Académique Documents
Professionnel Documents
Culture Documents
CHAPTER 1
Learning Objective #1: Identify the key trends in the development of accounting
through history
8. When anyone analyzes a company balance sheet and income statement, there are obvious
differences in all of the following except
__a. currency
__b. terminology
__c. inflation effects
**d. the reason to analyze of credit worthiness
13. As a result of the industrial revolution in the 19th and early 20th centuries,
__a. it was finally necessary to develop double entry accounting.
**b. the basic form of business organization shifted to limited liability and joint stock companies.
__c. fixed assets diminished in importance.
__d. governments got together and decided to require firms to draw up balance sheets every two
years.
17. Firms that have a worldwide view of production, sourcing raw materials and components, and
final markets are
**a. multinational enterprises.
__b. multidomestic enterprises.
__c. from the industrial but not developing countries.
__d. typical of industrial but not service firms.
18. When examining the lists of the largest corporations in the world, it is obvious that
**a. exchange rates have the potential of distorting the list.
__b. Japanese companies are the largest in sales and most profitable in the world.
__c. U.S. companies are the largest in sales but are not among the most profitable.
__d. European firms dominate the list of large and most profitable firms.
3. How do societal values and accounting values interact with each other to establish accounting
systems?
__a. Societal values affect accounting values, and accounting values also modify societal values.
__b. Accounting systems are influenced directly by societal values.
**c. Accounting systems are indirectly influenced by societal values through their impact on
accounting values and institutional consequences (such as legal systems, capital markets, etc.)
__d. Accounting values indirectly affect accounting systems through their impact on institutional
consequences.
Learning Objective #2: Discuss the major factors influencing the development
of accounting and information disclosure in the global economy
5. The emergence of corporations has influenced financial accounting by
__a. combining ownership and control.
__b. making transparency less important.
**c. emphasizing disclosure as part of the necessary means of regulating corporate behavior.
__d. removing limited liability as a way of hiding corporate responsibility.
7. Which of the following is true concerning the impact of securities markets on corporate
reporting?
**a. There is a strong correlation between well-developed capital markets and the extent of
financial disclosure in corporate reports.
__b. The wave of privatization is hampering disclosure, because state-owned firms cannot disclose
the same information that private firms can.
__c. There is a strong convergence of opinions on what corporate management wants to disclose
and what financial providers want from management.
__d. Most investors and creditors know what information they want, how they can use the
information, and what the costs and benefits are of that information.
8. The wider audience of users of financial information (employees, trade unions, consumers, etc.)
__a. want the same information as do providers of capital.
**b. tend to pursue a different set of information due to their nontraditional goals.
__c. want information that really doesn't affect corporate behavior and performance.
__d. is relatively unimportant in any country due to their lack of political and financial power.
Learning Objective #3: Examine some of the important accounting issues that
distinguish MNEs from purely domestic corporations
9. Multinational enterprises differ from strictly domestic enterprises in what way from an
accountability and disclosure perspective?
__a. MNEs typically don't pay taxes.
__b. MNEs usually are in conflict with the objectives of host countries, whereas domestic firms
tend to be compatible with home country objectives.
__c. strictly domestic companies do not operate on an arms-length basis with customers abroad.
**d. with MNEs, there is usually a significant volume of intercompany transactions in foreign
operations.
12 All of the following issues distinguish MNEs from purely domestic companies except
__a. volume of transactions between countries
__b. cross-frontier relationships
__c. participation in different markets with different laws and currencies
**d. private stockholder ownership
14. Accounting regulations tend to be more detailed and comprehensive in which of the following
systems?
__a. the common law system.
__b. countries that follow the British tradition.
**c. the civil law system.
__d. countries where culture is influential.
16. Which of the following is not an institutional consequence of societal values that impacts
accounting systems
**a. Trade
__b. Legal system
__c. Education
__d. Religion
Learning Objective #5: Identify the major international pressures for
accounting change
17. International forces for change:
__a. directly affect accounting values
**b. do not directly affect accounting values
__c. directly affect accounting systems
__d. do not directly affect physical environment factors
18. The EU has embarked on a major program of harmonization that will coordinate all of the
following except
__a. accounting
__b. company law
__c. monetary systems
**d. urbanization
20. In order to foster international economic and social development the OECD has issued
__a. the General Agreement on Tariffs and Trade
__b. the G7 accord
__c. the Potsdam declaration
**d. a Code of Conduct
CHAPTER 3
Learning Objective #1: Discuss different ways to identify and classify
accounting systems internationally
1. According to the deductive approach to accounting classification,
__a. accounting practices are analyzed and used to develop accounting groups.
**b. international accounting groups are developed by linking environmental factors to national
practices.
__c. it is impossible to compare countries due to cultural differences.
__d. disclosure groups are not as significant as are measurement groups in classifying countries.
3. The Mueller system of classifying countries for accounting purposes based on their business and
economic environments is an example of
**a. deductive classification.
__b. inductive classification.
__c. the inability to classify countries for accounting similarities.
__d. cultural relativism.
6. Which of the following accurately reflects the status of research in the classification of countries
in terms of accounting practices?
__a. the deductive approach is superior to the inductive approach.
__b. the inductive approach focuses too much on environmental factors rather than accounting
practices.
__c. narrow country groupings are possible due to advances in research methodology.
**d. only very general relationships between environmental factors and accounting systems have
been established.
Learning Objective #2: Examine the key dimensions of national culture and
how they influence behavior in work situations
15. Large power distance is more compatible with which accounting value?
__a. professionalism.
**b. uniformity.
__c. transparency.
__d. none of the above.
Learning Objective #4: Show how cultural values and accounting values relate
to each other in the development of accounting standards and practices
worldwide
18. A major accounting value that relates to enforcement and authority of accounting systems is
**a. statutory control.
__b. secrecy.
__c. optimism.
__d. conservatism.
22. Anglo-Saxon countries would tend to reflect which of the following accounting values?
**a. transparency.
__b. secrecy.
__c. conservatism.
__d. uniformity.
23. Germanic countries would tend to reflect which of the following accounting values?
__a. optimism.
__b. transparency.
__c. flexibility.
**d. secrecy.
7. Taxation accounting in the United States differs from that of Britain in that
__a. the British tax corporations and shareholders separately, whereas the Americans allow
shareholders to offset some of their tax burden with a tax credit for taxes paid by the
corporation.
**b. British companies account for deferred taxes only to the extent that the tax is actually expected
to be paid in the foreseeable future.
__c. the U.S. requires the partial method for deferred taxation.
__d. the U.S. does not allow firms to take into account changes in income tax rates when
computing deferred tax.
8. The treatment of inventory in Britain differs from that of the United States in that
__a. the British approach to inventory measurement is much less restrictive.
__b. FIFO is not permitted in Britain.
**c. LIFO is not permitted in Britain.
__d. in the United States, LIFO is not permitted.
9. Which of the following accurately describes the differences between the United States and the
United Kingdom in terms of conservatism in earnings measurement?
__a. The British tend to be more conservative in earnings measurements than do Americans.
__b. British earnings are higher than U.S. earnings because U.S. firms tend to capitalize interest
costs relating to certain types of assets during acquisition or construction.
**c. U.S. earnings tend to be lower than British earnings since U.S. firms capitalize and amortize
goodwill.
__d. none of the above.
10. Assume that translated U.K. earnings are $100 and U.S. earnings are $120. The index of
conservatism is
__a. .800 (U.S. is more conservative)
**b. .800 (British is more conservative)
__c. 1.200 (U.S. is more conservative)
__d. 1.200 (British is more conservative)
12. It is possible to determine the degree of conservatism of U.K versus U.S. GAAP, because
__a. British firms must disclose the difference due to London Stock Exchange requirements.
__b. British firms voluntarily disclose the difference in order to attract U.S. investors.
**c. British firms who list an American Depositary Receipt (ADR) or an actual share in the United
States must disclose the difference in earnings.
