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Chapter 20

Accounting and Finance in the International Business

True / False Questions

1. Accounting information is the means by which firms communicate their financial position to the
providers of capital.

True False

2. Accounting is shaped by the environment in which it operates.

True False

3. Accounting standards are rules for preparing financial statements.

True False

4. Auditing standards are rules that define the accounting principles and monetary policy of a nation.

True False

5. The standards of U.S. Financial Accounting Standards Board and IASB are vastly different.

True False

6. Most international businesses require all budgets and performance data within the firm to be
expressed in the currencies of the countries where its subunits are located.

True False

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7. The initial rate, in the Lessard-Lorange Model, refers to the spot exchange rate when the budget is
adopted.

True False

8. The ending rate refers to the spot exchange rate forecast for the end of the budget period in the
Lessard-Lorange Model.

True False

9. Using the ending rate to translate the budget is a valid practice according to the Lessard-Lorange
Model.

True False

10. Lessard and Lorange recommend that firms use the projected spot exchange rate to translate both the
budget and performance figures into the corporate currency.

True False

11. Performance of international subsidiaries depends on the transfer price set-up by the corporate.

True False

12. Most subsidiaries of an international business operate in uniform environments.

True False

13. Evaluation of a subsidiary should not be separate from the evaluation of its manager.

True False

14. Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment.

True False

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15. The connection between cash flows to the parent and the source of financing must be recognized
when performing capital budgeting for an international business.

True False

16. The governments of some countries require or prefer foreign multinationals to finance projects in their
country by local debt financing or local sales of equity.

True False

17. The total size of a firm's cash pool increases when it pools cash reserves of subsidiaries.

True False

18. A firm's ability to establish a centralized depository that can serve short-term cash needs might be
limited by government-imposed restrictions on capital flows across borders.

True False

19. The principles of multilateral netting and bilateral netting are different.

True False

20. A tax treaty between two countries is formed to fix the exchange rates between the two countries.

True False

21. A tax heaven is a country that gives income tax exemptions to firms that export all or part of its
products.

True False

22. Payment of dividends is an uncommon method of transferring funds from foreign subsidiaries to the
parent company.

True False

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23. A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the
parent company or another subsidiary.

True False

24. Firms cannot use transfer prices to move funds from a subsidiary to the parent company when
financial transfers in the form of dividends are blocked by host-country government policies.

True False

25. A fronting loan is a loan between a parent and its subsidiary channeled through a financial
intermediary.

True False

Multiple Choice Questions

26. _____ are the most important source of external capital for business enterprises in the United States.

A. Stocks or bonds
B. World Bank loans
C. Banks
D. Venture capitalists

27. The _____ has 15 members who are responsible for the formulation of new international financial
reporting standards.

A. U.S. Securities and Exchange Commission


B. International Accounting Standards Board
C. Office of Economic Analysis
D. Financial Accounting Standards Board

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28. Compliance to IASB standards is:

A. mandatory for countries to engage in international trade.


B. enforced through the World Trade Organization.
C. voluntary.
D. enforced through the United Nations.

29. The _____ is the main instrument of financial control in an organization.

A. chief financial officer


B. corporate accounting
C. audit
D. budget

30. A European subsidiary of a U.S. firm will usually prepare its budgets in _____.

A. U.S. dollars
B. Euro
C. a third party currency
D. Eurocurrency

31. The projected rate will typically be the _____ as determined by the foreign exchange market when firms
use the projected spot exchange rate to translate both the budget and performance figures into the
corporate currency.

A. transfer price
B. forward exchange rate
C. carrying cost
D. foreign exchange rate

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32. The price at which goods and services are transferred between subsidiary companies in a multi-
national firm is referred to as _____.

A. minimum retail price


B. deferral price
C. transfer price
D. transaction price

33. Capital budgeting for a foreign project:

A. begins with an audit of the current cash flows.


B. is vastly different from domestic capital budgeting.
C. begins with converting all cash flow to Eurocurrency.
D. uses the same theoretical framework that domestic capital budgeting uses.

34. Political risk tends to be:

A. greater in countries experiencing social unrest or disorder.


B. negligible for large multinational companies.
C. less in countries experiencing social unrest or disorder.
D. a consideration only for companies operating in third world countries.

35. Extensive empirical studies have shown that:

A. there is only a short-run relationship between a country's relative inflation rates and changes in
exchange rates; no long-run relationship exists.
B. there is a long-run relationship between a country's relative inflation rates and changes in exchange
rates.
C. that there exists both short-run and long-run relationships between a country's relative inflation
rates and changes in exchange rates.
D. a country's relative inflation rates and changes in exchange rates are not related to each other.

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36. Money management decisions attempt to manage the firm's _____ most efficiently.

A. cash flow
B. corporate expenses
C. working capital
D. corporate revenues

37. Pooling the cash of all the subsidiaries:

A. lowers the interest rate earned.


B. reduces the earning potential for firms.
C. increases the interest rate paid.
D. increases the earning potential for firms.

38. Every time a firm changes cash from one currency into another currency it must bear a(n) _____.

A. transaction cost
B. tax
C. transfer fee
D. audit

39. A _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid
to the foreign government.

A. tax amnesty
B. tax credit
C. waiver
D. tax treaty

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40. A _____ specifies that parent companies are not taxed on foreign source income until they actually
receive a dividend.

A. bilateral agreement
B. tax credit
C. deferral principle
D. tax treaty

41. _____ is a term used to describe the practice of transferring liquid funds from a foreign subsidiary to
the parent company.

A. Deferral principle
B. Bilateral netting
C. Unbundling
D. Multilateral netting

42. The age of a foreign subsidiary:

A. has no influence on payment of dividends.


B. indicates the number of capital investment needs; older subsidiaries have higher needs.
C. influences dividend policy in that younger subsidiaries tend to remit a higher proportion of their
earnings in dividends to the parent company.
D. influences dividend policy in that older subsidiaries tend to remit a higher proportion of their
earnings in dividends to the parent company.

43. _____ represent the remuneration paid to the owners for the use of technology or the right to
manufacture and/or sell products under patents or trade names.

A. Royalties
B. Transfer costs
C. Fees
D. Licensing costs

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44. It is common for a parent company to charge its foreign subsidiaries _____ for the technology, patents,
or trade names it has transferred to them.

A. transfer fees
B. royalties
C. an internal forward rate
D. usage fees

45. Royalties and fees have certain tax advantages over _____, particularly when the corporate tax rate is
higher in the host country than in the parent's home country.

