patterns identified by Mueller [1967]
in his pioneering classification study on Western, market-oriented economies?
a. Macroeconomic pattern
b. Independent discipline approach
c. Socialist approach
d. Uniform approach
e. Microeconomic pattern
18. Nobes' [1983] classification study had the following European countries in the macrouniform, continental, tax-based family:
a. Italy, France, W. Germany, Sweden
b. Belgium, Spain, Italy, W. Germany
c. Italy, France, Spain, Sweden
d. Italy, France, Ireland, Spain
e. Italy, France, Belgium, Spain
19. Nobes' [1983] classification study had the following countries in the micro-based, U.K.
influence, family:
a. Ireland, Netherlands, Canada, Australia
b. Australia, New Zealand, U.K., Ireland
c. Netherlands, Australia, U.K., U.S.A
d. Australia, Canada, U.K., Ireland
e. Netherlands, Australia, Canada, U.S.A.
20. The major immediate challenges that face accounting in the global arena include:
a. Global harmonization
b. Financial reporting in emerging economies
c. Social and environmental reporting
d. Financial reporting in the high technology era
e. All of the above
True/False Questions
1.
The purpose of accounting is to provide information that is useful for making economic
decisions.
2.
In order to make informed decisions in a global environment, one needs to have an

understanding of international accounting issues.
3.
The flow of goods and services across national borders requires that accounting standards be
country-specific.
4.
The phenomenal pace of globalization of capital markets in recent years points to the need
for capital market participants to understand accounting information that originates in other
countries.
5.
Being educated in international accounting is among the portfolio of skills required of

managers in companies engaged in international business.
6.
While accounting is a product of its environment it does not affect the environment in which
it exists.
7.
In the United States, financial accounting information is directed primarily toward the needs
of investors and creditors, and decision usefulness is the main criterion for judging its
quality.
8.
Accounting in the United States is increasingly feeling the influence of Swiss accounting
standards, as more and more Swiss companies enter U.S. capital markets.
9.
The factors that impact accounting at the national level do not contribute to accounting
diversity at the international level.
10. In equity-oriented capital markets, companies rely on the fairness of their bankers to obtain
the necessary capital.
11. Whether a country's capital market is equity-oriented or debt-oriented has no impact on the
financial reporting that develops in the country.
12. In countries such as Germany, Japan, and Switzerland companies have traditionally turned to
the stock market as their primary source of capital.
13. In countries such as Canada and the United States, once companies reach a certain size they
turn to banks as their primary source of capital.
14. The type of capital market that exists in a country impacts financial reporting at both the
cosmetic and the substantive level.
15. Considerably more resources are devoted to the preparation of annual reports in debtoriented capital markets than in equity-oriented capital markets.
16. Countries such as Austria and Germany set detailed financial reporting rules which have to
be complied with for both tax reporting and external financial reporting.
17. In code law countries such as France and Germany, accounting is regulated mainly through
an accounting code which is generally set by the legislature.
18. Financial reporting in common law countries tends to be more transparent and timely than in
code law countries.
19. While it is relatively inexpensive to adopt the sophisticated accounting standards of another
country, it takes considerable resources to actually implement such standards.
20. Recent statistics show that the U.S. has the highest number of auditors relative to the size of
its population (i.e., auditors per 100,000 population).
21. The lack of financial reporting transparency and the inconsistent application of audit
standards were among the factors that exacerbated the recent financial crisis in Southeast
Asia.
22. In macro-user oriented systems, government entities such as tax and economic planning
agencies are the principal users of accounting reports.
23. In micro-user oriented accounting systems such as those in France, Germany, and Sweden,
the role of accounting is viewed in terms of contributing to enterprise stability and
continuity.
24. Financial accounting diversity between countries imposes additional costs on capital market
participants worldwide.
25. The object of classification (or clustering) in international accounting research is to group
countries according to the common elements and distinctive characteristics of their
accounting systems.

1.
In the United States, the Financial Accounting Standards Board

a. establishes accounting principles for business and not for profit entities.
b. is the enforcement agency responsible for monitoring that companies comply with
accounting and securities regulations.
c. receives funding from the U.S. government.
d. establishes the tax code that companies must comply with.
e. is the representative of the U.S. accounting profession on the IASB.
2.
The main body that enforces financial accounting standards in the United States is
a. The U.S. Accounting Enforcement Agency (USAEA)
b. The Financial Accounting Standards Board (FASB)
c. The Securities Exchange Commission (SEC)
d. The American Institute of Certified Public Accountants (AICPA)
3.
What is an argument against the effort to harmonize accounting globally?

a. Market forces will bring about harmonization if it is truly necessary.
b. Investors are rational enough to spend the resources necessary to correctly analyze
investment opportunities and focus on real economic results.
c. It is unnecessary since most countries already accept U.S. generally accepted
accounting principles as the standards to be followed in preparing financial statements.
d. Better training of accountants mitigates the need for accounting harmonization.
e. The Big Four accounting firms would lose significant revenues if accounting rules were
harmonized globally.
4.
The key developmental organization for international accounting standards is the

a. International Accounting Standards Board.
b. International Federation of Accountants.
c. International Organization of Securities Commissions.
d. International Organization of Accounting Standard Setters.
e. Global Agency for Accounting Standards.
5.
The Organization for Economic Cooperation and Development is not

a. comprised of the governments of nearly all the industrialized world.
b. actively participating in writing generally accepted accounting principles for the world.
c. established to foster economic growth and development in member countries.
d. responsible for issuing a code of conduct for multinational corporations that includes
guidelines for voluntary disclosures of financial information.
e. any of the above.
6.
Which of the following organizations is directly involved with developing, publishing, and
advocating the use of financial accounting standards?
a. American Institute of Certified Public Accountants
b. Organization for Economic Cooperation and Development.
c. Nordic Federation of Accountants.
d. International Accounting Standards Board.
e. International Federation of Accountants.
7.
Which of the following organizations is directly involved with developing, publishing, and
advocating the use of international auditing standards?
b. Institute of Chartered Accountants of England and Wales.
c. United Nations.
d. Asean Federation of Accountants.
e. International Federation of Accountants.
8.
Which of the following organizations is directly involved with harmonizing accounting and
auditing standards?
b. Securities and Exchange Commission.
c. American Accounting Association.
d. International Federation of Accountants.
e. Both (a) and (d).
9.
Global harmonization of accounting principles does not require:

a. Complete uniformity in accounting principles globally.
b. That differences in accounting standards between countries be kept at a minimum.
c. That difference in accounting rules may exist in different countries as long as they can
be reconciled.
d. That one supra-national organization enforce global standards in all countries.
10. Current proponents of harmonizing accounting standards globally are