__d. all of the above.
13. As a result of research on the degree of conservatism among U.S. and British firms, it was
found that
__a. British and American firms are about the same in terms of the degree of conservatism.
__b. British earnings are more conservative than are U.S. earnings.
**c. U.S. earnings are more conservative than are British earnings.
__d. goodwill is not as significant a factor in determining earnings differences as was once thought.
Learning Objective #4: Show how reported earnings are affected by differences
in accounting principles in other parts of the world, with special reference to
continental Europe and Japan.
14. In ranking countries in terms of conservatism,
__a. Japanese firms tend to be less conservative than U.S. firms.
__b. continental European firms tend to be more conservative than British but less conservative
than U.S. firms.
**c. the Anglo-Saxon countries are less conservative and Germanic countries more conservative in
terms of earnings.
__d. there has been no research on the conservatism of earnings of countries other than the U.S. and
U.K.
15. When comparing the relative conservatism of U.S. versus foreign companies,
**a. U.S. firms tend to be less conservative than Japanese firms, because Japanese firms are more
heavily influenced by tax law.
__b. U.S. firms are more conservative than Continental European firms due to the dominance of
capital market disclosures in the United States.
__c. European firms are less focused on tax law than are the U.S. firms.
__d. British firms are more conservative than U.S. firms, because they tend to take goodwill to
income rather than to equity as is the case in the United States.
16. Given what you know about the differences in conservatism between the U.S. and U.K. and
what you learned from the ICI data, which of the following statements is most accurate?
__a. return on equity and the debt/equity ratio would usually be lower under U.K. GAAP than it
would be under U.S. GAAP.
__b. return on equity would usually be higher and the debt/equity ratio lower under U.K. GAAP
than under U.S. GAAP.
__c. return on equity would usually be lower and the debt/equity ratio higher under U.K. GAAP
than under U.S. GAAP.
**d. return on equity and the debt/equity ratio would usually be higher under U.K. GAAP than
under U.S. GAAP.
17. An earnings adjustment index based on US GAAP showing the comparative impact of
international accounting differences on earnings
__a. has Germany at the top
**b. has Japan on the bottom
__c. has the U.S. at the top
__d. has the U.K. at the bottom
3. All of the following international organizations are now issuing more detailed accounting
requirements except
**a. PGA
__b. UN
__c. OECD
__D. IASC
Learning Objective #2: Show how annual report disclosures are an important
way of communicating to stakeholders
5. Which of the following is true concerning managerial incentives to disclose information?
__a. More information increases uncertainty about financial performance.
__b. More disclosure increases the cost of capital, causing stock prices to fall.
__c. Information disclosure is usually neutral.
**d. More information usually helps managers get better access to external capital.
6. The disclosure of information that would help another firm know more about your firm would be
an example of
__a. the direct cost of disclosure.
__b. the cost of information production.
**c. the cost of competitive disadvantage.
__d. why government needs to regulate accounting disclosure.
7. Which of the following are considered by managers to generate the greatest cost of competitive
disadvantage?
**a. line of business profits, narrowly defined.
__b. inflation adjusted profits.
__c. a description of organizational structure.
__d. quarterly interim financial statements.
8. The value of the annual report as opposed to just the financial statements is that
__a. the annual report must contain a quantitative forecast of earnings.
**b. management can provide a good qualitative discussion of the financial information.
__c. financial information is usually not very accurate, so potential investors can rely more on
management impressions.
__d. management is more likely to provide more financial information in its annual report than it
is in its financial statements.
Learning Objective #3: Evaluate the incentives to disclose information and the
costs involved
9. The mutuality of interests concept related to information disclosure implies that
**a. disclosure may help users be more aware of common interests, improving cooperation.
__b. increased disclosure increases uncertainty about financial performance.
__c. user benefits always exceed costs.
__d. it is difficult to measure the costs and benefits of disclosure.
16. Why does Switzerland have one of the lowest levels of disclosure
__a. the size of the market is very high
__b. the size of the market is small
__c. a sophisticated regulation system
**d. secrecy is highest
Learning Objective #7: Review issues relating to the frequency and timeliness of
corporate reporting internationally
25. Which of the following are considered by managers to generate the greatest net costs?
__a. a description of major environmental projects.
__b. geographical sales, broadly defined.
__c. a description of major new products.
**d. inflation adjusted profits.
2. Which of the following is true concerning the pressures for information disclosure?
__a. Companies are not overly concerned about the demand for disclosure due to increasing
sophistication of information systems.
**b. The internationalization of capital markets is leading to the demand for more comparable
information.
__c. Corporate annual reports contain sufficient information for all user groups.
__d. The simplification of information is leading to greater understandability of financial
statements.
6. Which of the following organizations has been the most effective government organization at
harmonizing accounting practices?
__a. the United Nations.
__b. the Organization for Economic Cooperation and Development.
__c. the International Accounting Standards Committee.
**d. the European Union.
7. Which of the following is true concerning the impact of the United Nations on accounting?
__a. The U.N. generally represents the wishes of industrial countries.
**b. It has been more effective at monitoring accounting practices than at setting accounting
standards.
__c. It has not been able to establish guidelines for accounting practices due to internal
disagreements.
__d. It has been interested in nonfinancial rather than financial disclosures.
8. The European Union and the Organization for Economic Cooperation and Development differ
from each other in terms of their accounting harmonization efforts, because
__a. the OECD represents primarily developing countries, whereas the EU represents industrial
countries.
**b. the EU has the force of law behind it, whereas the OECD can only recommend disclosure
practices.
__c. the EU is involved only in measurement, whereas the OECD is only interested in disclosure.
__d. the OECD represents the profession, whereas the EU represents governments.
10. According to the 4th Directive of the EU, the operational basis for the income statement means
that
__a. a horizontal format must be used.
__b. there is a separate line item for staff costs.
__c. depreciation is considered a liability.
**d. cost of goods sold is presented as a line item.
12. Following the issuance of several directives in the EU, including the 4th, 7th and 8th, it appears
that
__a. the EU is ready to issue a series of new accounting regulations.
__b. Europeans prefer to have a set of standards that all countries would follow rather than the
current level of flexibility.
__c. stock exchanges are losing their influence.
**d. mutual recognition of each other's accounting standards and practices is becoming the norm.
Learning Objective #3: Discuss how trade unions and employees are interested
in harmonizing accounting to get information that will help them formulate
policy concerning MNEs
16. Trade unions do not want accounting information for interfirm comparisons, but for
__a. specific line item analysis
**b. policy formulation
__c. checking MNE labor law violations
__d. tax avoidance
Learning Objective #4: Describe how the International Organization of
Securities Commission (IOSCO) is representing investors in pushing for
harmonization of accounting to facilitate cross-border comparisons
17. IOSCO is
__a. a part of the UN
__b. a relic of the European customs union
**c. an organization of securities market regulators
__d. a group of accountants
19. Analysis of MNE aggregate results requires knowledge of the component parts of the following
except
**a. certification of the COFRI
__b. profitability
__c. degree of risk
__d. potential for growth
22. Which of the following is an example of a group involved in harmonization of accounting that
represents the accounting profession?