A. transaction costs
B. deferrals
C. dividends
D. transfer fees

46. Which of the following is an accounting problem that only international businesses face?

A. Lack of consistency in the accounting standards


B. Inaccurate filing of profit-and-loss statements
C. False reporting of income to the government
D. Lack of a dedicated accounting function within the firm

47. In countries such as the United States and Britain, firms typically raised capital by:

A. obtaining funding from the government.


B. borrowing money from national banks.
C. issuing stock or bonds to investors.
D. borrowing money from international banks.

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48. Historically, financial reports prepared by firms in Germany:

A. reveal less information than reports of British or U.S. firms.


B. contain detailed information required by individual investors.
C. overvalued assets and undervalued liabilities.
D. made more public disclosures compared to firms in other countries.

49. Which of the following is a country in which banks emerged as the main providers of capital to
enterprises?

A. United States
B. Britain
C. Philippines
D. Switzerland

50. Accounting standards:

A. are rules for preparing financial statements.


B. define the levels of tax-payments needed.
C. specify the rules for performing an audit.
D. refer to the technical process of balancing accounts.

51. The technical process by which an independent person gathers evidence for determining if financial
accounts conform to required accounting standards is known as _____.

A. standardization
B. an audit
C. reporting
D. a benchmark

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52. Transnational financing occurs when a firm based in one country enters another country to raise
capital:

A. by borrowing from financial institutions.


B. from the sale of stocks or bonds.
C. by borrowing from banks.
D. through exchange policies of governments.

53. A German firm raising capital by selling stock through the London Stock Exchange is an example of
_____.

A. transnational financing
B. service exporting
C. indirect financing
D. transnational investment

54. The International Accounting Standards Board:

A. can issue a new accounting standard if the majority of the board members agree.
B. was formed to replace the Financial Accounting Standards Board.
C. proposes standards but has no power to enforce the standards.
D. was formed to supervise the accounting practices that U.S. firms follow.

55. The _____ writes the generally accepted accounting principles (GAAP) that govern the financial
statements of U.S. firms.

A. U.S. Securities and Exchange Commission


B. Office of Economic Analysis
C. International Accounting Standards Board
D. Financial Accounting Standards Board

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56. Most international businesses require all budgets and performance data within the firm to be
expressed in the "corporate currency," which is normally:

A. a common currency such as the U.S. dollar.


B. the home currency.
C. a foreign currency.
D. the currency of the country where products are sold.

57. According to Lessard-Lorange model, _____ rate refers to the spot exchange rate when the budget is
adopted.

A. ending
B. initial
C. ideal
D. projected

58. According to Lessard-Lorange model, _____ is the spot exchange rate forecast for the end of the
budget period.

A. projected
B. initial
C. ideal
D. ending

59. According to Lessard-Lorange model, ending rate is the spot exchange rate:

A. forecast for the end of the budget period.


B. when the budget is adopted.
C. when no formal exchange rate exists.
D. when the budget and performance are being compared.

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60. Which of the following combinations of exchange rates was ruled out by Lessard and Lorange as
illogical and unreasonable?

A. Translating budget using ending rate and translating actual performance using initial rate
B. Translating both actual performance and budget using projected rate
C. Translating both actual performance and budget using initial rate
D. Translating budget using projected rate and translating actual performance using ending rate

61. Of the five combinations, Lessard and Lorange recommend that firms use the _____ spot exchange rate
to translate both the budget and performance figures into the corporate currency.

A. ending
B. initial
C. final
D. projected

62. When using the projected spot exchange rate to translate both the budget and performance figures
into the corporate currency, the projected rate in such cases will typically be the:

A. forward exchange rate as determined by the foreign exchange market.


B. exchange rate that exists at the start of a project.
C. exchange rate when the budget was prepared.
D. transfer price that a firm will offer to one or more of its subsidiaries.

63. Lessard and Lorange refer company-generated forecast of future spot rates as _____ rate.

A. forward exchange
B. internal forward
C. initial exchange
D. ending exchange

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64. Transfer price refers to the:

A. price at which goods and services are transferred to a subsidiary.


B. price at which the title of products is transferred to a customer.
C. price at which a supplier provides raw materials to a firm.
D. cost incurred when goods or services are transferred from one place to another.

65. Which of the following is a disadvantage of comparing managers in different countries only on the
basis of return on investment?

A. The managers are not responsible for increasing the ROI of an organization.
B. Managerial actions do not have a significant impact on firms' profitability.
C. Return on investment is not a valid indicator of organizational profitability.
D. Environmental factors also contribute to ROI of firms and these factors differ.

66. _____ is the technique financial managers use to try to quantify the benefits, costs, and risks of an
investment.

A. Capital budgeting
B. External audit
C. Transfer pricing
D. Control system analysis

67. Which of the following statements is true of the capital budgeting used in international businesses?

A. Capital budgeting does not provide connection between cash flows to the parent and subsidiaries.
B. Its basic framework is vastly different from the framework of domestic capital budgeting.
C. Capital budgeting does not consider the cash flows between subsidiaries of a firm.
D. It enables top managers to compare different investment alternatives in an objective fashion.

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68. The problem of blocked earnings is not as serious now as it once was because:

A. fixed exchange rates have become more common now.


B. governmental intervention in earnings is more frequent now.
C. there is greater acceptance of free market economics now.
D. political risk within the economy is very low in modern times.

69. Which of the following is a valid observation of the cost of capital?

A. The cost of capital is typically higher in the global capital market.


B. Domestic capital markets have more liquidity than global markets.
C. Local debt financing raises the cost of capital if liquidity is limited.
D. A local sale of equity is preferred to global sale by international firms.

70. Money management decisions attempt to manage a firm's _____.

A. equity capital
B. fixed costs
C. working capital
D. equipment costs

71. By pooling cash resources centrally firms can:

A. better handle short-term cash needs of subsidiaries.


B. increase liquidity of independent subsidiaries.
C. reduce the total size of the cash pool it must hold.
D. avoid government-imposed restrictions on capital flows.

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72. _____ costs are incurred every time a firm changes cash from one currency into another currency.

A. Dividend
B. Capital
C. Fixed
D. Transaction

73. Multilateral netting is used primarily to:

A. reduce the number of transactions between subsidiaries.


B. avail tax credit from governments.
C. establish a tax treaty amongst multiple countries.
D. to reduce the fixed costs of establishing a subsidiary.

74. A(n) _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes
paid to the foreign government.

A. indirect tax
B. tax haven
C. tax credit
D. internal tax

75. A _____ between two countries is an agreement specifying what items of income will be taxed by the
authorities of the country where the income is earned.

