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Test Bank for International Accounting Exam 1 (6th Edition by Timothy Doupnik)
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Test Bank for International Accounting Exam 1 (6th Edition by Timothy Doupnik)
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Test Bank for International AccountingExam 1 (6th Edition by Timothy Doupnik)
Foreign exchange risk - ANSForeign exchange risk (fx risk) refers to doing a transaction in a
different currency other than your own, and by the time cash is received the value of the
currency may have changed.
how to protect against fx risk - ANSCompanies usually try and do transactions in their domestic
currency when possible, it all depends on negotiating power. The best way to protect against fx
risk is to enter a hedge, which is a protection against fx risk.
Foreign direct investment; Greenfield investment - ANSRefers to companies investing in foreign
companies. Companies can invest in foreign countries by purchasing an existing company or
doing a greenfield investment in which operations start fresh off. Acquisitions are much faster
than greenfield investments
Foreign currency translation - ANSRefers to converting internal numbers from foreign operation
to one's domestic currency. i.e if you have operations in Japan, then convert yen to dollars to
follow GAAP.
Foreign currency transaction - ANSRefers to transactions being dealt with a counter party
denominated in a foreign currency
Transfer pricing and dividend payments - ANSTransfer pricing occurs when a company sells to
a sister company. The goal is to minimize taxation within company transaction. When a
company sends money to a parent company it's called repatriation not dividend.
EU members and Euro users - ANSMost countries in Europe are EU members, except UK,
Switzerland, and Russia.
Most countries in Europe use the Euro, except Denmark and Sweden.
Advantages of international standardization of accounting rules - ANSIt's efficient for companies
and less costly to keep in their books, it benefits investors as they don't need to learn multiple
accounting standards.
disadvantages of international standardization of accounting rules - ANSHigh costs of training
employees to understand the international standards and some people do not like to change to
IFRS, because they feel their accounting standards are better.
, Cooper Grant is the president of Acme Brush of Brazil, the wholly-owned Brazilian subsidiary of
U.S.-based Acme Brush Inc. Cooper Grant's compensation package consists of a combination
of salary and bonus. His annual bonus is calculated as a predetermined percentage of the
pretax annual income earned by Acme Brush of Brazil. A condensed income statement for
Acme Brush of Brazil for the most recent year is as follows (amounts in thousands of Brazilian
reals [BRL]):
Sales BRL 10,000
Expenses 9,500
Pretax income BRL 500
After translating the Brazilian real income statement into U.S. dollars, the condensed income
statement for Acme Brush of Brazil appears as follows (amounts in thousands of U.S. dollars
[US$]):
Sales US$3,000
Expenses 3,300
Pretax income (loss) US$(300)
Required:
a.Explain how Acme Brush of Brazil's pretax income (in BRL) became a U.S.-dollar pretax loss.
b.Discuss whether Cooper Grant should be paid a b - ANSa. The BRL pre-tax income becomes
a USD pre-tax loss because Sales and Expenses are translated at different exchange rates.
Specifically, Sales are translated at an exchange rate of USD 0.30 per 1 BRL [USD 3,000 / BRL
10,000] and Expenses are translated at an exchange rate of USD 0.347368 per 1 BRL [USD
3,300 / BRL 9,500].
b. The question is whether Acme Brush should use BRL income or USD income to evaluate
Cooper Grant's performance. There is no unequivocally correct answer to this question. Issues
that might be discussed include:
· What is the Brazilian subsidiary's objective? To generate profits that can be distributed to U.S.
stockholders?
· Does Cooper Grant have the ability to "control" USD income, for example, by hedging against
changes in the USD per BRL exchange rate?
· Do the translation procedures that result in a USD pre-tax loss make economic sense?
Common law impact on accounting - ANSCommon law has fewer laws, it's mainly used by
Great Britain colonies. This causes accounting rules to be detailed and specific and accounting
laws come from organizations rather than government.
code law impact on accounting - ANSCode law has more laws, and is mainly used by
non-English speaking countries. Code law usually has legislated accounting rules, accounting
law is more general, and requires more guidance.
Differences in capital sources and the impact on accounting - ANSIn the USA and other
countries capital comes from investors who rely on high quality f/s to make decisions, vs in other
countries it comes from families, banks, and governments. This causes certain countries in
which capital comes from investors to prioritize accounting more.
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