**a. the IASC.
__b. the EU.
__c. the OECD.
__d. the UN.
23. The International Accounting Standards Committee requires the following segment
information:
__a. There is no IASC standard at this point.
**b. sales and profits by line of business.
__c. sales but not profits for geographic areas.
__d. sales but not profits for line of business.
__a. I only
__b. II only
__c. III only
**d. I and II
__e. I and III
CHAPTER 7
Learning Objective #1: Show how countries aggregate information through the
process of consolidating financial statements
1. The best means of accounting for business combinations in most of the world is
__a. by disaggregating data by line of business.
__b. by disaggregating data by geographic area.
**c. consolidation of financial information.
__d. through parent company statements only, except in Anglo-Saxon countries.
10. For non-consolidated subsidiaries where the parent owns less than a majority interest but more
than a 20 percent interest,
__a. the equity method is used by a majority of corporations worldwide.
**b. the equity method must be used by U.S. companies.
__c. the cost method recognizes income when earned by the subsidiary.
__d. the equity method recognizes income when a dividend is received by the parent.
11. Which of the following accurately reflects the accounting for non-consolidated subsidiaries in
Japan?
**a. Cross-holdings of related companies makes it difficult to identify a parent company.
__b. Japanese companies are not permitted to use the equity method.
__c. Keiretsu relationships usually have a bank as the major shareholder in related companies.
__d. Earnings and assets of Japanese companies tend to be overstated due to the inclusion of group
members in consolidated financial statements.
12. For non-consolidated subsidiaries where the parent owns less than a majority interest but more
than a 20 percent interest,
__a. the equity method is used by a majority of corporations worldwide.
**b. the equity method must be used by U.S. companies.
__c. the cost method recognizes income when earned by the subsidiary.
__d. the equity method recognizes income when a dividend is received by the parent.
Learning Objective #5: Compare the different attitudes toward the cash-flow
statement worldwide
21. AT&T has a 60 percent equity interest in a joint venture with Marubeni Corporation in Japan to
develop and market laptop notebook portable computers, notably the Safari notebook. Would you
classify this operation as an
__a. implementor.
**b. integrated player.
__c. local innovator.
__d. multidomestic operation.
23. A contractual arrangement whereby two or more parties undertake an activity which is subject
to joint control
__a. a consol
__b. a preferred stock
**c. a joint venture
__d. a mutual fund
28. Analysts
__a. do not adjust corporate profits to exclude profit/losses from goodwill
__b. do not consider the market as efficient
__c. do not regard intangible accounting as full disclosure
**d. do adjust corporate profits to exclude profit/losses from goodwill
29. A major argument in favor of setting up goodwill as an asset without amortization is that
__a. it is inconsistent to amortize purchased but not internally generated goodwill.
__b. it is the cost of resources which will be used up.
**c. its future value is being continuously maintained.
__d. everything needs to pass through the income statement sometime.
30. A major argument in favor of the immediate write-off approach to goodwill is that
__a. it is an asset with future economic benefit.
**b. its true value has no predictive relationship to the cost paid on acquisition.
__c. it does not distort the financial statements.
__d. It provides a more accurate relationship between debt and total assets.
31. A major argument in favor of setting up goodwill as an asset with amortization is that
**a. goodwill is a cost of resources that will be used up
__b. its future value is being continuously maintained.
__c. its true value has no predictive relationship to the cost paid on acquisition.
__d. it does not distort the financial statements.
33. The dominant approach to accounting for goodwill in the United Kingdom is the
**a. immediate write-off to reserves.
__b. immediate write-off to income.
__c. set up as an asset with amortization.
__d. set up as an asset without amortization.
34. The dominant approach to accounting for goodwill in the United States is the
__a. immediate write-off to reserves.
__b. immediate write-off to income.
**c. set up as an asset with amortization.
__d. set up as an asset without amortization.
35. A major concern over the treatment of goodwill by the British in comparison with the
Americans is that
**a. the British may be able to offer more for an acquisition than an American firm.
__b. British income tends to be lower than U.S. income.
__c. British firms would have a more difficult time acquiring firms that have brand names.
__d. British firms are able to pay more for new greenfield (as opposed to acquisition) investments
than are U.S. firms.
36. Greatbrit PLC, a British firm, acquired a foreign corporation for a purchase price of $500
million. The book value of the net assets was stated at $350 million, but the fair market value of
the net assets is $420 million. Assume the useful life of the goodwill to be 10 years. If the
goodwill is systematically amortized over its useful life, what would be the amount per year?
__a. $15 million per year
**b. $8 million per year
__c. $7 million per year
__d. Goodwill cannot be systematically amortized in Britain.
37. Using the same assumptions as given in question 5, but assume that Lewis PLC is Japanese.
What would be the amount of goodwill recognized on an annual basis under their GAAP?
**a. $30 million per year
__b. $15 million per year
__c. $8 million per year
__d. Goodwill cannot be systematically amortized.
CHAPTER 8
Learning Objective #1: Identify the major uses and users of segment information
2. Segment information
I. Permits a better assessment of risk
II. Gives a more accurate assessment of potential growth
__a. I only
__b. II only
__c. neither I or I
**d. both I and II
4. Segment information is
__a. very easy for MNEs to compute
**b. useful because some users only want part of the MNE data
__c. does not require cost allocations
__d. does not concern transfer pricing
Learning Objective #2: Discuss the major benefits of segment disclosure from the
perspective of predictive ability tests and stock market studies
8. Segment disclosures
__a. do not affect firm risk
__b. increase firm risk
__c. increase the MNE price variability
**d. decrease the MNE price variability
Learning Objective #3: Highlight the costs of segment disclosures from the standpoint
of preparation and disclosure of information to competitors
10. MNEs often make the argument against segment disclosure that
__a. economic efficiency will result
**b. they will be put at a competitive disadvantage
__c. there will be an affect on global comparative advantage
__d. turnover rates will decrease
Learning Objective #5: Compare the different regulations for segment disclosures
around the world, especially in the United States and the United Kingdom
17. A major difference between U.S. segment disclosures and those of other countries is that
__a. U.S. companies tend to disclose more segments on average than do U.K. companies.
**b. U.K. companies have several different sources of standards, whereas U.S. companies only have to
worry about the FASB and SEC.
__c. U.K. company law gives significant direction to companies on establishing segments, whereas the
FASB gives no discretion to management on the establishment of segments.
__d. U.S. companies have to report geographic sales by source and destination, whereas British companies
are only allowed to report geographic sales by destination.
Learning Objective #6: Examine the problems of segment reporting in practice and
discuss ways to make segment disclosures more useful
21. Which of the following is not a major problem for segment reporting?
__a. There are problems with verification of information.
__b. There are problems with segment identification.
__c. The greater the disaggregation, the more likely the need to allocate common costs, which could distort
profits.
**d. U.S. firms do not provide much information about their segments.
Learning Objective #1: Examine exchange rates and the nature of the foreign exchange