A. tax deferral agreement


B. fixed-rate treaty
C. tax treaty
D. free trade agreement

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76. A deferral principle specifies that parent companies are not taxed on foreign source income until:

A. the subsidiary providing income makes some profit.


B. they actually receive a dividend.
C. they acquire majority stake in the subsidiary.
D. the subsidiary providing income is listed in the United States.

77. Which of the following statements is true of tax havens?

A. Firms that export to tax havens get special tax concessions from home governments.
B. Firms would require huge capital investments to start business in tax havens.
C. Nations such as United States are widely regarded as tax havens.
D. Firms can save tax by establishing a non-operating subsidiary in the tax haven.

78. _____ is the most common method by which firms transfer funds from foreign subsidiaries to the
parent company.

A. Issue of long-term loans


B. Payment of annual fee
C. Issue of bonds
D. Payment of dividends

79. A _____ is compensation for professional services or expertise supplied to a foreign subsidiary by the
parent company or another subsidiary.

A. fronting loan
B. fee
C. royalty
D. transfer price

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80. A _____ represents the remuneration paid to the owners of technology, patents, or trade names for the
use of that technology or the right to manufacture and/or sell products under those patents or trade
names.

A. fronting loan
B. fee
C. royalty
D. transfer price

81. Part of the benefit that a parent company receives by receiving payment through royalties can be lost
if the subsidiary's:

A. combined tax rate is higher than the parent's.


B. local government views royalties as an expense.
C. local tax rates on profits are extremely high.
D. managers are controlled directly by the parent.

82. Funds can be moved out of a particular country in which a parent country has set up a subsidiary by:

A. setting high transfer prices for the goods supplied.


B. removing royalties imposed on the subsidiary.
C. charging a discounted fee on the subsidiary.
D. issuing loans to the subsidiary at discounted rates.

83. Which of the following is a disadvantage of pursuing a transfer pricing policy?

A. It is not useful in shifting earnings from a high-tax country to a low-tax one.


B. Transfer pricing does not treat each subsidiary as a profit center.
C. It is not effective when significant currency devaluation is expected.
D. A transfer price policy cannot be used to move funds when dividends are restricted.

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84. A(n) _____ is a loan between a parent and its subsidiary channeled through a financial intermediary,
usually a large international bank.

A. fronting loan
B. equity loan
C. direct loan
D. security loan

85. Firms use fronting loans to:

A. avoid host-country restrictions on the remittance of funds from a foreign subsidiary.


B. implement a cost-based and fair pricing policy across an international business.
C. increase the profit center revenue of a subsidiary functioning in another country.
D. implement a market-driven and fair pricing policy across an international business.

86. A tax haven is a country:

A. where companies benefit from establishing fully operating subsidiaries.


B. that does not charge local companies for importing products from other countries.
C. that does not charge taxes on the purchase or sale of any items.
D. with an exceptionally low, or even no, income tax.

87. Which of the following combinations of exchange rates was recommended for translating budget and
performance by Lessard and Lorange?

A. Translating budget using projected rate and translating actual performance using initial rate
B. Translating both actual performance and budget using initial rate
C. Translating budget using ending rate and translating actual performance using initial rate
D. Translating both actual performance and budget using projected rate

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88. Financial management in an international business includes three sets of related decisions. Which of
these involves making decisions about what activities to finance?

A. Investment decisions
B. Money management decisions
C. Multilateral decisions
D. Financing decisions

89. Which of the following was formed in March 2001 to replace the International Accounting Standards
Committee (IASC)?

A. U.S. Securities and Exchange Commission


B. International Accounting Standards Board
C. Office of Economic Analysis
D. Financial Accounting Standards Board

90. Three sets of related decisions are involved in financial management in an international business.
Which of these involves making decisions about how to fund the chosen activities?

A. Investment decisions
B. Financing decisions
C. Bilateral decisions
D. Money management decisions

91. _____ enables top managers to compare, in a reasonably objective fashion, different investment
alternatives within and across countries so they can make informed choices about where the firm
should invest its scarce financial resources.

A. Auditing
B. Money management
C. Capital budgeting
D. Multilateral accounting

20-20
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92. Critics of adjusting discount rates to reflect a location's riskiness argue that it:

A. does not penalize either distant or early cash flows enough.


B. penalizes distant cash flows too heavily.
C. does not penalize early cash flows enough.
D. penalizes early cash flows too heavily.

93. Most banks charge a(n) _____ for moving cash from one location to another.

A. transfer fee
B. internal forward rate
C. accounting service fee
D. audit fee

94. Financial management in an international business includes three sets of related decisions. Which of
these involves making decisions about how to manage the firm's financial resources most efficiently?

A. Multilateral decisions
B. Financing decisions
C. Investment decisions
D. Money management decisions

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95. Which of the following is one of the gains derived by adjusting transfer prices?

A. The firm can reduce its tax liabilities by using transfer prices to shift earnings from a low-tax country
to a high-tax one.
B. The firm can use transfer prices to move funds out of a country where a significant currency
appreciation is expected.
C. The firm can use transfer prices to move funds from a parent company to the subsidiary (or a tax
haven) when financial transfers in the form of dividends are restricted or blocked by host-country
government policies.
D. The firm can use transfer prices to reduce the import duties it must pay when an ad valorem tariff is
in force—a tariff assessed as a percentage of value.

Essay Questions

96. Describe importance of accounting information in business.

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97. Identify a key accounting problem that international businesses are confronted with but that does not
confront purely domestic businesses. Substantiate with a suitable example.

98. How is a country's accounting system affected by the providers of capital? Explain with the help of
suitable examples.

99. Briefly differentiate accounting standards and auditing standards.

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100. What are the shortcomings of IASB?

101. What are the main steps in the control process of a typical firm?

102. Describe the three exchange rates that Lessard and Lorange pointed out.

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103. What are the nine possible combinations of the three exchange rates proposed by Lessard and
Lorange in the control process?

104. Explain the concept of transfer pricing.

105. Explain why the evaluation of a subsidiary should be kept separate from the evaluation of its manager.

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106. Describe three factors that complicate the process of an international business.

107. Describe the problem of blocked earnings.

108. What are the considerations when seeking external financing for international business?

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109. Define tax credit and tax treaty.