a. Investors.
b. Multinational companies.
c. The securities industry and stock exchanges.
d. Developing countries.
11. The International Federation of Accountants (IFAC) is not involved in:
a. harmonizing global auditing practices.
b. providing ethical guidelines for auditors on issues such as integrity and objectivity.
c. establishing public sector standards applicable to all levels of government.
d. maintaining auditor independence in today's complex business environment.
e. administering a worldwide uniform examination for auditors.
12. The "world class issuer" approach to global accounting harmonization is not very promising
because:
a. it is opposed by the U.S. Securities and Exchange Commission.
b. there are difficulties in establishing and agreeing upon the criteria for inclusion.
c. it faces strong opposition by U.S. companies.
d. there are practical difficulties in implementation.
e. of all of the above.
13. The G4+1 originally consisted of accounting standard-setters from the following countries
plus the International Accounting Standards Committee:
a. Australia, Canada, New Zealand, and the United Kingdom
b. Bangladesh, India, Pakistan, and Sri Lanka
c. Indonesia, Japan, Korea, and Malaysia
d. Australia, Canada, the United Kingdom and the United States
e. None of the above.
14. The different types of articles found in European Union (EU) directives include:
a. uniform rules to be implemented in all member countries
b. minimum rules that may be strengthened by individual governments
c. alternative rules which give member states choices
d. All of the above
e. Only (a) and (b)
15. The European Union (EU) has adopted a number of directives dealing with accounting
matters. Which EU directives are generally regarded as the most significant on accounting
issues?
a. The First and Second directives
b. The Fourth and Seventh directives
c. The Second and Fourth directives
d. The Third and Seventh directives
e. The Fifth and Sixth directives
16. The overall lack of success of the European accounting harmonization effort can be
attributed to:
a. The scope of the EU directives is technically incomplete with a number of accounting
topics not being directly covered.
b. The directives were unevenly adopted into individual national legislation.
c. The directives were static instruments that were not updated and lacked quality
improvement mechanisms.
d. Compliance with EU accounting rules did not prove to be sufficient to enter global
capital markets.
17. Which of the following statements best describes accounting harmonization in Europe?
a. It has been a tremendous success and is being closely studied by other regional
alliances.
b. There is considerable evidence of accounting harmonization among EU countries.
c. The EU has decided to turn to the IASB to achieve accounting harmonization.
d. The ASEAN countries are following the EU model of accounting harmonization.
e. Annual reports of companies from France, Germany, and the United Kingdom have
become standardized as a result of the European accounting harmonization initiative.
18. The necessary conditions that can make regional accounting harmonization a policy
objective among a group of countries include:
a. An articulated rationale and a set of values that facilitate regional accounting harmony.
b. A high level of economic integration.
c. A political infrastructure to pursue harmonization within a broad policy framework.
d. The economic and political clout to develop a regional vision without the fear of being
marginalized in the global arena.
19. The reasons why regional accounting harmonization has not been seriously pursued by the
member countries of the Association of Southeast Asian Nations (ASEAN) are:
a. ASEAN has not been able to articulate a clear rationale for why regional accounting
harmonization is a preferred course of action for its member countries.
b. ASEAN lacks a political infrastructure to pursue harmonization within a broad policy
framework.
c. ASEAN countries are mainly developing countries with young accounting traditions
and face greater risks of being marginalized in the global arena by developing their
distinct regional system.
d. ASEAN countries are not sufficiently integrated economically to warrant regional
accounting harmonization.
20. Which of the following countries was not a signatory of the Treaty of Rome of 1957 which
led to the formation of the European Economic Community?
a. The Netherlands
b. France
c. Italy
d. Luxembourg
e. The United Kingdom
1.
When accounting standards vary around the world, the inherent reliability of financial
statements will also vary.
2.
Accounting harmonization is the process by which differences in financial reporting

practices among countries are reduced in order to make financial statements more
comparable and decision-useful across countries.
3.
The primary economic rationale for accounting harmonization is that major differences in
accounting practices act as a barrier to capital flowing to the most efficient users.
4.
There is a concern that some developing countries might adopt international accounting
standards to gain global respectability for their financial reporting without considering
whether these standards are suitable for their economies.
5.
Most developing countries have the time and the resources to develop their own indigenous
accounting standards.
6.
The adoption of international accounting standards in countries is a purely technical matter

that is not subject to political lobbying.
7.
Politically it is easier for countries to adopt external standards promulgated by a

supranational organization such as the IASB rather than to adopt the standards of another
country.
8.
The World Bank and United Nations recently opined that the inconsistent application of
auditing standards around the world adversely affects the comparability of financial
statements from one country to the next.
9.
The International Accounting Standards Board was formed to develop global accounting
standards; compliance with IASB standards is mandatory worldwide.
10. Non-U. S. firms that issue securities in the United States must abide by the rules of the SEC.
11. The Organization for Economic Cooperation and Development issues accounting directives
which have the full weight of law behind them.
12. In international accounting, harmonization is a movement away from total diversity while
standardization is a movement towards uniformity.
13. In international accounting, harmonization and standardization are states while harmony
and uniformity are processes.
14. The IASC's early standards were criticized for being too narrow and for allowing too few
alternatives.
15. In the 1970s, a United Nations committee produced a list of financial and non-financial
disclosures (to be provided by MNCs) which were heartily endorsed by most industrialized
countries.
16. The Multijurisdictional Disclosure System negotiated between Canada and the United States
represents a very promising model for global accounting harmonization.
17. The New York Stock Exchange strongly opposes the "world class issuer" approach to global
accounting harmonization.
18. The G4+1 presently consisted of standard-setters from Australia, Canada, New Zealand, the
United Kingdom, the United States and the International Accounting Standards Committee.
19. The basic objective of the European Union (EU) is to bring about a common market which
allows for the free mobility of capital, goods and people between member countries.
20. Of the European Union (EU) directives, the Fourth Directive and the Seventh Directive are
generally regarded as the most significant on accounting matters.
21. The European accounting harmonization effort has been a resounding success and is being
copied in Asia and Africa.
22. The ASEAN countries have followed the regional harmonization paradigm modeled after
the European Union (EU) rather than the global harmonization paradigm represented by
international accounting standards.
23. The global accounting harmonization paradigm makes more sense for ASEAN countries
than the regional harmonization paradigm because ASEAN countries are more dependent
economically on their global trading partners than on other ASEAN member countries.
24. Japan, Korea, Singapore, and Thailand have harmonized their accounting as a result of their
membership in the Association of Southeast Asian Nations (ASEAN).
25. Global accounting harmonization has not been pursued in ASEAN because the requisite
conditions that would make it an important policy objective are not present.

1.
The currency in which the parent company prepares its financial statements is the
a. base currency.
b. functional currency.
c. historical currency.
d. reporting currency.
2.
The right and the obligation to trade foreign currency in the future at a set rate is a
a. currency swap.
b. currency option.
c. forward contract.
d. money market hedge.
3.
Which of the following can give rise to foreign currency transaction exposure?
a. Selling goods whose prices are contractually denominated in a foreign currency.
b. Borrowing funds in a foreign currency.
c. Engaging in contracts to trade in foreign currency at a future date.
d. Other economic transactions denominated in foreign currencies.
4.
In the one-transaction approach:

a. The gain or loss is recorded separately
b. The gain or loss is reflected in the value of the resource acquired
c. Either (a) or (b)
d. None of the above
5.
The two-transaction approach is required in:

a. The United States
b. Australia
c. Canada
d. All of the above
e. None of the above
6.
A forward exchange contract is an agreement to:

a. Buy a foreign currency in the future at a variable rate
b. Sell a foreign currency in the future at a variable rate
c. Buy or sell a foreign currency in the future at a set rate
7.
Under the monetary/non-monetary method of foreign currency translation, depreciation

expense is translated at the:
a. Current rate
b. Weighted average rate
c. Historical rate
8.
Under the temporal method, translation gains and losses appear in:
a. the stockholders' equity section
b. the income statement as a normal operating item
c. the income statement as an extraordinary item
9.
Under the current rate method