markets
1. The exchange rate quoted for transactions within two business days is the
**a. spot rate.
__b. the forward rate.
__c. the current rate.
__d. the swap rate.
3. The exchange rate which is a contract rate between the company and the foreign exchange trader
at the bank for delivery in the future is the
__a. spot rate
**b. forward rate.
__c. future spot rate.
__d. current rate.
8. The amount of foreign currency required for one unit of the local currency is the
__a. direct rate.
**b. indirect rate.
__c. bid rate.
__d. offer rate.
13. The foreign exchange market where the most foreign currency traded is
__a. New York.
**b. London.
__c. Tokyo.
__d. Frankfurt.
14. The institution established to promote exchange rate stability worldwide is the
__a. United Nations.
__b. Organization for Monetary Union.
**c. International Monetary Fund.
__d. Global Exchange Rate Coordinating Commission.
16. The economic theory that explains exchange rate movements by looking at the relative prices in
one country versus another is
**a. purchasing power parity.
__b. the Fisher Effect.
__c. the International Fischer Effect.
__d. the Foreign Exchange Reserves Effect.
17. The economic theory that explains how a country with a higher nominal interest rate should
have a higher inflation rate is
__a. purchasing power parity.
**b. the Fisher Effect.
__c. the International Fischer Effect.
__d. the Foreign Exchange Reserves Effect.
Learning Objective #2: Describe the foreign exchange derivatives market, especially in the
context of forward contracts, swaps, and options
18. If the forward rate is greater than the spot rate on a direct quote basis, the foreign currency
would be selling at a
__a. cross rate.
**b. premium.
__c. discount.
__d. bid rate.
19. If the forward rate is less than the spot rate on a direct quote basis, the foreign currency would
be selling at a
__a. cross rate.
__b. premium.
**c. discount.
__d. bid rate.
21. The right but not the obligation to trade foreign currency in the future is a
__a. forward contract.
__b. swap.
__c. premium.
**d. option.
22. An option where the holder has the right to sell foreign currency to the writer of the option is a
__a. forward option.
**b. put option.
__c. call option.
__d. swap option.
23. An option where the holder has the right to buy foreign currency from the writer of the option is
a
__a. forward option.
__b. put option.
**c. call option.
__d. swap option.
Learning Objective #3: Identify the different ways that companies can account for
transactions denominated in a foreign currency
The following information will be used for questions 22-34. Assume that Lewis International sells
running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will
be collected on July 15. Also assume that Lewis closes its books at the end of each month. The
following are the relevant exchange rates.
For questions 23-28, assume the treatment of FASB Statement 52 and that no forward contract is
entered into.
23 What is the dollar value of the sale as carried on the books on June 30?
__a. $120,750
__b. $120,000
__c. $119,625
**d. $121,500
25. What is the amount of the foreign exchange gain or loss that it will recognize on June 30?
__a. $1500 loss
**b. $ 750 loss
__c. $1125 loss
__d. $1875 loss
__e. gain or loss is deferred
26. What is the amount of the foreign exchange gain or loss that it will recognize on July 15?
__a. $1875 loss
__b. $ 750 loss
**c. $1125 loss
__d. $ 750 gain
__e. gain or loss is deferred
27. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on June 30?
__a. $ 750 loss
__b. $ 750 gain
__c. $1125 loss
__d. $1875 loss
**e. gain or loss is deferred
28. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on July 15?
**a. $1875 loss
__b. $1125 loss
__c. $ 375 loss
__d. $ 750 loss
__e. gain or loss is deferred
Learning Objective #4: Discuss how companies can account for forward contracts, swaps,
and options in the context of foreign currency transactions, commitments, and anticipated
future transactions
For questions 29-32, assume FASB Statement 52 treatment and that Lewis enters into a forward
contract.
30. What is the amount of cash that Lewis will receive for the sale?
__a. $120,750
**b. $120,000
__c. $119,625
__d. $121,500
31. The difference between the spot rate on June 1 and the forward rate is a
__a. $375 foreign exchange gain
__b. $375 foreign exchange loss
**c. $1500 foreign exchange loss
__d. $1500 foreign exchange gain
32. If Lewis had purchased merchandise rather than sold it, what would be your answer to question
30?
__a. $375 foreign exchange gain
__b. $375 foreign exchange loss
__c. $1500 foreign exchange loss
**d. $1500 foreign exchange gain
34. Using the data for the problem, assume that you entered into an option with Goldman Sachs for
one contract worth £75,000 at a premium of $.0325, a strike price of 162 and a brokerage fee of
$25 to get into the option and also to exercise the option. Would you exercise the option?
**a. yes
__b. no
__c. It depends on the June 1 spot rate.
__d. This is not an appropriate situation for an option.
35. Using the data for the problem, assume that you entered into an option with Goldman Sachs for
one contract worth £75,000 at a premium of $.0325, a strike price of 155 and a brokerage fee of
$25 to get into the option and also to exercise the option. Would you exercise the option?
__a. yes.
**b. no
__c. It depends on the June 1 spot rate.
__d. This is not an appropriate situation for an option.
36. Assuming that you entered into the option and the strike price were 154, what would be your
net cash proceeds on July 15?
__a. $117,000.00
**b. $114,537.50
__c. $114,512.50
__d. $115,500.00
37. Assuming that you entered into the option and the strike price were 160, what would be your
net cash proceeds on July 15?
__a. $117,000.00
__b. $120,000.00
__c. $117,537.50
**d. $117,512.50
Use the following information for problems 39-47
Assume that RadCo International purchases ski equipment on account from a German exporter on
October 1 and that the sale is denominated in 500,000 German marks. RadCo closes its books at
the end of each month, and the payable is due on November 15. The following are the relevant
exchange rates.
Questions 39-43 assumes the treatment of FASB Statement 52 and that no forward contract is
entered into.
41. What is the amount of the foreign exchange gain or loss that it will recognize on October 31?
__a. $300 loss
**b. $450 loss
__c. $450 gain
__d. $150 loss
__e. gain or loss is deferred
42. What is the amount of the foreign exchange gain or loss that it will recognize on November 15?
**a. $350 gain
__b. $200 loss
__c. $100 loss
__d. $350 loss
__e. gain or loss is deferred
43. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on October 31?
__a. $300 loss
__b. $450 loss
__c. $450 gain
__d. $150 loss
**e. gain or loss is deferred
44. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on November 15?
__a. $100 gain
__b. $300 gain
__c. $350 gain
**d. $100 loss
__e. gain or loss is deferred
45. Assume that RadCo enters into a forward contract. What is the dollar value of the purchases on
November 15?
__a. $297,050
**b. $296,950
__c. $297,250
__d. $297,400
46. Assume that RadCo enters into a forward contract. What is the amount of cash that it will pay
for the merchandise?
__a. $297,050
__b. $296,950
**c. $297,250
__d. $297,400
47. The difference between the spot rate on October 1 and the forward rate is
__a. a premium discount.
__b. a premium gain.
**c. a premium loss.
__d. a discount gain.
__e. a discount loss.
49. In the case of a forward contract used to hedge a foreign currency commitment,
**a. the gain or loss on the contract should be deferred and included in the measurement of the
related foreign currency transaction.
__b. the gain or loss on the contract should be recognized in the period in which the exchange rate
changes.
__c. the premium or discount must be written off over the life on the contract.
__d. the related foreign currency transaction will be recorded on the books at the rate in effect when
title passes.
50. In the case of a forward contract to hedge a foreign currency transaction,
__a. the gain or loss on the contract should be deferred and included in the measurement of the
related foreign currency transaction.
**b. the gain or loss on the contract should be recognized in the period in which the exchange rate
changes.
__c. a gain will occur if the foreign currency strengthens against the dollar, and a loss will occur if
the foreign currency weakens against the dollar.
__d. the related foreign currency transaction will be recorded on the books at each new exchange
rate until the monetary part of the transactions (the receivable or payable) is settled.
53. Which of the following is true concerning the book accounting for foreign currency transactions
in different countries?
__a. In the United States, gains and losses are deferred until the monetary side of the transaction is
settled.
__b. In Canada, gains on long-term items are deferred and amortized over the useful life of the
underlying transaction but losses are recognized in the current period.
**c. In Japan, long-term items are carried at the original spot rate, and gains and losses are deferred
until the settlement date.