110. What are the advantages of using royalties and fees to move money across borders?

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Chapter 20 Accounting and Finance in the International Business Answer
Key

True / False Questions

1. Accounting information is the means by which firms communicate their financial position to the
providers of capital.

TRUE

Accounting information is the means by which firms communicate their financial position to the
providers of capital, enabling them to assess the value of their investments and make decisions
about future resource allocations.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

2. Accounting is shaped by the environment in which it operates.

TRUE

Accounting is shaped by the environment in which it operates. Just as different countries have
different political systems, economic systems, and cultures, historically they have also had different
accounting systems.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.

20-28
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Education.
Topic: National Differences in Accounting Standards

3. Accounting standards are rules for preparing financial statements.

TRUE

Accounting standards are rules for preparing financial statements. They define what is useful
accounting information.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

4. Auditing standards are rules that define the accounting principles and monetary policy of a nation.

FALSE

Auditing standards specify the rules for performing an audit—the technical process by which an
independent person (the auditor) gathers evidence for determining if financial accounts conform to
required accounting standards and if they are also reliable.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-29
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Education.
5. The standards of U.S. Financial Accounting Standards Board and IASB are vastly different.

FALSE

To date, the impact of the IASB standards has probably been least noticeable in the United States
because most of the standards issued by the IASB have been consistent with opinions already
articulated by the U.S. Financial Accounting Standards Board (FASB).

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

6. Most international businesses require all budgets and performance data within the firm to be
expressed in the currencies of the countries where its subunits are located.

FALSE

Most international businesses require all budgets and performance data within the firm to be
expressed in the "corporate currency," which is normally the home currency.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-30
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Education.
7. The initial rate, in the Lessard-Lorange Model, refers to the spot exchange rate when the budget is
adopted.

TRUE

In the Lessard-Lorange Model, the initial rate is the spot exchange rate when the budget is
adopted.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

8. The ending rate refers to the spot exchange rate forecast for the end of the budget period in the
Lessard-Lorange Model.

FALSE

The ending rate refers to the spot exchange rate when the budget and performance are being
compared in the Lessard-Lorange Model.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

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Education.
9. Using the ending rate to translate the budget is a valid practice according to the Lessard-Lorange
Model.

FALSE

Lessard and Lorange ruled out four of the nine combinations they proposed as illogical and
unreasonable. For example, it would make no sense to use the ending rate to translate the budget
and the initial rate to translate actual performance data.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

10. Lessard and Lorange recommend that firms use the projected spot exchange rate to translate both
the budget and performance figures into the corporate currency.

TRUE

Of the five valid combinations they identified, Lessard and Lorange recommend that firms use the
projected spot exchange rate to translate both the budget and performance figures into the
corporate currency.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-32
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Education.
11. Performance of international subsidiaries depends on the transfer price set-up by the corporate.

TRUE

The price at which goods and services are transferred between subsidiary companies in a multi-
national firm is referred to as the transfer price. The profitability of a subsidiary is dependent on this
transfer price.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

12. Most subsidiaries of an international business operate in uniform environments.

FALSE

Foreign subsidiaries do not operate in uniform environments; their environments have widely
different economic, political, and social conditions, all of which influence the costs of doing
business in a country.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-33
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
13. Evaluation of a subsidiary should not be separate from the evaluation of its manager.

FALSE

Foreign subsidiaries do not operate in uniform environments; their environments have widely
different economic, political, and social conditions, all of which influence the costs of doing
business in a country. Thus, the manager of a subsidiary in an adverse environment that has an ROI
of 5 percent may be doing a better job than the manager of a subsidiary in a benign environment
that has an ROI of 20 percent. Accordingly, it has been suggested that the evaluation of a
subsidiary should be kept separate from the evaluation of its manager.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

14. Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment.

TRUE

Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

20-34
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Education.
15. The connection between cash flows to the parent and the source of financing must be recognized
when performing capital budgeting for an international business.

TRUE

The connection between cash flows to the parent and the source of financing must be recognized
when performing capital budgeting for an international business.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

16. The governments of some countries require or prefer foreign multinationals to finance projects in
their country by local debt financing or local sales of equity.

TRUE

The governments of some countries require, or at least prefer, foreign multinationals to finance
projects in their country by local debt financing or local sales of equity. In countries where liquidity
is limited, this raises the cost of capital used to finance a project.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-05 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.
Topic: International Financing Options

20-35
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
17. The total size of a firm's cash pool increases when it pools cash reserves of subsidiaries.

FALSE

By pooling its cash reserves, the firm can reduce the total size of the cash pool it must hold in
highly liquid accounts, which enables the firm to invest a larger amount of cash reserves in longer-
term, less liquid financial instruments that earn a higher interest rate.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

18. A firm's ability to establish a centralized depository that can serve short-term cash needs might be
limited by government-imposed restrictions on capital flows across borders.

TRUE

A firm's ability to establish a centralized depository that can serve short-term cash needs might be
limited by government-imposed restrictions on capital flows across borders.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-36
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
19. The principles of multilateral netting and bilateral netting are different.

FALSE

Multilateral netting is an extension of bilateral netting. Bilateral netting involves adjustments


between two firms whereas multilateral netting involves adjustments between multiple subsidiaries.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20. A tax treaty between two countries is formed to fix the exchange rates between the two countries.

FALSE

A tax treaty between two countries is an agreement specifying what items of income will be taxed
by the authorities of country where the income is earned.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-37
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
21. A tax heaven is a country that gives income tax exemptions to firms that export all or part of its
products.

FALSE

A tax haven is a country with an exceptionally low, or even no, income tax. International businesses
avoid or defer income taxes by establishing a wholly owned, non-operating subsidiary in the tax
haven.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

22. Payment of dividends is an uncommon method of transferring funds from foreign subsidiaries to
the parent company.

FALSE

Payment of dividends is the most common method by which firms transfer funds from foreign
subsidiaries to the parent company.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-38
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
23. A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the
parent company or another subsidiary.

TRUE

A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the
parent company or another subsidiary.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

24. Firms cannot use transfer prices to move funds from a subsidiary to the parent company when
financial transfers in the form of dividends are blocked by host-country government policies.

FALSE

A firm can use transfer prices to move funds from a subsidiary to the parent company (or a tax
haven) when financial transfers in the form of dividends are restricted or blocked by host-country
government policies.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-39
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
25. A fronting loan is a loan between a parent and its subsidiary channeled through a financial
intermediary.

TRUE

A fronting loan is a loan between a parent and its subsidiary channeled through a financial
intermediary, usually a large international bank.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

Multiple Choice Questions

26. _____ are the most important source of external capital for business enterprises in the United
States.

A. Stocks or bonds
B. World Bank loans
C. Banks
D. Venture capitalists

In countries where there are well-developed capital markets, such as the United States and Britain,
firms typically raise capital by issuing stock or bonds to investors.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.

