Test Bank for International Accounting
Exam 1 CH 1-3 6th Edition by Timothy
Doupnik
International Accounting - ANSFocuses on the accounting issues unique to multinational
corporations
Three levels of international accounting - ANS1. Supranational accounting
2. Company Level
3. International Accounting
1. Supranational accounting - ANSStandards, guidelines, rules followed by supranational
organizations (ex. European Union). No jurisdiction over the US.
2. Company Level - ANSfollowed by the company in international activities and foreign
investments. Ex. US is not supranational so we have FASB and GAAP
3. International Accounting - ANSstudy of the standards, guidelines, and rules of accounting,
auditing and taxation existing within each country and comparison across countries
Issues - ANSForeign Currency risk, capital domestically is limited so list stocks internationally
Foreign currency Risk - ANSCountries you sell to will pay in their own currency. That currency
has to be converted back using the exchange risk at that time. Exchange rate is volatile,
constantly changing.
It is riskier as time passes.
Use Foreign currency options or forward contracts to hedge this risk
What time should you use the exchange rate? - ANSRevenue is recognized when delivered to
customer, so use the exchange rate from that time. Record the Journal Entry in your own
currency
Foreign currency option - ANSThe right to sell foreign currency at a predetermined exchange
rate and time
Call Option- the right to buy
Put Option- the right to sell
, If "in the money" you sell and make money.
If "out of the money" the exchange rate got better so you rip of the paper and use the rate it is
trading at now.
Forward Contract - ANSObligation to exchange foreign currency at a future date
Foreign Direct Investment - ANSOwnership and control of foreign assets through:
Acquisition- investment in existing operations in foreign countries
Greenfield Investment- new operation in foreign countries
Reasons for Foreign Direct Investment - ANS-Increase sales and profits
-Enter rapidly growing/emerging markets
-Reduce Costs
-Gain foothold in economic blocs
-Protect domestic markets
-Protect foreign markets
-Acquire technological and managerial know-how
Steps in reporting for Foreign Operations - ANS1. Convert from local to U.S. GAAP
2. Translate from local currency to U.S. dollars
Double Taxation - ANS1. Foreign income taxes- the company's profit is taxed at foreign rates
2. U.S. income taxes- the US also taxes the company's foreign based income
Tax treaties to provide some relief from double taxation
Because taxes are higher in some countries than others, the goal is to legally minimize the
taxes in the foreign country and home country, and then maximize the after tax cash flows. Ex if
the marginal tax rate in the US is 30% and In Mexico it is 20%, you would want to pay most of
the taxes in Mexico so people may artificially inflate selling price for Mexico or artificially inflate
US costs.
International Transfer Pricing - ANSAn issue for multinational companies making intercompany
sales
Companies use of discretionary transfer pricing:
Price negotiation between buyer and seller is not feasible because of the differences in tax rates
Companies shift profits from countries with high tax rates to countries with low tax rates
Exam 1 CH 1-3 6th Edition by Timothy
Doupnik
International Accounting - ANSFocuses on the accounting issues unique to multinational
corporations
Three levels of international accounting - ANS1. Supranational accounting
2. Company Level
3. International Accounting
1. Supranational accounting - ANSStandards, guidelines, rules followed by supranational
organizations (ex. European Union). No jurisdiction over the US.
2. Company Level - ANSfollowed by the company in international activities and foreign
investments. Ex. US is not supranational so we have FASB and GAAP
3. International Accounting - ANSstudy of the standards, guidelines, and rules of accounting,
auditing and taxation existing within each country and comparison across countries
Issues - ANSForeign Currency risk, capital domestically is limited so list stocks internationally
Foreign currency Risk - ANSCountries you sell to will pay in their own currency. That currency
has to be converted back using the exchange risk at that time. Exchange rate is volatile,
constantly changing.
It is riskier as time passes.
Use Foreign currency options or forward contracts to hedge this risk
What time should you use the exchange rate? - ANSRevenue is recognized when delivered to
customer, so use the exchange rate from that time. Record the Journal Entry in your own
currency
Foreign currency option - ANSThe right to sell foreign currency at a predetermined exchange
rate and time
Call Option- the right to buy
Put Option- the right to sell
, If "in the money" you sell and make money.
If "out of the money" the exchange rate got better so you rip of the paper and use the rate it is
trading at now.
Forward Contract - ANSObligation to exchange foreign currency at a future date
Foreign Direct Investment - ANSOwnership and control of foreign assets through:
Acquisition- investment in existing operations in foreign countries
Greenfield Investment- new operation in foreign countries
Reasons for Foreign Direct Investment - ANS-Increase sales and profits
-Enter rapidly growing/emerging markets
-Reduce Costs
-Gain foothold in economic blocs
-Protect domestic markets
-Protect foreign markets
-Acquire technological and managerial know-how
Steps in reporting for Foreign Operations - ANS1. Convert from local to U.S. GAAP
2. Translate from local currency to U.S. dollars
Double Taxation - ANS1. Foreign income taxes- the company's profit is taxed at foreign rates
2. U.S. income taxes- the US also taxes the company's foreign based income
Tax treaties to provide some relief from double taxation
Because taxes are higher in some countries than others, the goal is to legally minimize the
taxes in the foreign country and home country, and then maximize the after tax cash flows. Ex if
the marginal tax rate in the US is 30% and In Mexico it is 20%, you would want to pay most of
the taxes in Mexico so people may artificially inflate selling price for Mexico or artificially inflate
US costs.
International Transfer Pricing - ANSAn issue for multinational companies making intercompany
sales
Companies use of discretionary transfer pricing:
Price negotiation between buyer and seller is not feasible because of the differences in tax rates
Companies shift profits from countries with high tax rates to countries with low tax rates