a. all assets and liabilities are translated at the current year's average exchange rate.
b. foreign currency translation gains and losses do not affect the income statement.
c. all revenues and expenses are translated using the current exchange rate.
d. the income statement contains a cumulative translation adjustment amount.
10. Under SFAS No. 52, the temporal method of translation is used when
a. the local currency is the functional currency.
b. the local currency is the reporting currency.
c. the parent's currency is the functional currency.
d. the parent's currency is the reporting currency.
11. Under SFAS No. 52, the current rate method of translation is used when
a. the local currency is the functional currency.
b. the local currency is the reporting currency.
c. the parent's currency is the functional currency.
d. the parent's currency is the reporting currency.
12. Under SFAS No. 52, a hyperinflationary economy is defined as one that has inflation of
approximately:
a. 100 percent per year
b. 100 percent or more over a three year period
c. 25 percent per year
13. Under SFAS No. 52, the primary currency in which a company conducts its business is
called the:
a. Core currency
b. Functional currency
c. Hard currency
d. Convertible currency
14. Under which translation method is the foreign currency translation gain or loss taken to
stockholders' equity?
a. The current rate method
b. The temporal method
c. The conversion method
15. When a foreign subsidiary's functional currency is its local currency and its financial
statements are prepared in the local currency then SFAS No. 52 requires that:
a. The current method be used in translating financial statements.
b. The temporal method be used in remeasuring financial statements.
c. The temporal method be used in translating financial statements.
d. The current method be used in remeasuring financial statements.
16. According to SFAS No. 52, a self-sustaining, autonomous foreign subsidiary
a. has a low volume of transactions with the parent.
b. has sales mainly denominated in the parent's currency.
c. has the U.S. dollar as its functional currency.
d. obtains financing primarily from the parent.
e. should be disclosed as a separate geographic segment.
17. According to SFAS No. 52, an integral foreign subsidiary
a. has a low volume of transactions with the parent.
b. must be 100 percent owned by the parent.
c. obtains most of its financing locally.
d. depends on the parent for its revenues and expenses.
e. has an active local sales market for its products.
18. The Indian subsidiary of a U.S. software firm purchased an office building on January 22,
2004, for Indian Rupees (IRs.) 10 million when the exchange rate was IRs. 50 = US$1. On
December 31, 2004 (the parents fiscal year-end), the exchange rate was Irs. 52 = US$1.
The average exchange rate for the year 2004 was Irs. 51 = US$1. If the Indian subsidiarys
primary operating environment is considered to be India, under the requirements of SFAS
No. 52, at what amount will the office building be included in the consolidated financial
statements at December 31, 2004?
a.
b.
c.
d.
e.
US$200,000
US$192,308
US$196,078
IRs. 10 million
None of the above.
19. The Indian subsidiary of a U.S. software firm purchased an office building on January 22,
2004, for Indian Rupees (IRs.) 10 million when the exchange rate was IRs. 50 = US$1. On
December 31, 2004 (the parents fiscal year-end), the exchange rate was Irs. 52 = US$1.
The average exchange rate for the year 2004 was Irs. 51 = US$1. If the Indian subsidiarys
primary operating environment is considered to be the United States, under the requirements
of SFAS No. 52, at what amount will the office building be included in the consolidated
financial statements at December 31, 2004?
a.
b.
c.
d.
e.
US$200,000
US$192,308
US$196,078
IRs. 10 million
None of the above.
Use the following information to answer questions 20-25.

The Comfy Couch Co. purchases raw materials on account from a Mexican company on June 2,
2004. The total amount of the invoice is 3 million Mexican pesos and is due on August 2, 2004.
Comfy Couch Co.s fiscal year ends on June 30, 2004. Listed below is the exchange rate
between the Mexican peso and the US dollar on the relevant dates.
Spot rate on June 2
Spot rate on June 30
Spot rate on August 2
Forward rate for August 2 (on June 2)
MP 9.50 = US$1
MP 9.60 = US$1
MP 9.65 = US$1
MP 9.70 = US$1
In questions 20-23, assume that Comfy Couch Co. did not have a forward contract and that it
does its accounting in accordance with SFAS No. 52.
20. What is the US dollar value of the payable on June 2, 2004?
a.
b.
c.
d.
e.
US$315,789
US$312,500
US$310,881
US$309,278
None of the above.
21. How much will Comfy Couch Co. pay (in US$) on August 2, 2004?
a.
b.
c.
d.
e.
US$315,789
US$312,500
US$310,881
US$309,278
None of the above.
22. What is the foreign currency gain or loss that Comfy Couch must recognize on June 30,
2004?
a.
b.
c.
d.
e.
Gain of US$3,289
Gain of US$4,908
Gain of US$6,511
Gain of US$3,222
None of the above.
23. What is the foreign currency gain or loss that Comfy Couch must recognize on August 2,
2004?
a.
b.
c.
d.
e.
Gain of US$6,511
Gain of US$3,222
Gain of US$1,603
Gain of US$1,619
None of the above.
24. If Comfy Couch entered into a forward contract on June 2, 2004, what is the dollar value of
the payable?
a.
b.
c.
d.
e.
US$315,789
US$312,500
US$310,881
US$309,278
None of the above.
25. If Comfy Couch entered into a forward contract on June 2, 2004, what amount in US dollars
will it pay on August 2, 2004?
a.
b.
c.
d.
e.
US$315,789
US$312,500
US$310,881
US$309,278
None of the above.
1.
A currency option is a contract that provides the right and the obligation to trade a foreign
currency at a set exchange rate on or before a given date.
2.
An indirect foreign currency quote represents how much of the foreign currency can be
purchased for one unit of the domestic currency.
3.
The bid rate represents the price at which a financial institution is willing to buy a currency.
4.
If the spot rate is higher than the forward rate for a particular currency, then that currency
would be selling at a premium.
5.
Quotation exposure, backlog exposure, and billing exposure are various stages of foreign
currency translation exposure.
6.
All foreign transactions are also foreign currency transactions.
7.
Under the one-transaction approach, the transaction is not considered to be completed until
the final settlement.
8.
Under the two-transaction approach, a company's foreign currency receivable or payable are
considered a separate transaction distinct from the transaction to buy goods or services.
9.
Under the current rate method of translation, all current assets are translated at the year end
rate and non-current assets are translated at the applicable historical rates.
10. Under the current rate method, gains or losses from translation are shown in the cumulative
translation adjustment account in the balance sheet.
11. In the foreign currency context, there is no distinction between the terms conversion and
translation.
12. Using the current exchange rate to translate current assets and liabilities (under the
current/non-current method) is based on the false premise that they are similarly affected by
exchange rate changes.
13. The temporal method accommodates current market valuation of non-monetary assets (e.g.,
inventories) while the monetary/non-monetary method does not.
14. A major criticism of SFAS No. 8 was that it required foreign currency translation gains and
losses to be included in the income statement.
15. Under the temporal method, translation gain or loss for the period appears in the
stockholders' equity section of the balance sheet.
16. Cost of goods sold, depreciation expense, and amortization expense are translated at the
average exchange rate under the temporal method and the year end exchange rate under the
current rate method.
17. SFAS No. 52 requires the use of the current rate method for foreign subsidiaries located in
hyperinflationary environments.
18. Under SFAS No. 52, functional currency is the currency of the primary operating
environment in which the foreign subsidiary operates and generates cash flows.
19. According to SFAS No. 52, a hyperinflationary economy is deemed to be one in which the
annual inflation rate is greater than 100 percent.
20. If the U.S. dollar is deemed to be the functional currency, then SFAS No. 52 requires that the
current rate method be used.
21. Since the current rate method of foreign currency translation uses a constant exchange rate
to translate balance sheet items, it preserves the original financial statement relationships in
the consolidated financial statements.
22. An advantage of the current rate method of foreign currency translation is that a foreign
subsidiary's financial statement ratios are the same before and after translation.
23. IAS No. 21 requires the use of the temporal method of foreign currency translation for
foreign operations that are integral to the operations of the reporting enterprise.
24. As of June 30, 2003, Britain, Denmark and Sweden were among the European countries that
adopted the euro as their currency.
25. Between January 1, 1999, and January 1, 2002, companies doing business in Euroland can
enter into and settle transactions in the national currency or the euro and must have the
ability to process transactions in both currencies.
1.
In an inflationary period, one would experience a monetary loss from holding:

a. monetary liabilities
b. monetary assets
c. non-monetary assets
d. non-monetary liabilities
2.
Which of the following is a non-monetary item?