20-40
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Topic: National Differences in Accounting Standards

27. The _____ has 15 members who are responsible for the formulation of new international financial
reporting standards.

A. U.S. Securities and Exchange Commission


B. International Accounting Standards Board
C. Office of Economic Analysis
D. Financial Accounting Standards Board

The International Accounting Standards Board (IASB) has emerged as a major proponent of
standardization. The IASB has 15 members who are responsible for the formulation of new
international financial reporting standards.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

28. Compliance to IASB standards is:

A. mandatory for countries to engage in international trade.


B. enforced through the World Trade Organization.
C. voluntary.
D. enforced through the United Nations.

Another hindrance to the development of international accounting standards is that compliance is


voluntary; the IASB has no power to enforce its standards.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

20-41
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

29. The _____ is the main instrument of financial control in an organization.

A. chief financial officer


B. corporate accounting
C. audit
D. budget

The budget is the main instrument of financial control. The budget is typically prepared by the
subunit, but it must be approved by headquarters management.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

30. A European subsidiary of a U.S. firm will usually prepare its budgets in _____.

A. U.S. dollars
B. Euro
C. a third party currency
D. Eurocurrency

Most international businesses require all budgets and performance data within the firm to be
expressed in the "corporate currency," which is normally the home currency. Here the firm would
typically prepare budget in U.S. dollars.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic

20-42
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

31. The projected rate will typically be the _____ as determined by the foreign exchange market when
firms use the projected spot exchange rate to translate both the budget and performance figures
into the corporate currency.

A. transfer price
B. forward exchange rate
C. carrying cost
D. foreign exchange rate

Of the five valid combinations they identified, Lessard and Lorange recommend that firms use the
projected spot exchange rate to translate both the budget and performance figures into the
corporate currency. The projected rate in such cases will typically be the forward exchange rate as
determined by the foreign exchange market.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-43
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
32. The price at which goods and services are transferred between subsidiary companies in a multi-
national firm is referred to as _____.

A. minimum retail price


B. deferral price
C. transfer price
D. transaction price

The price at which goods and services are transferred between subsidiary companies in a multi-
national firm is referred to as the transfer price.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

33. Capital budgeting for a foreign project:

A. begins with an audit of the current cash flows.


B. is vastly different from domestic capital budgeting.
C. begins with converting all cash flow to Eurocurrency.
D. uses the same theoretical framework that domestic capital budgeting uses.

Capital budgeting for a foreign project uses the same theoretical framework that domestic capital
budgeting uses; that is, the firm must first estimate the cash flows associated with the project over
time.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: Financial Management: The Investment Decision

20-44
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
34. Political risk tends to be:

A. greater in countries experiencing social unrest or disorder.


B. negligible for large multinational companies.
C. less in countries experiencing social unrest or disorder.
D. a consideration only for companies operating in third world countries.

Political risk tends to be greater in countries experiencing social unrest or disorder and countries
where the underlying nature of the society makes the likelihood of social unrest high.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

35. Extensive empirical studies have shown that:

A. there is only a short-run relationship between a country's relative inflation rates and changes in
exchange rates; no long-run relationship exists.
B. there is a long-run relationship between a country's relative inflation rates and changes in
exchange rates.
C. that there exists both short-run and long-run relationships between a country's relative inflation
rates and changes in exchange rates.
D. a country's relative inflation rates and changes in exchange rates are not related to each other.

There have been extensive empirical studies of the relationship between countries' inflation rates
and their currencies' exchange rates. These studies show that there is a long-run relationship
between a country's relative inflation rates and changes in exchange rates.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium

20-45
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: Financial Management: The Investment Decision

36. Money management decisions attempt to manage the firm's _____ most efficiently.

A. cash flow
B. corporate expenses
C. working capital
D. corporate revenues

Money management decisions attempt to manage the firm's global cash resources—its working
capital—most efficiently.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

37. Pooling the cash of all the subsidiaries:

A. lowers the interest rate earned.


B. reduces the earning potential for firms.
C. increases the interest rate paid.
D. increases the earning potential for firms.

Cash balances are typically deposited in liquid accounts, such as overnight money market accounts.
Because interest rates on such deposits normally increase with the size of the deposit, by pooling
cash centrally, the firm should be able to earn a higher interest rate than it would if each subsidiary
managed its own cash balances.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation

20-46
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

38. Every time a firm changes cash from one currency into another currency it must bear a(n) _____.

A. transaction cost
B. tax
C. transfer fee
D. audit

Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into
another currency it must bear a transaction cost—the commission fee it pays to foreign exchange
dealers for performing the transaction.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-47
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
39. A _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes
paid to the foreign government.

A. tax amnesty
B. tax credit
C. waiver
D. tax treaty

A tax credit allows an entity to reduce the taxes paid to the home government by the amount of
taxes paid to the foreign government.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

40. A _____ specifies that parent companies are not taxed on foreign source income until they actually
receive a dividend.

A. bilateral agreement
B. tax credit
C. deferral principle
D. tax treaty

A deferral principle specifies that parent companies are not taxed on foreign source income until
they actually receive a dividend.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,

20-48
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
transaction costs, and taxation.
Topic: Global Money Management

41. _____ is a term used to describe the practice of transferring liquid funds from a foreign subsidiary to
the parent company.

A. Deferral principle
B. Bilateral netting
C. Unbundling
D. Multilateral netting

International businesses use a number of techniques to transfer liquid funds across borders. These
include dividend remittances, royalty payments and fees, transfer prices, and fronting loans. Some
firms rely on more than one of these techniques to transfer funds across borders—a practice
known as unbundling.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-49
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Education.
42. The age of a foreign subsidiary:

A. has no influence on payment of dividends.


B. indicates the number of capital investment needs; older subsidiaries have higher needs.
C. influences dividend policy in that younger subsidiaries tend to remit a higher proportion of their
earnings in dividends to the parent company.
D. influences dividend policy in that older subsidiaries tend to remit a higher proportion of their
earnings in dividends to the parent company.

The age of a foreign subsidiary influences dividend policy in that older subsidiaries tend to remit a
higher proportion of their earnings in dividends to the parent company, presumably because a
subsidiary has fewer capital investment needs as it matures.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

43. _____ represent the remuneration paid to the owners for the use of technology or the right to
manufacture and/or sell products under patents or trade names.