__d. Germans tend to recognize both gains and losses in the current period.
54. According to IAS 21, the preferred treatment for recognizing gains and losses on foreign
currency transactions
__a. is similar to the way U.S. tax accounting treats gains and losses.
**b. is to recognize differences as income or expense in the period in which they arise.
__c. follows the German approach of conservatism.
__d. is to recognize losses but not gains in the period in which they arise.
55. In the United States, derivatives held for trading or speculative purposes are
__a. carried at the original spot rate.
__b. are deferred and amortized over the useful life of the derivative.
**c. are marked-to-market.
__d. and not permitted in the case of foreign currencies.
56. The balancing of a foreign exchange gain or loss on a transaction with a derivative loss or gain
is known as
**a. hedge accounting.
__b. a swap.
__c. a forward option.
__d. luck.
58. Which of the following is not a criterion that must exist for hedge accounting to function:
__a. Item to be hedge exposes the enterprise to price, currency, or interest rate risk.
__b. The hedge position reduces the exposure.
__c. The hedge position is designated as a hedge.
**d. The enterprise would suffer a loss in the absence of the hedge.
59. Which of the following is true concerning the accounting for a foreign currency option?
__a. Hedge accounting is allowed when the characteristics and terms of the transaction cannot be
identified.
__b. Hedge accounting is not allowed when the anticipated transaction will most likely occur.
**c. The option is carried as fair value on the balance sheet.
__d. Options gains are deferred, whereas options losses are recognized in the period in which they
occur.
CHAPTER 10
Learning Objective #1: Differentiate between the process of foreign currency
conversion and the process of translation
2. The process by which one currency is expressed or restated in terms of another is known as
**a. translation.
__b. conversion.
__c. mark-to-market.
__d. inversion.
4. The currency of the primary economic environment in which the firm operates is the
**a. functional currency.
__b. reporting currency.
__c. historical currency.
__d. base currency.
5. The currency in which the parent company prepares its financial statements is the
__a. functional currency.
**b. reporting currency.
__c. historical currency.
__d. base currency.
6. The currency of the country where the foreign company is operating is the
__a. base currency.
__b. parent currency.
**c. local currency.
__d. third country currency.
7. If a U.S.-based company has a subsidiary in Germany, and the German subsidiary imports components
from Britain, the British pound would most likely be considered (from the standpoint of the German
subsidiary)
__a. the local currency.
**b. a foreign currency.
__c. the functional currency.
__d. the reporting currency.
10. The translation method in which current assets and liabilities are translated at current exchange rates
and other assets, liabilities and owner's equity are translated at historical exchange rates is known as the
**a. current-noncurrent method.
__b. monetary-nonmonetary method.
__c. temporal method.
__d. current rate method.
11. The translation method which uses as the basis for its logic that financial assets and liabilities have
similar attributes and should be translated at the same exchange rate is the
__a. current-noncurrent method.
**b. monetary-nonmonetary method.
__c. temporal method.
__d. current rate method.
12. The translation methodology which assumes that the only assets that should be translated at the
historical rate are those carried at past exchange prices is the
__a. current-noncurrent method.
__b. monetary-nonmonetary method.
**c. temporal method.
__d. current rate method.
13. According to the temporal method of translating foreign currency financial statements,
__a. current assets and liabilities are translated at current exchange rates, and other assets, liabilities and
owner's equity are translated at historical exchange rates.
**b. only those assets carried at past exchange prices should be translated at the historical rate.
__c. only owner's equity is translated at historical exchange rates.
__d. the entire income statement should be at the current rate
16. The translation methodology that translates only owner's equity at historical exchange rates is the
__a. current-noncurrent method.
__b. monetary-nonmonetary method.
__c. temporal method.
**d. current rate method.
17. According to the current-rate method of translating foreign currency financial statements,
__a. current assets and liabilities are translated at current exchange rates, and other assets, liabilities and
owner's equity are translated at historical exchange rates.
__b. only those assets carried at past exchange prices should be translated at the historical rate.
**c. only owner's equity is translated at historical exchange rates.
__d. translation losses are taken to income, but translation gains are deferred.
19. If a parent company has a subsidiary in a country where the cumulative rate of inflation for the past
three years is around 100 percent, which translation methodology would they use according to the IASC?
__a. the temporal method.
__b. the temporal method after adjusting for inflation.
__c. the current rate method.
**d. the current rate method after adjusting for inflation.
Learning Objective #4: Describe the basic dimensions of FASB Statement 52 and how
that standard compares with previous GAAPs in the United States
20. Which foreign currency translation standard uses the following objective: "for the purpose of
preparing an enterprise's financial statements, the objective of translation is to measure and express (a) in
dollars and (b) in conformity with U.S. generally accepted accounting principles (GAAP) the assets,
liabilities, revenues, or expenses that are measured or denominated in foreign currency."
__a. Accounting Research Study #12
**b. FASB Statement 8
__c. FASB Statement 52
__d. International Accounting Standard 14.
22. Which foreign currency translation standard uses the following objective: "1. Provide information that
is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows
and equity. 2. Reflect in consolidated statements the financial results and relationships of the individual
consolidated entities as measured in their functional currencies in conformity with generally accepted
accounting principles."
__a. Accounting Research Study #12
__b. FASB Statement 8
**c. FASB Statement 52
__d. International Accounting Standard 14.
24. If a parent company has a subsidiary in a country where the cumulative rate of inflation for the past
three years is around 100 percent, which translation methodology would they use under FASB Statement
No. 52?
**a. the temporal method.
__b. the temporal method after adjusting for inflation.
__c. the current rate method.
__d. the current rate method after adjusting for inflation.
Learning Objective #5: Illustrate the temporal and current-rate methods of
translation foreign currency financial statements
27. According to which method is the translation gain or loss taken to the income statement?
__a. the current rate method
__b. the consolidation method
**c. the temporal method
__d. the transcription method
29. If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is
located, the translation method that should be selected is the
__a. temporal method
**b. current rate method
__c. monetary/nonmonetary method
__d. the current rate method if the rate of inflation is the foreign country is 25% per month.
30. According to which method is the foreign currency translation gain or loss taken to stockholders'
equity?
**a. the current rate method
__b. the consolidation method
__c. the temporal method
__d. the conversion method
32. In general, if a foreign firm translates its financial statements according to the temporal method during
a period when the value of the foreign currency is rising against the reporting currency, the firm will
recognize a
__a. translation gain in the income statement.
**b. translation loss in the income statement.
__c. translation gain in the accumulated translation adjustment account in owners' equity.
__d. translation loss in the accumulated translation adjustment account in owners' equity.
33. In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements
according to the current rate method during a period when the value of the Japanese yen is falling against
the reporting currency (the U.S. dollar) , the subsidiary will recognize a
__a. translation gain in the income statement.
__b. translation loss in the income statement.
__c. translation gain in the accumulated translation adjustment account in owners' equity.
**d. translation loss in the accumulated translation adjustment account in owners' equity.
34. In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements
according to the current rate method during a period when the value of the Japanese yen is rising against
the reporting currency (the U.S. dollar) , the subsidiary will recognize a
__a. translation gain in the income statement.
__b. translation loss in the income statement.
**c. translation gain in the accumulated translation adjustment account in owners' equity.
__d. translation loss in the accumulated translation adjustment account in owners' equity.
35. Which of the following reflects how foreign exchange translation gains and losses are treated in
different countries?
__a. U.S. companies are required to take translation gains and losses to income if the current rate method is
used.
__b. The Fourth Directive of the EU requires that all firms in Europe use the same procedure for
determining translation gains and losses.
**c. Most European countries use the current rate method, the notable exception being Germany.
__d. British firms are not allowed to set up an accumulated translation adjustment account, because they
are not permitted to use reserves.
36. A major difference between the Canadian translation standard and Statement 52 is that
**a. translation gains and losses for long-term debt may be deferred and amortized over the life of the
underlying asset.