a. Cash
b. Accounts payable
c. Notes receivable
d. Equipment
3.
Which of the following are monetary items?

a. Accounts payable
b. Land
c. Inventory
d. Long-term loan
4.
The Shiraz Co. reported sales of 10 million rials in 2001, 12 million rials in 2002, and 15
million rials in 2003 made evenly throughout each year. The general price level index was at
120 at the end of 2001, 150 at the end of 2002, and 200 at the end of 2003. Assume that
prices rose evenly through each year. What amount should Shiraz Co. report as sales in its
income statement for 2002, restated for general price level changes?
a. Rials 13.33 million
b. Rials 15.00 million
c. Rials 20.00 million
d. Rials 18.00 million
5.
120 at the end of 2001, 150 at the end of 2002, and 200 at the end of 2003. What amount
should Shiraz Co. report as sales for 2003, restated for general price level changes?
6.
120 at the end of 2001, 150 at the end of 2002, and 200 at the end of 2003. What amount
should Shiraz Co. report as sales for 2001, restated for general price level changes?
7.
The Graz Company's historical cost balance sheet showed equipment (at cost) of 20 million
schillings on December 31, 2000 and 24 million schillings on December 31, 2001. The
equipment was being depreciated over a five year period on a straight line basis. Equipment
costing 4 million schillings was acquired on January 1, 2001. A full year's depreciation was
taken in the year of purchase. The December 31, 2000 balance of equipment (at cost)
restated to reflect December 31, 2001 purchasing power was 25 million schillings. What
amount of equipment should be shown in the general price level adjusted (GPLA) income
statement if the general price level index was 120 at December 31, 2000 and 144 at
December 31, 2001?
a. 29.00 million schillings
b. 29.80 million schillings
c. 28.80 million schillings
d. 25.00 million schillings
8.
The Graz Company's historical cost balance sheet showed equipment (at cost) of 20 million
schillings on December 31, 2000 and 24 million schillings on December 31, 2001. The
equipment was being depreciated over a five year period on a straight line basis. Equipment
costing 4 million schillings was acquired on January 1, 2001. A full year's depreciation was
taken in the year of purchase. The December 31, 2000 balance of equipment (at cost)
restated to reflect December 31, 2001 purchasing power was 25 million schillings. What
amount of depreciation expense should be shown in the general price level adjusted (GPLA)
income statement if the general price level index was 120 at December 31, 2000 and 144 at
December 31, 2001?
a. 5.96 million schillings
b. 5.80 million schillings
c. 5.76 million schillings
d. 5.00 million schillings
9.
On January 2, 2003 the Kowloon Corporation took a five year loan at 8 percent per annum
for HK$20 million. During 2003, Hong Kong experienced inflation of 6 percent. In its
general price level adjusted (GPLA) balance sheet at the end of 2003, at what amount should
Kowloon report its long term loan?
a. HK$21.2 million.
b. HK$21.6 million.
c. HK$20.0 million
d. HK$22.8 million
10. On January 2, 2003 the Kowloon Corporation took a five year loan at 8 percent per annum
for Singapore$20 million. During 2003, Singapore experienced inflation of 6 percent. What
is the amount of monetary gain or loss Kowloon experienced on the loan in 2003 (assuming
that interest was paid in 2003)?
a. HK$1.2 million gain.
b. HK$1.6 million loss.
c. HK$2.8 million loss.
d. HK$0.4million gain.
11. Sandvika Corp. acquired a warehouse at the start of the year 2003 - its first year of operation
- for 10 million Norwegian kroner. The warehouse was to be depreciated over 20 years using
the straight line method. At the end of 2003, an appraiser indicated that the replacement cost
of the warehouse was 12 million Norwegian kroner. For the year 2003, Sandvika's realized
and unrealized holding gains respectively related to the warehouse were:
a. 100,000 kroner and 1,900,000 kroner.
b. 100,000 kroner and 2,000,000 kroner
c. 200,000 kroner and 22,000,000 kroner
d. 200,000 kroner and 2,000,000 kroner
12. Sandvika Corp. acquired a warehouse at the start of the year 2000 - its first year of operation
- for 10 million Norwegian kroner. The warehouse was to be depreciated over 20 years using
the straight line method. At the end of 2003, an appraiser indicated that the replacement cost
of the warehouse was 12 million kroner. For the year 2003, Sandvika's realized and
unrealized holding gains respectively related to the warehouse were:
a. 100,000 kroner and 1,600,000 kroner
b. 200,000 kroner and 1,600,000 kroner
c. 100,000 kroner and 2,000,000 kroner
d. 400,000 kroner and 2,000,000 kroner
13. Those in favor of retaining goodwill in the balance sheet without amortization argue that:
a. all costs need to become expenses at some time.
b. it is an asset without future economic benefit.
c. amortization of goodwill results in bad press for the company.
d. its future value is maintained through continuos outlays by the company.
e. it tends to overstate earnings.
14. An argument in favor of setting up brands as an asset without amortization is that:
a. it is easy to obtain brand valuations periodically.
b. it is consistent with conservatism.
c. it is a good marketing tool.
d. the value of brands is maintained through regular advertising.
e. it helps smooth earnings.
15. The International Accounting Standards require that brands:

a. be revalued periodically.
b. be expensed immediately.
c. be valued according to a globally accepted formula.
d. None of the above.
16. Research and development costs are:
a. capitalized in the United States.
b. continue to decrease in importance as corporate research declines globally.
c. are uniformly required to be expensed globally.
d. split into parts under the revised IAS No. 9.
e. not a tax deductible expense.
17. The economic rationale for investors demanding geographic segment information is that:
a. it helps identify the dependence of a company on various product lines.
b. it helps compare labor costs in various countries.
c. it enables better assessment of risks and opportunities in different parts of the world.
d. it helps shift profits from high tax countries to low tax countries.
e. it makes the company appear to be a multinational corporation.
18. Value added reporting:
a. is a uniquely European concept.
b. is primarily geared towards stockholders.
c. is consistent with the view that companies have stakeholders other than stockholders.
d. is prepared in lieu of the income statement in many countries.
e. is useful for tax reporting in the United States.
19. The Brisbane Chemical Company has the following information in its 2004 income
statement:
Sales
Cost of raw materials, rent and external services
Wages and Salaries
Interest Expense
Income Tax
Value added is equal to:
a. A$3,100,000
b. A$1,300,000
c. A$1,210,000
d. A$970,000
A$9,100,000
6,000,000
1,800,000
90,000
240,000
20. Based on current corporate disclosure practices globally, the extent of environmental
disclosure provided by companies appears to be a function of:
a. the strength of environmental laws in respective countries.
b. the level of enforcement by the environmental agencies in countries.
c. the societal pressures brought to bear upon corporations.
d. the personal values of corporate managers.
e. the level of pollution in a country.
1.
A weakness of the historical cost model is that it does not account for changes in the
purchasing power of the currency that is used in the financial statements.
2.
The general price level adjusted (GPLA) model uses price indexes to adjust for general
changes in the purchasing power of a country's monetary unit.
3.
The current cost adjusted (CCA) model focuses on the specific price changes of physical
assets owned, used, or sold by a business entity.
4.
Monetary items such as cash and accounts receivable are not adjusted for inflation in a
balance sheet prepared under the general price level adjusted (GPLA) model.
5.
The general price level adjusted (GPLA) model is an improvement on the historical cost
model in that it converts nominal monetary amounts from different points in time and with
different purchasing powers into a monetary amount at a specific point in time and a
constant purchasing power.
6.
Like all the other accounting models, the current cost adjusted (CCA) model also takes a
physical asset perspective to measuring the wealth and income of an economic entity.
7.
In times of inflation, one would experience monetary gains from holding monetary assets
and monetary losses from holding monetary liabilities.
8.
Under the current cost adjusted (CCA) model, unrealized holding gains occur when physical
assets are consumed or sold.
9.
Purchased goodwill is measured as the difference between the total price paid for an
acquired business and the book value of its net identifiable assets.
10. An argument against the amortization of goodwill is that goodwill has an infinite life that
can be maintained and even enhanced over time.
11. The revised IAS No. 9 requires that research costs be expensed immediately and that
development costs also be expensed as incurred unless they meet asset recognition criteria.
12. The evidence from a number of research studies indicates a consensus that the geographic
segment disclosure provided in corporate annual reports is generally of a very high quality.
13. Terms such as inconsistent, jumbled and meaningless have been used to describe the general
level of geographic segment disclosure in U.S. annual reports.
14. The United States and Mexico worked jointly to revise their existing segment reporting
standards and issued related exposure drafts in January 1996.
15. Recently, the International Accounting Standards Committee, the German Institut
Wirtschaftprufer and the U.S. Financial Accounting Standards Board have collaborated on
developing new financial reporting standards on segment reporting.
16. In the United States, SFAS No. 131 adopts the management approach to segment reporting.
17. Critics often complain that most corporate environmental disclosure is predominantly a
public relations exercise by companies and contains little of substance.
18. Due to environmental disasters such as the Union Carbide chemical leak in Bhopal, India,
and the Exxon Valdez oil spill in Alaska most countries now have very specific financial
reporting requirements on environmental disclosure.
19. In most developed countries, environmental disclosure is mainly for environmentalists and
has no relevance to investors.
20. Scandinavian companies typically provide a great deal of environmental disclosure.
21. Investors ought to be interested in employee disclosure because how a company treats its
employees is likely to impact the quality of its labor relations which in turn is likely to affect
its current and future performance.
22. U.S. corporations are widely regarded as global leaders in providing employee disclosure.
23. Japanese corporate annual reports include a Social Balance Sheet which provides detailed
employee and environmental disclosure.
24. The value added statement provides information on the company's performance from the
perspective of the various stakeholders in the company.
25. The value added statement computes the wealth created by a company and shows how much
of this wealth is distributed to the various stakeholders in the company.

1.
Which of the following is the least expensive approach to transnational financial reporting
by a company?
a. Preparing country-specific secondary statements.
b. Preparing convenience statements.
c. Preparing convenience translations.
d. Preparing universal secondary statements.
e. Preparing limited restatements.
2.
The do nothing approach is a rational response by a company when:

a. the company takes great pride in its domestic accounting principles.
b. the company does not seek to raise capital or sell products in other countries.
c. the company is based in an English speaking country.
d. the company is based in a country that has adopted the euro as its currency.
e. the company has a website containing its primary financial statements.
3.
In transnational financial reporting, convenience translations

a. are provided in the foreign reader's language.
b. are prepared in the accounting principles of the foreign reader's country.
c. use the currency of the foreign reader's country.
e. Only (a) and (c) from the above.
4.
In transnational financial reporting, convenience statements

a. are provided in the foreign reader's language.
b. are prepared in the accounting principles of the foreign reader's country.
c. use the currency of the foreign reader's country.
e. Only (a) and (c) from the above.
5.
In a limited restatement, a company

a. only restates the language to that of the foreign reader's country.
b. only restates the currency to that of the foreign reader's country.
c. only restates parts of the financial statements in the accounting principles of the foreign
reader's country.
d. only provides the annual reports to a limited number of foreigner readers.
6.
In a country-specific secondary statement, a company

a. translates only the language to that of the foreign reader's country.
b. translates only the language and the currency to that of the foreign reader's country.
c. translates only the language and the accounting principles to that of the foreign reader's
country.
d. translates the language, currency, and the accounting principles to that of the foreign
reader's country.
e. translates only the currency and the accounting principles to that of the foreign reader's
country.
7.
In a typical universal secondary statement, a company

a. translates the annual report into English.
b. translates the accounting principles into that of the foreign reader's country.
c. translates the currency into that of the foreign reader's country.
d. translates the accounting principles into international accounting standards.
e. Only (a) and (d) from above.
8.
In the age of global capital markets, some companies send primary financial statements to
some investors and secondary financial statements to others.
a. This is primarily done by U.S. companies.
b. This is inappropriate and is frowned upon by most regulators.
c. The primary financial statements are prepared in accordance with GAAP while the
secondary statements are prepared in accordance with the tax laws.
d. Secondary statements are a rational response when the additional cost of preparing them
is justified by the benefits they generate for the company.
e. This practice is very confusing for both institutional and individual investors.
9.
The difference between a convenience statement and a convenience translation is:

a. The accounting principles used.
b. The currency used.
c. The language used.
e. Only a and b.
10. Which of the following statements is true?

a. Most Japanese corporations use U.S. accounting principles because of their
considerable exports to the United States.
b. Most Swedish companies use International Accounting Standards when they prepare
limited restatements for U.S. investors.
c. Most companies in Spanish speaking countries prepare secondary financial statements.
d. Most Swiss companies use International Accounting Standards when they prepare
secondary statements.
e. Most German companies use U.S. accounting principles when they prepare convenience
statements.
11. Companies doing business globally respond to foreign users of their financial
statements in a variety of ways. Which of the following statements is true?
a. Most companies opt for limited restatements since they result in limited costs.
b. Secondary financial statements are the least expensive of the alternatives available to
companies.
c. The do nothing approach is invariably the most sensible choice.
d. Each approach can be appropriate for a company that uses it if the option chosen is a
result of a reasonable cost-benefit analysis by management.
e. A convenience translation is almost always chosen by management because of its
convenience.
12. Research evidence reviewed in the chapter showed that financial statements of two
companies may lack comparability even if they are prepared using the same accounting
principles. This suggests that:
a. global accounting harmonization efforts serve little purpose.
b. ratio analysis should never be used in comparing countries from different countries.
c. it is important to factor in the company's domestic business environment in conducting
cross-country ratio analysis.
d. it is best to use convenience statements in comparing companies from other countries
with one's domestic companies.
e. All of the above statements are false.
13. Potential investors who have difficulty understanding a foreign company's financial
statements may
a. ask their local regulator to intervene even though the company is not listed on their
country's stock exchange.
b. use a variety of coping mechanisms if they are really interested in investing in foreign
companies to diversify their portfolios.
c. boycott the company's products.
d. demand that the company be required to use International Accounting Standards.
e. vote to change the company's top management.
14. When a company prepares a limited restatement for foreign users of its financial statements,
the related information is located in
a. the report of the independent auditors.
b. the balance sheet.
c. the management discussion and analysis section.
d. the notes to the financial statements.
e. the chief executive officer's message to stockholders.
15. In a recent research study, most non-U.S. firms indicated that as a result of accounting
diversity they refused to list their shares in U.S. markets and had instead:
a. bypassed the U.S. market in favor of the Eurobond market.
b. relied on domestic bank financing rather than raising capital in the United States.
c. encouraged foreign investors to buy the company's shares in its home market.
d. raised capital by undertaking a private placement in the United States.
16. In a study of financial statement users, underwriters indicated that accounting diversity
affected their decision making in the following ways:
a. It influenced the geographic spread and location of their activity.
b. It influenced the types of companies and securities they selected.
c. It affected their information processing costs.
d. It affected their assessment of securities returns in different countries.
17. At the macro-level, the reliability of financial statements from various countries is likely to
be affected by:
a. the level of financial reporting transparency that prevails in a country.
b. the scope and extent of audit required.
c. the degree of enforcement of financial reporting regulations.
d. the level of enforcement of securities regulations.
18. In Morgan Stanley Dean Witters Apples to Apples series, the following accounting issues
were identified as needing the most attention in conducting sensible cross-country
comparisons:
a. depreciation and revaluation of long-lived assets.
b. goodwill.
c. pension and other post-employment benefits.
d. consolidation and group reporting.
19. Users of accounting information must be cognizant of a number of differences other than
accounting principles, in annual reports that originate in countries other than their own.
These include:
a. the availability of financial information.
b. the reliability of financial information.
c. the timeliness of annual reports.
d. the format used in financial statements.
20. Users respond to foreign financial statements based on their resources and their level of
interest in the company. Investor responses include:
a. Refusing to invest in foreign companies.
b. delegating the monitoring function to professional fund managers.
c. relying on the companies' credit ratings.
d. meeting with company management periodically.
1.
Companies that take the do nothing approach to transnational financial reporting are
generally not interested in raising equity capital abroad.
2.
Most U.S. companies take the do nothing approach to transnational financial reporting.
3.
A convenience translation sent by a Brazilian company to France would be in French and in