A. Royalties
B. Transfer costs
C. Fees
D. Licensing costs

Royalties represent the remuneration paid to the owners of technology, patents, or trade names for
the use of that technology or the right to manufacture and/or sell products under those patents or
trade names.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember

20-50
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

44. It is common for a parent company to charge its foreign subsidiaries _____ for the technology,
patents, or trade names it has transferred to them.

A. transfer fees
B. royalties
C. an internal forward rate
D. usage fees

It is common for a parent company to charge its foreign subsidiaries royalties for the technology,
patents, or trade names it has transferred to them.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-51
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Education.
45. Royalties and fees have certain tax advantages over _____, particularly when the corporate tax rate
is higher in the host country than in the parent's home country.

A. transaction costs
B. deferrals
C. dividends
D. transfer fees

Royalties and fees have certain tax advantages over dividends, particularly when the corporate tax
rate is higher in the host country than in the parent's home country. Royalties and fees are often tax
deductible locally (because they are viewed as an expense), so arranging for payment in royalties
and fees will reduce the foreign subsidiary's tax liability.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

46. Which of the following is an accounting problem that only international businesses face?

A. Lack of consistency in the accounting standards


B. Inaccurate filing of profit-and-loss statements
C. False reporting of income to the government
D. Lack of a dedicated accounting function within the firm

International businesses face a number of accounting problems that do not confront purely
domestic businesses. The lack of consistency in the accounting standards of different countries is
one such problem.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

20-52
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

47. In countries such as the United States and Britain, firms typically raised capital by:

A. obtaining funding from the government.


B. borrowing money from national banks.
C. issuing stock or bonds to investors.
D. borrowing money from international banks.

In countries where there were well-developed capital markets, such as the United States and Britain,
firms typically raised capital by issuing stock or bonds to investors.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

48. Historically, financial reports prepared by firms in Germany:

A. reveal less information than reports of British or U.S. firms.


B. contain detailed information required by individual investors.
C. overvalued assets and undervalued liabilities.
D. made more public disclosures compared to firms in other countries.

In Germany and Switzerland the banks emerged as the main providers of capital to enterprises.
Bank officers often sat on the boards of these companies and were privy to detailed information
about their operations and financial position. As a consequence, there were fewer demands for
detailed accounting disclosures, and public accounts tended to reveal less information.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy

20-53
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

49. Which of the following is a country in which banks emerged as the main providers of capital to
enterprises?

A. United States
B. Britain
C. Philippines
D. Switzerland

In Germany and Switzerland the banks emerged as the main providers of capital to enterprises.
Bank officers often sat on the boards of these companies and were privy to detailed information
about their operations and financial position. As a consequence, there were fewer demands for
detailed accounting disclosures, and public accounts tended to reveal less information.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

50. Accounting standards:

A. are rules for preparing financial statements.


B. define the levels of tax-payments needed.
C. specify the rules for performing an audit.
D. refer to the technical process of balancing accounts.

Accounting standards are rules for preparing financial statements. They define what is useful
accounting information.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation

20-54
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

51. The technical process by which an independent person gathers evidence for determining if financial
accounts conform to required accounting standards is known as _____.

A. standardization
B. an audit
C. reporting
D. a benchmark

An audit is the technical process by which an independent person (the auditor) gathers evidence
for determining if financial accounts conform to required accounting standards and if they are also
reliable.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-55
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Education.
52. Transnational financing occurs when a firm based in one country enters another country to raise
capital:

A. by borrowing from financial institutions.


B. from the sale of stocks or bonds.
C. by borrowing from banks.
D. through exchange policies of governments.

Transnational financing occurs when a firm based in one country enters another country's capital
market to raise capital from the sale of stocks or bonds.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

53. A German firm raising capital by selling stock through the London Stock Exchange is an example of
_____.

A. transnational financing
B. service exporting
C. indirect financing
D. transnational investment

Transnational financing occurs when a firm based in one country enters another country's capital
market to raise capital from the sale of stocks or bonds.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-56
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Education.
54. The International Accounting Standards Board:

A. can issue a new accounting standard if the majority of the board members agree.
B. was formed to replace the Financial Accounting Standards Board.
C. proposes standards but has no power to enforce the standards.
D. was formed to supervise the accounting practices that U.S. firms follow.

The International Accounting Standards Board (IASB) has emerged as a major proponent of
standardization. However, the IASB has no power to enforce its standards.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

55. The _____ writes the generally accepted accounting principles (GAAP) that govern the financial
statements of U.S. firms.

A. U.S. Securities and Exchange Commission


B. Office of Economic Analysis
C. International Accounting Standards Board
D. Financial Accounting Standards Board

The FASB writes the generally accepted accounting principles (GAAP) by which the financial
statements of U.S. firms must be prepared.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

20-57
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Education.
56. Most international businesses require all budgets and performance data within the firm to be
expressed in the "corporate currency," which is normally:

A. a common currency such as the U.S. dollar.


B. the home currency.
C. a foreign currency.
D. the currency of the country where products are sold.

Most international businesses require all budgets and performance data within the firm to be
expressed in the "corporate currency," which is normally the home currency.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

57. According to Lessard-Lorange model, _____ rate refers to the spot exchange rate when the budget
is adopted.

A. ending
B. initial
C. ideal
D. projected

Lessard and Lorange point out three exchange rates that can be used to translate foreign
currencies into the corporate currency in setting budgets and in the subsequent tracking of
performance. One of them is the initial rate, the spot exchange rate when the budget is adopted.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

20-58
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

58. According to Lessard-Lorange model, _____ is the spot exchange rate forecast for the end of the
budget period.

A. projected
B. initial
C. ideal
D. ending

Lessard and Lorange point out three exchange rates that can be used to translate foreign
currencies into the corporate currency in setting budgets and in the subsequent tracking of
performance. One of them is the projected rate, the spot exchange rate forecast for the end of the
budget period.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-59
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Education.
59. According to Lessard-Lorange model, ending rate is the spot exchange rate:

A. forecast for the end of the budget period.


B. when the budget is adopted.
C. when no formal exchange rate exists.
D. when the budget and performance are being compared.

Lessard and Lorange point out three exchange rates that can be used to translate foreign
currencies into the corporate currency in setting budgets and in the subsequent tracking of
performance. One of them is the ending rate, the spot exchange rate when the budget and
performance are being compared.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

60. Which of the following combinations of exchange rates was ruled out by Lessard and Lorange as
illogical and unreasonable?