__b. translation gains and losses for long-term assets may be deferred and amortized.
__c. the closing rate may be used for the income statement but not the balance sheet.
__d. forward contracts may not be used to hedge a net investment position.
38. According to FASB Statement No. 52, which of the following does not have to be disclosed?
__a. The aggregate transaction gain or loss included in income.
__b. The beginning and ending amount of cumulative translation adjustments.
**c. The average exchange rate movement of countries whose operations are material to the parent
company's results.
__d. The aggregate adjustment for the period resulting from translation adjustments.
39. Assume that U.S. parent company ABC has a subsidiary XYZ in Germany. XYZ's total assets are as
follows in German marks:
What is the total value of assets if the functional currency is the German mark?
**a. $1,130,952
__b. $1,179,469
__c. $1,175,883
__d. $1,185,012
40. Assume that U.S. parent company ABC has a subsidiary XYZ in Germany. XYZ's total assets are as
follows in German marks:
What is the total value of assets if the functional currency is the U.S. dollar?
__a. $1,130,952
**b. $1,179,469
__c. $1,175,883
__d. $1,185,012
CHAPTER 11
Learning Objective #1: Identify the major ways that companies and their financial
statements are impacted by inflation
Learning Objective #2: Compare general purchasing power and current value
approaches to inflation accounting
7. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What would be
the unrealized holding gain in constant purchasing power terms?
__a. $100,000
__b. $220,000
__c. $120,000
**d. $ 80,000
__e. $ 20,000
__f. $280,000
8. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What is the
unrealized holding gain in current cost terms?
**a. $100,000
__b. $220,000
__c. $120,000
__d. $ 80,000
__e. $ 20,000
__f. $280,000
9. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What is the
current cost gain or loss net of inflation?
__a. $100,000
__b. $220,000
__c. $120,000
__d. $ 80,000
**e. $ 20,000
12. Which of the following reflects the treatment of inflation accounting in the European Union?
__a. The 4th Directive does not allow an alternative to historical cost due to the influence of the Germans.
**b. Firms are allowed to provide supplemental current cost information.
__c. Firms are not allowed to put their financial statements in terms of current costs, even if they provide
supplemental historical cost information.
__d. none of the above.
1.3. IAS 15 on inflation requires the
I..general purchasing power approach
II..current cost approach
__a. only I
__b. only II
**c. either I and II
__d. neither I or II
14. A major difference between the British and U.S. approach to inflation accounting (before the standards
were withdrawn) was that
**a. the British were allowed to use current cost accounting in primary or supplementary financial
statements.
__b. the British did not permit a gearing adjustment.
__c. the U.S. allowed general purchasing power adjustments but not current cost adjustments.
__d. U.S. firms took their inflation adjustments to a reserve account.
15. What is the trend in inflation accounting in South American countries of Argentina and Brazil
__a. change to current cost accounting
__b. change to general purchasing power adjustments
__c. continued use of an index in general purchasing power statements
**d. dropping of inflation accounting
Learning Objective #1: Discuss important factors influencing the quality of the
accounting and auditing profession
2. Which of the following is not an element of the quality of the auditing profession.
__a. reputation of the profession.
__b. the quality of the educational system.
__c. the certification process.
**d. the organization of the auditing firms.
3. The identity of a candidate for the auditing profession is important. For example,
__a. Mexico has a strict requirement that one must be a Mexican citizen or be fluent in Spanish in order to
practice in Mexico.
**b. the U.K. requires that candidates be a member of one of the Chartered Institutes or the Chartered
Association of Certified Accountants.
__c. France does not allow candidates from other EU member countries to practice in France.
__d. the Dutch are short on good accountants, so their requirements are not too strict.
Learning Objective #2: Discuss the nature of global audit services and examine the
challenges of auditing across borders
8. The U.S. model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
**b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
9. The British model of accounting education is like which of the following models?
**a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
10. The German model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
**b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
11. The Dutch model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
**c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
12. The French model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
**c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
Learning Objective #3: Describe the strategies of the global public accounting firms in
servicing clients worldwide
13. A major development in the global accounting firms in recent years has been the
__a. decision on the part of the largest firms to concentrate in specific geographic areas rather than attempt
to service all markets.
**b. merger of some of the largest accounting firms.
__c. slowdown in merger activity.
__d. all of the above.
14. Which of the following is not a major reason for the global expansion of public accounting firms?
__a. to service clients better.
__b. to provide a line of defense against global competitors.
__c. to increase the client base outside of the home market.
**d. to focus on the industrial instead of developing countries where the accounting tradition is already
well-established.
15. Which of the following is not a problem that public accounting firms face when the do business
overseas.
__a. restrictions on the use of the firm's name.
__b. restrictions on the scope of practice.
__c. tax discrimination.
**d. understanding the different audit statement formats.
16. Companies that switch from small or medium audit firms to more international auditors often give the
reason of
**a. the need to have one firm auditing all companies within one group
__b. better brand recognition
__c. superior low balling
__d. side payments
17. With respect to accounting services, the General Agreement on Trade in Services (GATS)
__a. was enacted in the Uruguay Round of GATT negotiations, and it resulted in the free trade in
accounting services.
__b. efforts are being concentrated on tariff barriers to the cross-border trade in services.
__c. governments are all required to use the same reciprocity rules.
**d. wants to ensure that quality of service is not compromised.
18. Which of the following is true concerning the EU's 4th Directive?
__a. it is a source of audit requirements, standards and practices.
__b. it is a source of audit standards and practices but not audit requirements.
**c. it is a source of audit requirements but not standards and practices.
__d. it describes the format and content of the audit report.
1. A multidomestic strategy
**a. allows each subsidiary abroad to operate relatively independently of other subsidiaries.
__b. occurs when an MNE pits itself against competitors on a global basis.
__c. results in highly centralized decision-making.
__d. does not allow products to vary from one market to another.
2. A global strategy
__a. involves the development of global markets, market by market.
**b. involves the integration of activities worldwide.
__c. is not able to capitalize on firm-specific advantages as easily as does the multidomestic strategy.
__d. generally results in each subsidiary establishing its own accounting system but sending the
information back to the home office for global consolidation.
9. Which of the following is not consistent with establishing a product line focus in the MNEs
organizational structure?
__a. The product line is wide.
__b. Products are subject to rapid technological change.
__c. Production and logistics need to be coordinated.
**d. Country and regional expertise is of prime importance.
10. The need to achieve economies of scale is an example of the forces for
__a. worldwide innovation
__b. local differentiation.
**c. global integration.
__d. lateral relations.
14. A strategy where corporate assets are dispersed, interdependent and specialized is symbolic of a
__a. multidomestic strategy.
__b. global strategy.
**c. transnational strategy.
__d. geocentric strategy.
16. The movement of business data electronically between or within firms in a structured, computer-
processable data format is known as
__a. decentralization.
__b. globalization.
**c. Electronic Data Interchange.
__d. routine transfers.
23. Having product managers and geographic area coordinators get together to discuss strategy is an
example of
**a. lateral relations.
__b. developing corporate culture.
__c. formalizing rules.
__d. decentralizing decision making.
24. A major problem with the internal audit function as a control mechanism is that
__a. auditors cannot function if they do not know the local language.
**b. internal auditors need to understand Statement 52 in order to determine whether or not management is
determining the functional currency correctly.
__c. internal auditors must live in the local country where the audit is being performed in order to conduct
the audit properly.