French francs.
4.
A convenience statement sent by Toyota to the United Kingdom would be in English and in
British pound sterling.
5.
In limited restatements, a company translates only the language and the currency to
accommodate foreign readers of its annual reports.
6.
Traditionally, Swedish companies have provided limited restatements to investors in the

United States.
7.
In preparing country-specific secondary statements the company translates its domestic

annual report into the foreign user's language, currency, and accounting principles.
8.
If Sony provided investors in the United States with an annual report that was in English, in
U.S. dollars, and in Japanese accounting principles that would be an example of a
convenience translation.
9.
Some Swiss companies provide universal secondary statements to foreign investors. These
annual reports are in English, in Swiss francs and use international accounting standards.
10. There is a potential for confusion between convenience statements and country specific
secondary statements because the two annual reports look similar.
11. Cost considerations and the need to tap capital providers in several countries sometimes
results in companies providing country-specific rather than universal secondary statements.
12. Research evidence shows that large U.K. and U.S. firms which tend to have more experience
in dealing with international capital markets are relatively less affected by accounting
differences.
13. Research evidence shows that German, Swiss and Japanese firms tend to be more affected
by accounting differences than U.K. and U.S. firms.
14. Research evidence suggests that some firms refuse to list their shares on U.S. stock
exchanges because of the costs resulting from accounting diversity.
15. Large institutional investors might consider it worthwhile to invest in developing skills in
interpreting the financial statements of foreign companies contained in their primary annual
reports.
16. With the increasing globalization of capital markets, regulators face the challenge of
balancing their mandate to protect domestic investors without imposing unreasonable
barriers to reputable foreign companies from entering the capital market in the regulator's
jurisdiction.
17. Even though Honda might provide secondary financial statements prepared in U.S. GAAP,
the numbers contained therein might still not be fully comparable to those in Ford's annual
report due to important differences in the business environments of Japan and the United
States.
18. Companies in debt oriented countries are generally less willing to respond to requests from
investors in other countries for their annual reports.
19. The scope and extent of audit required in a country is likely to affect the reliability of
financial statements of companies from that country.
20. The absence of laws against insider trading in several countries results in individuals or
groups being able to benefit from trading on information they have obtained before it is
disclosed to the public at large in those countries.
21. In the United Kingdom and the United States, balance sheet items are listed in increasing
order of liquidity, with the most liquid items appearing at the bottom of the balance sheet.
22. In Germany and the United Kingdom, balance sheet items are listed in increasing order of
liquidity, with the most liquid items appearing at the bottom of the balance sheet.
23. Differences in definitions of terms can adversely affect the comparability of financial
statements across countries.
24. The accounting item cash and cash equivalents is one of the few items that is defined
exactly the same way in all countries.
25. The accounting terms accounts receivable and accounts payable in the United States
are similar to the accounting terms debtors and creditors in the United Kingdom.

1.
According to the International Finance Corporation, which of the following European

countries had emerging capital markets in 2001?
a. France
b. Luxembourg
c. Spain
d. Russia
e. Italy
2.
According to the International Finance Corporation, which of the following Asian countries
had emerging capital markets in 2001?
a. Japan
b. Thailand
c. Singapore
d. Hong Kong
3.
According to the International Finance Corporation, which of the following Latin American
countries had emerging capital markets in 2001?
a. Argentina
b. Brazil
c. Chile
d. Mexico
4.
Which of the following are likely benefits to developing countries of having emerging
capital markets (ECMs)?
a. ECMs expand the investment options available in the country thereby attracting foreign
investors.
b. ECMs allow capital to be raised in a more cost-effective manner.
c. ECMs positively influence the economic culture in developing countries by
encouraging domestic companies to become more responsive and accountable to a
greater number of stakeholders in society.
d. ECMs help in improving allocative efficiency by channeling funds to the most efficient
and productive users of capital.
5.
According to the International Finance Corporation study cited in the book, which of the
following developing countries had good domestic accounting standards:
a. Argentina
b. Greece
c. Taiwan
d. Philippines
6.
According to the International Finance Corporation study cited in the book, which of the
following developing countries had adequate domestic accounting standards:
a. Jordan
b. Nigeria
c. Pakistan
d. Zimbabwe
7.
The qualitative criteria for evaluating financial reporting in emerging capital markets
include:
a. reliability
b. comparability
c. information availability
e. Only (a) and (b).
8.
In many ECMs the public dissemination of financial information is limited by several

factors. These include:
a. the absence of an effective securities exchange agency.
b. the absence of effective competition among brokers.
c. weakness in the research capability of financial institutions.
d. a weak financial press.
9.
Substantial differences have been observed in the level of assurance provided by an