A. Translating budget using ending rate and translating actual performance using initial rate
B. Translating both actual performance and budget using projected rate
C. Translating both actual performance and budget using initial rate
D. Translating budget using projected rate and translating actual performance using ending rate

Lessard and Lorange ruled out four of the nine possible combinations they proposed as illogical
and unreasonable. It would make no sense to use the ending rate to translate the budget and the
initial rate to translate actual performance data.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic

20-60
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

61. Of the five combinations, Lessard and Lorange recommend that firms use the _____ spot exchange
rate to translate both the budget and performance figures into the corporate currency.

A. ending
B. initial
C. final
D. projected

Of the five combinations, Lessard and Lorange recommend that firms use the projected spot
exchange rate to translate both the budget and performance figures into the corporate currency,
combination PP.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-61
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Education.
62. When using the projected spot exchange rate to translate both the budget and performance
figures into the corporate currency, the projected rate in such cases will typically be the:

A. forward exchange rate as determined by the foreign exchange market.


B. exchange rate that exists at the start of a project.
C. exchange rate when the budget was prepared.
D. transfer price that a firm will offer to one or more of its subsidiaries.

Of the five combinations, Lessard and Lorange recommend that firms use the projected spot
exchange rate to translate both the budget and performance figures into the corporate currency.
The projected rate in such cases will typically be the forward exchange rate as determined by the
foreign exchange market or some company-generated forecast of future spot rates, which Lessard
and Lorange refer to as the internal forward rate.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

63. Lessard and Lorange refer company-generated forecast of future spot rates as _____ rate.

A. forward exchange
B. internal forward
C. initial exchange
D. ending exchange

Company-generated forecast of future spot rates are used as projected rate in some instances.
Lessard and Lorange refer to which as the internal forward rate.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

20-62
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

64. Transfer price refers to the:

A. price at which goods and services are transferred to a subsidiary.


B. price at which the title of products is transferred to a customer.
C. price at which a supplier provides raw materials to a firm.
D. cost incurred when goods or services are transferred from one place to another.

The price at which such goods and services are transferred to a subsidiary is referred to as the
transfer price.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-63
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Education.
65. Which of the following is a disadvantage of comparing managers in different countries only on the
basis of return on investment?

A. The managers are not responsible for increasing the ROI of an organization.
B. Managerial actions do not have a significant impact on firms' profitability.
C. Return on investment is not a valid indicator of organizational profitability.
D. Environmental factors also contribute to ROI of firms and these factors differ.

Foreign subsidiaries do not operate in uniform environments; their environments have widely
different economic, political, and social conditions, all of which influence the costs of doing
business in a country. Thus, the manager of a subsidiary in an adverse environment that has an ROI
of 5 percent may be doing a better job than the manager of a subsidiary in a benign environment
that has an ROI of 20 percent. Accordingly, it has been suggested that the evaluation of a
subsidiary should be kept separate from the evaluation of its manager.

AACSB: Analytical Thinking


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

66. _____ is the technique financial managers use to try to quantify the benefits, costs, and risks of an
investment.

A. Capital budgeting
B. External audit
C. Transfer pricing
D. Control system analysis

Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment. This enables top managers to compare investment alternatives in a
reasonably objective fashion.

AACSB: Knowledge Application

20-64
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

67. Which of the following statements is true of the capital budgeting used in international businesses?

A. Capital budgeting does not provide connection between cash flows to the parent and
subsidiaries.
B. Its basic framework is vastly different from the framework of domestic capital budgeting.
C. Capital budgeting does not consider the cash flows between subsidiaries of a firm.
D. It enables top managers to compare different investment alternatives in an objective fashion.

Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment. This enables top managers to compare, in a reasonably objective fashion,
different investment alternatives within and across countries so they can make informed choices
about where the firm should invest its scarce financial resources.

AACSB: Analytical Thinking


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

20-65
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Education.
68. The problem of blocked earnings is not as serious now as it once was because:

A. fixed exchange rates have become more common now.


B. governmental intervention in earnings is more frequent now.
C. there is greater acceptance of free market economics now.
D. political risk within the economy is very low in modern times.

The problem of blocked earnings is not as serious as it once was. The worldwide move toward
greater acceptance of free market economics has reduced the number of countries in which
governments are likely to prohibit the affiliates of foreign multinationals from remitting cash flows
to their parent companies.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

69. Which of the following is a valid observation of the cost of capital?

A. The cost of capital is typically higher in the global capital market.


B. Domestic capital markets have more liquidity than global markets.
C. Local debt financing raises the cost of capital if liquidity is limited.
D. A local sale of equity is preferred to global sale by international firms.

The governments of some countries require, or at least prefer, foreign multinationals to finance
projects in their country by local debt financing or local sales of equity. In countries where liquidity
is limited, this raises the cost of capital used to finance a project.

AACSB: Reflective Thinking


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-05 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.

20-66
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Education.
Topic: International Financing Options

70. Money management decisions attempt to manage a firm's _____.

A. equity capital
B. fixed costs
C. working capital
D. equipment costs

Money management decisions attempt to manage the firm's global cash resources—its working
capital—most efficiently.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

71. By pooling cash resources centrally firms can:

A. better handle short-term cash needs of subsidiaries.


B. increase liquidity of independent subsidiaries.
C. reduce the total size of the cash pool it must hold.
D. avoid government-imposed restrictions on capital flows.

By pooling its cash reserves, the firm can reduce the total size of the cash pool it must hold in
highly liquid accounts, which enables the firm to invest a larger amount of cash reserves in longer-
term, less liquid financial instruments that earn a higher interest rate.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

20-67
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

72. _____ costs are incurred every time a firm changes cash from one currency into another currency.

A. Dividend
B. Capital
C. Fixed
D. Transaction

Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into
another currency it must bear a transaction cost—the commission fee it pays to foreign exchange
dealers for performing the transaction.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

73. Multilateral netting is used primarily to:

A. reduce the number of transactions between subsidiaries.


B. avail tax credit from governments.
C. establish a tax treaty amongst multiple countries.
D. to reduce the fixed costs of establishing a subsidiary.

A firm's subsidiaries trade with each other and at the end of each month a large volume of cash
transactions must be settled. Firms would incur huge transaction costs if money is transferred for
each transaction. Multilateral netting reduces this cost by reducing the number of transactions.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation

20-68
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

74. A(n) _____ allows an entity to reduce the taxes paid to the home government by the amount of
taxes paid to the foreign government.

A. indirect tax
B. tax haven
C. tax credit
D. internal tax

A tax credit allows an entity to reduce the taxes paid to the home government by the amount of
taxes paid to the foreign government.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-69
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
75. A _____ between two countries is an agreement specifying what items of income will be taxed by
the authorities of the country where the income is earned.