__d. internal auditors must travel in order to maintain their independence.
25. Which of the following is not a problem of the internal audit function.
__a. Adapting to local business practices and customs.
__b. Dealing in foreign currencies.
__c. Language - working through interpreters.
**d. Dealing in checks drawn on banks in the foreign location.
Learning Objective #4: Examine the Foreign Corrupt Practices Act and its impact on
the internal control system of U.S.-based MNEs
26. The Foreign Corrupt Practices Act in the United States is designed to
__a. deal with bribery only.
**b. force companies to develop good internal control systems.
__c. eliminate payments to foreign governments.
__d. ensure that bribes are properly recorded on the company's books and records.
27. Bribes are made for all of the following reasons except
**a. get an independent auditor
__b. get an edge on competitors
__c. grease normal channels
__d. support the political process
28. In order to comply with the FCPA, a firm needs strong support form all of the following except
__a. management
__b. internal auditors
**c. stockholders
__d. external auditors
Learning Objective #1: Identify the major stages in the strategic control process
1. Benchmarking performance based on global competitors is sound practice, because since it is easy to get
good data on them.
__a. True.
**b. False
3. Global innovators and integrated players tend to rely more on outcome controls than on behavioral
controls.
__a. True
**b. False
5. Which of the following is not true concerning the performance evaluation of global innovators.
__a. They need relatively flexible performance evaluation systems.
__b.They rely more on behavioral controls.
**c. The rely on outcome controls.
__d. They need more autonomy than do implementors.
7. In order to maximize global profits, foreign subsidiaries should always be established as profit centers.
__a. True
**b. False
8. The international environment and global strategy of the MNE are very influential in the budgeting
process in that
__a. the value of budgets is equally accepted worldwide due to the increased flow of information about
evaluation techniques.
**b. transfer prices can affect profitability and, therefore, performance evaluation.
__c. managers in countries with wide variations in inflation rates usually can predict those rate variations
for budgeting purposes.
__d. all of the above.
9. Which of the following does not accurately describe economic value added.
__a. It is after-tax operating profit minus the total annual cost of capital.
__b. It includes the cost of debt and the cost of equity.
__c. It is a measure of the value added or depleted from shareholder value in one period.
**d. It requires that different costs of capital be used in different country settings.
10. Bailes and Assada report differences between performance measurement by Japanese and American
companies
**a. Japanese most frequently use sales and Americans most frequently use return on investment
__b. Japanese most frequently use return on investment and Americans most frequently use sales
__c. Japanese most frequently use asset turnover and Americans most frequently use profit minus
corporate costs
__d. Japanese most frequently use market share and Americans most frequently use profit minus corporate
costs
12. According to the Robbins and Stobaugh study of performance evaluation systems of MNEs,
__a. intangible assets considered in the investment decision are usually covered in performance evaluation
systems.
__b. foreign and domestic subsidiaries are judged on different bases.
**c. ROI is the most utilized evaluation measure.
__d. all of the companies used local currency rather than dollar budgets.
13. According to the Abdallah and Keller study on performance evaluation systems of MNEs,
**a. budgets were equally important as a measure of foreign subsidiary and foreign subsidiary
management performance.
__b. ROI is no longer an important technique of evaluating performance.
__c. Companies tend to evaluate foreign subsidiary performance but not performance of foreign
management.
__d. foreign currency is not a critical element in performance evaluation of MNEs due to widespread use
of the current rate method.
Learning Objective #4: Discuss how foreign currencies impact on the budgeting and
performance evaluation process
15. There have been few good studies on the use of local currency versus parent currency in establishing
budgets. However, the Appleyard study of a small sample of British firms found that
**a. most firms set their budgets in local currency.
__b. most firms set their budgets in sterling.
__c. most firms set their budgets in both sterling and the local currency.
__d. most firms set their budgets in the local currency, although all of them saw the final results in sterling.
16. The local currency should be used for performance evaluation purposes if
**a. the MNE leaves considerable autonomy to the foreign operation.
__b. sales are made in the foreign currency.
__c. the foreign currency is relatively stable.
__d. the local manager is given authority and responsibility to hedge foreign exchange differences.
17. Which of the following Lessard/Lorange translation approaches results in a foreign exchange variance?
__a. setting the budget and monitoring performance at the rate in effect when the budget was set.
__b. setting the budget and monitoring performance at the projected rate.
**c. setting the budget at the projected rate and monitoring performance at the actual rate.
__d. updating the budget at the end of period rate, and tracking performance at the end of period rate.
18. Which of the following Lessard/Lorange translation approaches results in a foreign exchange variance?
__a. A-1
__b. P-2
**c. P-3
__d. E-3
19. Which of the following Lessard/Lorange translation approaches forces management to predict the
future?
__a. setting the budget and tracking performance at the actual rate at the time of the budget.
__b. setting the budget at the actual rate at the time of the budget and tracking performance at the actual rate
at the end of the period.
**c. setting the budget at the projected rate and tracking performance at the rate at the end of the period.
__d. updating the budget for the end of period rate and tracking performance at the end of period rate.
20. Which of the following Lessard/Lorange translation approaches forces management to predict the
future?
__a. A-1
__b. A-3
**c. P-3
__d. E-3
21. When comparing Japanese and U.S. firms for budget purposes,
__a. Japanese firms take much longer to prepare budgets.
__b. U.S. managers are less likely to be evaluated by the budgets.
__c. Japanese managers are more likely to have their salaries and bonuses affected by budgets.
**d. Japanese managers are more likely to use budget variances to recognize problems on a timely basis.
Learning Objective #5: Review the problems involved with setting intra-corporate
transfer price
24. If a U.S. parent is shipping inventory to its Chinese subsidiary at an arbitrarily high transfer price,
__a. the U.S. parent will show a lower pre-tax profit.
__b. the Chinese government will collect relatively higher income taxes.
__c. the U.S. government will collect relatively high import tariffs.
**d. the Chinese subsidiary will show relatively lower profits.
25. If a U.S. parent is shipping inventory to its Mexican subsidiary at an arbitrarily low transfer price,
__a. the U.S. parent will show a higher pre-tax profit.
**b. the Mexican government will collect relatively higher income taxes.
__c. the Mexican government will collect relatively high import tariffs.
__d. the Mexican subsidiary will show relatively lower profits.
26. If the Brazilian subsidiary of a U.S. company ships components to its U.S. parent at an arbitrarily high
transfer price,
__a. the U.S. parent will show a higher pre-tax profit.
__b. the Brazilian government will collect relatively lower income taxes.
**c. U.S. Customs will collect higher tariffs.
__d. the Brazilian subsidiary will show relatively lower profits.
30. Which of the following does not accurately reflect target costing?
**a. market price is based on the standard cost plus a desired markup.
__b. the projected selling price is based on the projected market price of the product.
__c. the target profit margin is consistent with the firm's long-term strategy.
__d. it is similar to an ideal standard cost system.
32. According to the target costing system employed by Toyota Motor Company (TMC) in the United
Kingdom (TMUK),
__a. the target cost is determined by TMC without any input by TMUK, because TMUK tends to
underestimate its potential performance.
__b. the target cost in the U.K. is the same as in Japan in order to make comparisons easier.
**c. TMUK works with European suppliers to reduce their prices to help TMUK achieve its target cost.
__d. TMUK personnel are not allowed to visit supplier plants to help them become more efficient because
of work rules in the EU.
35. A major difference between Japanese and U.S. cost accounting strategies is that
__a. U.S. companies are not permitted to allocate to foreign operations overhead generated in the United
States.
**b. Japanese companies use cost accounting to support and reinforce their manufacturing strategies.
__c. Japanese companies prefer to use direct labor hours as cost drivers, whereas U.S. companies prefer to
use machine hours.