independent audit in various national settings. These differences are traceable to a variety of
factors including:
a. the training and qualifications of local auditors.
b. differences in audit standards and requirements.
c. differences in the nature of audits conducted.
d. the availability of sufficient numbers of trained auditors.
10. According to the statistics presented in the book, which emerging market had the highest
number of auditors relative to its population?
a. South Africa
b. South Korea
c. Sri Lanka
d. Brazil
e. Chile
11. According to the statistics presented in the book, which emerging market had the lowest
a. India
b. Brazil
c. South Africa
d. Argentina
e. Zimbabwe
12. According to the statistics presented in the book, which developed market had the highest
a. USA
b. New Zealand
c. Australia
d. Japan
e. Italy
13. According to the statistics presented in the book, which developed market had the lowest
a. Spain
b. Ireland
c. Finland
d. Japan
e. Both c and d.
14. Important policy issues facing regulators in emerging capital markets in regard to improving
their financial reporting capability include:
a. the choice between mandated and voluntary approaches to regulation.
b. whether, and to what extent, accounting harmonization should be pursued.
c. whether to allow foreign auditors to practice in the regulator's jurisdiction.
15. According to the survey cited in the book, which emerging markets were rated above
average in the comprehensiveness of their audit reports?
a. Philippines
b. India
c. Taiwan
d. Turkey
e. Portugal
16. According to the survey cited in the book, which emerging markets were rated below
a. Mexico
b. Pakistan
c. Colombia
d. India
e. Nigeria
17. According to the survey cited in the book, which developed markets were rated above
a. Austria
b. Belgium
c. Denmark
d. Germany
18. According to the survey cited in the book, which developed markets were rated below
a. Italy
b. Ireland
c. Spain
d. Switzerland
19. According to research evidence cited in the book, which of the following emerging markets
allow the revaluation of fixed assets:
a. Argentina
b. India
c. Malaysia
d. South Africa
20. According to research evidence cited in the book, in which of the following emerging
markets is historical cost not used as an overall valuation method for financial reporting?
a. India
b. Korea
c. Malaysia
d. Mexico
e. Nigeria
1.
Informational problems stemming from the difficulty of obtaining adequate and reliable
information contribute to the risks of investing in emerging capital markets.
2.
Relevant, reliable, and timely financial reporting is a crucial element of the information
necessary for sustaining investor confidence in emerging capital markets.
3.
The capital markets classified as emerging are all smaller in size than the capital markets in
Western Europe and North America.
4.
In no instance does the market capitalization of shares traded on the stock exchanges of
emerging capital markets exceed those of stock exchanges in developed countries.
5.
Emerging capital markets in Brazil, China, India, and Mexico rank among the twenty largest
capital markets globally.
6.
Multinational lending institutions such as the World Bank generally agree that a wellfunctioning stock market provides the impetus necessary for the economic growth of
developing countries.
7.
Active stock markets in ECMs serve as a barometer for a country's economic health by
signaling expectations regarding macroeconomic variables such as economic growth and
inflation.
8.
The World Bank regards the presence of an effective accounting and auditing profession as
essential to building well-functioning capital markets.
9.
Financial reporting is peripheral to establishing an active market for corporate securities.
10. Capital market research studies conducted in different countries do not provide convincing
evidence of the importance of accounting reports for stock market investors.
11. In the financial reporting context, availability means that financial and other information on
publicly listed companies is adequate, timely, and conveniently accessible.
12. A recent article from the Wall Street Journal concluded that U.S. companies are overvalued
relative to Asian companies because the U.S. companies more aggressive accounting
practices make their quality of earnings more vulnerable.
13. Weakness in the research capability of local brokers and financial institutions limits the
public dissemination of information in many emerging capital markets.
14. In the financial reporting context, reliability means that financial reports need to be prepared
on the basis of sound accounting principles and there is a mechanism to ensure compliance
with these principles.
15. Some emerging capital markets have attempted to emulate financial reporting requirements
in more developed capital markets by adopting the OECD's accounting standards.
16. In both developed and developing countries, the most rigorous financial reporting
requirements mean little if enforcement is inadequate.
17. The United Nations and the World Bank were critical of the major international accounting
firms for using less stringent auditing standards in developing countries than those used in
developed countries.
18. A major difficulty in a number of emerging capital markets is the shortage of qualified
auditors capable of attesting to the reliability of financial statements.
19. A recent survey showed that Japan has the lowest proportion of auditors to total population
among the important global financial centers.
20. Government policy towards financial reporting is not an important factor in improving the
quality of financial reporting in emerging capital markets.
21. Emerging capital markets generally share similar financial reporting legislation and practices
with the countries by which they were formerly colonized.
22. Proponents of a free market approach suggest that disclosure adequacy is best advanced by
allowing companies to choose the appropriate level of disclosure according to their
particular circumstances.
23. The most distinctive feature of Mexican accounting is its continued use of inflation
accounting long after it was discontinued by countries such as the United Kingdom and the
United States.
24. A distinct feature of the Chinese capital market is that Chinese companies issue several
classes of shares which results in Chinese companies using different GAAPs to prepare
financial statements.
25. The principal risk of pursuing accounting harmonization in emerging capital markets is that
accounting standards adopted are inappropriate for the economic conditions prevailing in the
specific country.

1.
A number of macroeconomic variables can adversely affect comparability of the financial

performance of subsidiaries in different countries. These include:
a. The levels of inflation in countries.
b. The levels of political stability in countries.
c. The labor situation in countries.
2.
Research studies comparing budgeting and performance evaluation practices in Japan and
the United States have found that:
a. the length of time spent in preparing budgets was higher in the U.S. than in Japan.
b. U.S. firms tended to focus on profitability measures while Japanese firms tended to
focus on sales volume and market share.
c. the compensation and promotion of U.S. managers was more likely to be impacted by
their budget performance than were those of Japanese managers.
e. Only (b) and (c) above.
3.
Managers who refrain from active management of foreign exchange risk may do so for a
variety of reasons, including:
a. they consider the use of risk management instruments such as currency options and
swaps as speculative.
b. they claim that foreign currency exposures cannot be measured with precision.
c. they argue that all business is risky and the firm gets rewarded for bearing risk.
d. they assert that the firm's balance sheet is hedged on an accounting basis.
4.
Managers actively engaged in foreign exchange risk management cite the following
benefits:
a. Since there is a direct relationship between a company's risk and its cost of capital a less
volatile earnings stream reduces its cost of capital.
b. A less volatile earnings stream has the potential for tax savings under certain tax
regimes.
c. Hedging activities can help securities analysts get a more precise value of the firm's
assets.
e. Only (a) and (b) above.
5.
The main types of foreign exchange exposure are:

a. translation exposure
b. transaction exposure
c. operating exposure
d. currency exposure
e. Only (a), (b), and (c) above.
6.
The main foreign currency risk hedging instruments available to companies are:
a. forward contracts, currency options, currency futures, political risk insurance.
b. forward contracts, currency options, money market hedges, currency futures.
c. currency futures, commodities futures, political risk insurance, stock options.
d. forward contracts, stock options, political risk insurance, currency futures.
e. currency options, currency futures, commodities futures, stock options.
7.
The main internal constituents of a company that are likely to be affected by its transfer
pricing policies are:
a. senior management of the company.
b. shareholders of the company.
c. domestic tax authorities.
8.
The main external constituents of a company that are likely to be affected by its transfer
pricing policies are:
a. domestic tax authorities
b. foreign tax authorities
c. joint venture partners
9.
The following is a list of the external constituents of a firm's transfer pricing policies:
a. employees, shareholders, suppliers, and customers.
b. domestic tax authorities, joint venture partners, competitors, and customers.
c. foreign tax authorities, joint venture partners, customers, and shareholders.
d. domestic tax authorities, foreign tax authorities, employees, and suppliers.
e. competitors, suppliers, customers, and managers of foreign subsidiaries.
10. The main transfer pricing approaches are:

a. market based methods
b. cost based methods
c. negotiated transfer prices.
11. The main transfer pricing methods for the sale and transfer of tangible items are:
a. the comparable uncontrolled price method.
b. the resale price method
c. the cost plus method
d. the comparable profits method
12. The main transfer pricing methods for intangible assets are:
a. the comparable uncontrolled transaction method
b. the comparable profit method
c. the resale price method
13. Which of the following is an advantage to a company of entering into an Advance Pricing
Agreement:
a. It removes some of the uncertainty of how transfer prices will be treated for tax
purposes.
b. It makes the relationship between the company and the tax authority less adversarial.
c. It reduces the company's record keeping burden.
14. Which of the following is a disadvantage to a company of entering into an Advance Pricing
Agreement (APA):
a. The taxpayer may have to divulge proprietary information as part of the APA process.
b. It does not protect the company from subsequent scrutiny of its transfer pricing
activities.
c. The monetary cost of entering into an APA can be considerable.
e. Only (a) and (c) above.
15. Research evidence cited in the chapter shows that some of the main factors cited by
companies in their choice of transfer pricing approach include:
a. overall profitability of the company.
b. differentials in income tax rates among countries.
c. restrictions imposed by countries on repatriation of profits or dividends.
d. competitive position of subsidiaries in foreign countries.
16. In the area of information technology, the main areas of differences between multinational
companies and domestic companies are:
a. factors affecting system design.
b. factors affecting system operation.
c. factors affecting regulation.
17. Identify the approaches that can help provide a match between a firm's global business
strategy and its global information technology system.
a. Independent global operations system.
b. Parent mandated system
c. Cooperative system
d. Integrated system
18. As relates to a multinational information technology strategy, which of the following
statements is true of the independent global operations system?
a. Under this approach the parent prescribes the information technology choices of
subsidiaries.
b. Under this approach the information technology system is integrated globally.
c. An advantage is that it permits greater local responsiveness.
d. An advantage is that it makes it easy for the multinational company to implement global
initiatives and strategies.
statements is true of the parent mandated system?
a. Under this approach subsidiaries are fairly autonomous.
b. The equipment used in information systems reflects local communications standards
and offerings as well as local availability of trained personnel.
c. This approach is responsive to local needs and customs.
d. This approach facilitates global strategies and coordination.
e. This approach offers a greater chance of local acceptance.
statements is not true about the cooperative system?
a. Under this approach the parent influences rather than mandates the information
technology choices of its subsidiaries.
b. Joint application development efforts are undertaken between various entities within the
group.
c. Subsidiaries have latitude in modifying applications developed centrally to better fit the
local environment.
d. An advantage of this approach is that systems developed cooperatively are more likely
to be used by subsidiaries.
e. An advantage of this approach is that the development period is short and the end
product is fully integrated.
1.
If the budget is to motivate employees and to help create goal congruence between
employees and the organization then it must provide reasonable targets for the employees to
attain.
2.
Additional considerations must be factored into designing budget and performance

evaluation systems for subsidiaries in other countries.
3.
In certain situations companies may need to include non-financial criteria instead of

financial criteria based on what they perceive to be the primary role of the foreign subsidiary
in the firm's overall strategy.
4.
An important benefit of non-financial measures is that they can be reported on a timely basis
and problems identified can be addressed promptly before they negatively affect the
company's financial performance.
5.
If a multinational company has a centralized treasury operation at headquarters with

exclusive authority to manage foreign currency risk then the parent's currency is the one that
ought to be used for evaluating foreign subsidiaries.
6.
The type of transfer pricing policies within an organization have no impact on the
profitability of each subsidiary engaged in intra-firm activity.
7.
For a company that has subsidiaries in a number of countries, comparability might be a

desired ingredient of a transfer pricing system.
8.
If multinational companies are to suitably motivate and reward the managers of their foreign
subsidiaries it is critical that they distinguish between manager performance and subsidiary
performance.
9.
Research studies that have compared budgeting and performance evaluation practices have
found that the average length of time spent in preparing budgets is greater in Japanese
companies than in U.S. companies.
10. Research studies that have compared budgeting and performance evaluation practices have
found that U.S. companies tend to focus on profitability measures of performance while
Japanese firms tend to focus on sales volume and market share.
11. Research studies that have compared budgeting and performance evaluation practices have
found that U.S. firms use budget variances primarily to evaluate managers while Japanese
firms use budget variances primarily for the timely recognition of problems and to improve
next period's budget.
12. There is research evidence that British firms tend to focus on control systems to improve
short term profits while Japanese firms focused more on long term strategic planning and
emphasized growth in market share.
13. A recent study found that while management accounting practices of Australian companies
emphasize cost control tools at the manufacturing stage, Japanese companies pay much
greater attention to cost planning and cost reduction tools at the production design stage.
14. In conducting multinational capital budgeting analysis, one way to handle the additional risk
from projects based abroad is to add a foreign risk premium to the discount rate that would
be used for a domestic project.
15. In conducting multinational capital budgeting analysis, one way to handle the additional risk
from projects based abroad is to adjust the cash flows for the foreign project to reflect the
additional uncertainty.
16. The additional complexities resulting from doing business abroad must be incorporated in
the capital budgeting analysis by adjusting either the discount rate or the expected life of the
investment.
17. Some managers refrain from actively managing foreign currency risk because they consider
risk management instruments such as currency options and futures to be speculative.
18. Management should only devote resources to managing foreign exchange risk if the benefits
to the company exceed the cost of implementing such a program.
19. Managers actively engaged in foreign exchange risk management argue that since there is a
direct relation between risk and the required rate of return a less volatile earnings stream
reduces the firm's cost of capital.
20. A forward contract is the right and the obligation to buy or sell a currency at a set exchange
rate on a set date in the future.
21. In a foreign currency option, the right to buy currency is a put and the right to sell currency
is a call.
22. The only objective under a multinational transfer pricing policy is to minimize the firm's
global tax liability.
23. Joint venture partners in other countries are never impacted by a multinational company's
transfer pricing policies.
24. In international business, dumping is generally said to occur when a firm sells products at
much higher prices in foreign markets than it does in its domestic market.
25. With the improvement in information technology and the growing cooperation between tax
authorities in various countries, the level of monitoring of multinational companies is likely
to decrease.

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Test Bank for Chapter 1

Multiple Choice Questions

Which of the following variables play a role in shaping accounting development?

High levels of financial disclosure are generally found in countries

In countries with micro-oriented accounting systems, the role of accounting is

Which of the following is not an environmental factor affecting accounting?

Companies in which country produce annual reports to attract potential investors:

10. Which of the following is an impetus for international accounting standards?

In order to make informed decisions in a global environment, one needs to have an

Being educated in international accounting is among the portfolio of skills required of

Test Bank for Chapter 2

In the United States, the Financial Accounting Standards Board

What is an argument against the effort to harmonize accounting globally?

The key developmental organization for international accounting standards is the

The Organization for Economic Cooperation and Development is not

Global harmonization of accounting principles does not require:

10. Current proponents of harmonizing accounting standards globally are

Accounting harmonization is the process by which differences in financial reporting

The adoption of international accounting standards in countries is a purely technical matter

Politically it is easier for countries to adopt external standards promulgated by a

Test Bank for Chapter 3

In the one-transaction approach:

The two-transaction approach is required in:

A forward exchange contract is an agreement to:

Under the monetary/non-monetary method of foreign currency translation, depreciation

Under the current rate method

Use the following information to answer questions 20-25.

All foreign transactions are also foreign currency transactions.

In an inflationary period, one would experience a monetary loss from holding:

Which of the following is a non-monetary item?

Which of the following are monetary items?

15. The International Accounting Standards require that brands:

Test Bank for Chapter 5

The do nothing approach is a rational response by a company when:

In transnational financial reporting, convenience translations

In transnational financial reporting, convenience statements

In a limited restatement, a company

In a country-specific secondary statement, a company

In a typical universal secondary statement, a company

The difference between a convenience statement and a convenience translation is:

10. Which of the following statements is true?

A convenience translation sent by a Brazilian company to France would be in French and in

Traditionally, Swedish companies have provided limited restatements to investors in the

In preparing country-specific secondary statements the company translates its domestic

Test Bank for Chapter 6

According to the International Finance Corporation, which of the following European

In many ECMs the public dissemination of financial information is limited by several

Substantial differences have been observed in the level of assurance provided by an

Financial reporting is peripheral to establishing an active market for corporate securities.

Test Bank for Chapter 7

A number of macroeconomic variables can adversely affect comparability of the financial

The main types of foreign exchange exposure are:

10. The main transfer pricing approaches are:

Additional considerations must be factored into designing budget and performance

In certain situations companies may need to include non-financial criteria instead of

If a multinational company has a centralized treasury operation at headquarters with

For a company that has subsidiaries in a number of countries, comparability might be a

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