__d. for U.S. companies, prices are usually a function of costs but not market conditions.
36. Something that determines the creation (and thus the allocation) of overhead is known as
__a. strategic costing.
__b. target costing.
**c. cost driver.
__d. market-driven product costing.
Learning Objective #7: Examine the major issues and trends in performance
evaluation
38. Which of the following describe some of the national practices in performance evaluation techniques.
__a. British firms rely more on ROI and sales growth.
__b. U.S. firms rely more on budgets than do British firms.
**c. Japanese firms rely more on sales growth and market share than do U.S. firms.
__d. All of the above.
39. In transferring the domestic performance evaluation system into the international environment, MNEs
__a. are creating a more expensive performance evaluation system.
**b. miss significant foreign events that could affect performance.
__c. are taking into consideration that there are strategic differences in subsidiaries.
__d. are sacrificing comparability for understandability.
40. A performance evaluation tool that measures after-tax operating profit minus the total annual cost of
capital is
__a. return on investment.
__b. return on assets.
**c. economic value added.
__d. residual income.
CHAPTER 15
Learning Objective #1: Identify the major factors that influence the different tax
systems used worldwide
3. The concept where under similar circumstances, taxpayers should pay the same tax is
__a. double taxation.
__b. a tax incentive.
**c. equity.
__d. neutrality.
4. The concept where the tax effect should not have an impact on business decisions is
__a. double taxation.
__b. a tax incentive.
__c. equity.
**d. neutrality.
5. The concept which assets that Hong Kong should only tax income that is earned in Hong is know as the
__a. worldwide approach.
**b. territorial approach.
__c. multidomestic approach.
__d. transnational approach.
Learning Objective #2: Discuss the role that the tax credit and tax treaties play in
avoiding double taxation when firms earn income in different countries
10. Which of the following is true concerning tax harmonization in the European Union?
__a. The EU has harmonized rates and categories in the value-added tax.
__b. The EU requires the use of the split rate form of tax system.
**c. Tax rates have been coming down in the EU.
__d. Although tax rates have not been harmonized, taxes bases and tax systems have been.
11. In order the minimize the effects of double taxation, the U.S.
**a. permits the use of a tax credit.
__b. allows firms to use the split rate or imputation tax system.
__c. allows MNEs to use the lower of the U.S. or foreign tax rate.
__d. requires firms to deduct foreign income taxes paid.
Learning Objective #3: Explain how income from controlled foreign corporations may
be taxed differently than income from noncontrolled foreign corporations
13. The principle whereby foreign source income is not taxed until received by the U.S. shareholder is
known as
__a. the tax credit.
**b. deferral.
__c. a tax treaty.
__d. double taxation.
14. Which of the following is true concerning taxable earnings of foreign corporations according to the
U.S. IRS?
__a. The temporal method must be used to translate financial statements into dollars.
__b. Active income of a CFC is not recognized until distributed as a dividend.
__c. Passive income does not need to be recognized.
**d. Passive income of a CFC is taxed after being translated into dollars at the average exchange rate.
15. All of the following foreign corporations derive more than 50 percent of their income from subpart F
income. Which of them must recognize the subpart F income in the year in which it is earned? The
percentage ownership of each shareholder is provided in parenthesis.
**a. U.S. shareholder A (10), Foreign shareholder B (20), U.S. shareholder C (35), U.S. shareholder D (5),
Foreign shareholder E (15), U.S. shareholder F (15)
__b. U.S. shareholder A (5), Foreign shareholder B (40), U.S. shareholder C (15), U.S. shareholder D (15),
Foreign shareholder E (10), U.S. shareholder F (15)
__c. U.S. shareholder A (50), Foreign shareholder B (20), U.S. shareholder C (5), U.S. shareholder D (5),
Foreign shareholder E (15), U.S. shareholder F (5)
__d. all of the above since subpart F income exceeds 50 percent of total.
Learning Objective #4: Compare the tax treatment and book treatment of foreign
exchange gains and losses due to foreign currency transactions and the translation of
foreign currency financial statements
17. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary does not declare a dividend, how
much of its income is included in U.S. taxable income?
__a. $100,000
__b. $ 60,000
__c. $ 39,600
**d. nothing.
18. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, how
much of its income is included in U.S. taxable income?
**a. $100,000
__b. $ 60,000
__c. $ 39,600
__d. nothing.
19. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is
the amount of its direct and deemed direct tax credit?
__a. $40,000
__b. $ 3,000
**c. $43,000
__d. $34,000
20. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is
the maximum allowable tax credit according to U.S. tax law?
__a. $40,000
__b. $ 3,000
__c. $43,000
**d. $34,000
21. According to the U.S. IRS, which of the following is true concerning the taxation of gains and losses
on foreign currency transactions?
__a. Gains are recognized when the financial obligation has been settled, but losses are recognized
immediately.
__b. Losses are recognized when the financial obligation has been settled, but gains are recognized
immediately.
__c. Gains and losses are recognized immediately.
**d. Gains and losses are recognized when the financial obligation has been settled.
22. On January 1, Multicorp, a U.S. firm, sells £200,000 of merchandise on account to an importer in
Britain with payment due on February 15. The relevant exchange rates are as follows:
January 1 $1.6260
January 31 $1.5995
February 15 $1.5900
February 28 $1.5855
What would be the gain or loss for U.S. tax purposes on February 15?
__a. No gain or loss would be recognized.
__b. $5,300 loss
**c. $7,200 loss
__d. $1,900 loss
Learning Objective #5: Discuss the tax dimensions of intracorporate transfer pricing
23. The price set on goods and services transferred between a parent and subsidiary is known as a (an)
**a. transfer price.
__b. arms-length price.
__c. allocation price.
__d. none of the above.
24. If the French subsidiary of a U.S. company ships components to its U.S. parent at an arbitrarily low
transfer price,
__a. the French subsidiary will show relatively high profits.
**b. the French government will collect relatively low corporate income tax.
__c. U.S. Customs will collect relatively high tariffs.
__d. the U.S. parent will show lower pre-tax profits.
26. According to changes in the U.S. tax laws related to transfer pricing,
__a. the level of complexity and documentation has been lowered significantly.
__b. companies will have less flexibility in determining transfer pricing practices.
**c. companies have to gather a lot of information from the third-party marketplace to justify their transfer
pricing practices.
__d. the IRS is not concerned with analyzing which transfer pricing method is the best method.
26. Which of the following is the correct transfer pricing rule that can be followed by an FSC?
__a. All transfer prices must be arm's-length prices.
**b. Special rules allow the exporter to sell goods or services to the FSC at less than an arm's-length price.
__c. Special rules apply for FSC income that arises from export services performed inside the United
States for its parent companies.
__d. Special rules apply only for income that is exempt from U.S. taxation.
Learning Objective #6: Illustrate how international tax planning can influence cash
flows
27. Which of the following accurately describes how the U.S. taxes foreign branch earnings.
__a. Earnings that have been distributed to the home office are taxable, but earnings that are retained in the
foreign location are not.
__b. Neither earnings distributed to the home office nor earnings retained in the foreign location are taxed
in the U.S. due to the tax credit.
**c. Earnings distributed to the home office are translated at the exchange rate in effect on the date of the
transfer.
__d. Profits not distributed as earnings are translated at the year-end exchange rate.
29. Which of the following is not true concerning the taxation of expatriate income?
**a. The taxpayer must have been a resident outside of the United States for an uninterrupted period that
includes less than an entire taxable year or less than at least 330 full days during any twelve
consecutive months.
__b. The taxpayer can exclude from U.S. taxation the lesser of the individual's foreign earned income or
$70,000.
__c. The $70,000 exclusion is an increase from the prior year.
__d. A housing allowance is permitted.
30. In choosing the correct entry strategy in the context of the tax environment,
__a. exports are typically not affected by tax rules since they are made from the home country anyway.
**b. it is best to organize a foreign branch in the early years if operations are not profitable.
__c. it is best to organize a foreign subsidiary in the early years if operations are not profitable.
__d. foreign tax incentives are not useful, because they are typically offset by home country regulations.