A. tax deferral agreement


B. fixed-rate treaty
C. tax treaty
D. free trade agreement

A tax treaty between two countries is an agreement specifying what items of income will be taxed
by the authorities of the country where the income is earned.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

76. A deferral principle specifies that parent companies are not taxed on foreign source income until:

A. the subsidiary providing income makes some profit.


B. they actually receive a dividend.
C. they acquire majority stake in the subsidiary.
D. the subsidiary providing income is listed in the United States.

A deferral principle specifies that parent companies are not taxed on foreign source income until
they actually receive a dividend.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.

20-70
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Education.
Topic: Global Money Management

77. Which of the following statements is true of tax havens?

A. Firms that export to tax havens get special tax concessions from home governments.
B. Firms would require huge capital investments to start business in tax havens.
C. Nations such as United States are widely regarded as tax havens.
D. Firms can save tax by establishing a non-operating subsidiary in the tax haven.

A tax haven is a country with an exceptionally low, or even no, income tax. International businesses
avoid or defer income taxes by establishing a wholly owned, non-operating subsidiary in the tax
haven. The tax haven subsidiary owns the common stock of the operating foreign subsidiaries. This
allows all transfers of funds from foreign operating subsidiaries to the parent company to be
funneled through the tax haven subsidiary.

AACSB: Analytical Thinking


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-71
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Education.
78. _____ is the most common method by which firms transfer funds from foreign subsidiaries to the
parent company.

A. Issue of long-term loans


B. Payment of annual fee
C. Issue of bonds
D. Payment of dividends

Payment of dividends is the most common method by which firms transfer funds from foreign
subsidiaries to the parent company. The dividend policy typically varies with each subsidiary
depending on such factors as tax regulations, foreign exchange risk, the age of the subsidiary, and
the extent of local equity participation.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

79. A _____ is compensation for professional services or expertise supplied to a foreign subsidiary by
the parent company or another subsidiary.

A. fronting loan
B. fee
C. royalty
D. transfer price

A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the
parent company or another subsidiary.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

20-72
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

80. A _____ represents the remuneration paid to the owners of technology, patents, or trade names for
the use of that technology or the right to manufacture and/or sell products under those patents or
trade names.

A. fronting loan
B. fee
C. royalty
D. transfer price

Royalties represent the remuneration paid to the owners of technology, patents, or trade names for
the use of that technology or the right to manufacture and/or sell products under those patents or
trade names.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-73
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Education.
81. Part of the benefit that a parent company receives by receiving payment through royalties can be
lost if the subsidiary's:

A. combined tax rate is higher than the parent's.


B. local government views royalties as an expense.
C. local tax rates on profits are extremely high.
D. managers are controlled directly by the parent.

When receiving money as royalties, the parent can often take a tax credit for the local withholding
and income taxes it has paid, part of the benefit can be lost if the subsidiary's combined tax rate is
higher than the parent's.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

82. Funds can be moved out of a particular country in which a parent country has set up a subsidiary
by:

A. setting high transfer prices for the goods supplied.


B. removing royalties imposed on the subsidiary.
C. charging a discounted fee on the subsidiary.
D. issuing loans to the subsidiary at discounted rates.

Transfer prices can be used to position funds within an international business. For example, funds
can be moved out of a particular country by setting high transfer prices for goods and services
supplied to a subsidiary in that country and by setting low transfer prices for the goods and
services sourced from that subsidiary.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply

20-74
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

83. Which of the following is a disadvantage of pursuing a transfer pricing policy?

A. It is not useful in shifting earnings from a high-tax country to a low-tax one.


B. Transfer pricing does not treat each subsidiary as a profit center.
C. It is not effective when significant currency devaluation is expected.
D. A transfer price policy cannot be used to move funds when dividends are restricted.

Another problem associated with transfer pricing is related to management incentives and
performance evaluation. Transfer pricing is inconsistent with a policy of treating each subsidiary in
the firm as a profit center.

AACSB: Analytical Thinking


Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

84. A(n) _____ is a loan between a parent and its subsidiary channeled through a financial intermediary,
usually a large international bank.

A. fronting loan
B. equity loan
C. direct loan
D. security loan

A fronting loan is a loan between a parent and its subsidiary channeled through a financial
intermediary, usually a large international bank.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation

20-75
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

85. Firms use fronting loans to:

A. avoid host-country restrictions on the remittance of funds from a foreign subsidiary.


B. implement a cost-based and fair pricing policy across an international business.
C. increase the profit center revenue of a subsidiary functioning in another country.
D. implement a market-driven and fair pricing policy across an international business.

Fronting loans can circumvent host-country restrictions on the remittance of funds from a foreign
subsidiary to the parent company.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

86. A tax haven is a country:

A. where companies benefit from establishing fully operating subsidiaries.


B. that does not charge local companies for importing products from other countries.
C. that does not charge taxes on the purchase or sale of any items.
D. with an exceptionally low, or even no, income tax.

A tax haven is a country with an exceptionally low, or even no, income tax. International businesses
avoid or defer income taxes by establishing a wholly owned, non-operating subsidiary in the tax
haven.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation

20-76
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

87. Which of the following combinations of exchange rates was recommended for translating budget
and performance by Lessard and Lorange?

A. Translating budget using projected rate and translating actual performance using initial rate
B. Translating both actual performance and budget using initial rate
C. Translating budget using ending rate and translating actual performance using initial rate
D. Translating both actual performance and budget using projected rate

Of the five combinations, Lessard and Lorange recommend that firms use the projected spot
exchange rate to translate both the budget and performance figures into the corporate currency.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-77
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Education.
88. Financial management in an international business includes three sets of related decisions. Which of
these involves making decisions about what activities to finance?

A. Investment decisions
B. Money management decisions
C. Multilateral decisions
D. Financing decisions

Financial management in an international business includes three sets of related decisions: (1)
investment decisions: decisions about what activities to finance, (2) financing decisions: decisions
about how to finance those activities, and (3) money management decisions: decisions about how
to manage the firm's financial resources most efficiently.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

89. Which of the following was formed in March 2001 to replace the International Accounting
Standards Committee (IASC)?

A. U.S. Securities and Exchange Commission


B. International Accounting Standards Board
C. Office of Economic Analysis
D. Financial Accounting Standards Board

The International Accounting Standards Board (IASB) has emerged as a major proponent of
standardization. The IASB was formed in March 2001 to replace the International Accounting
Standards Committee (IASC), which had been established in 1973. The IASB has 15 members who
are responsible for the formulation of new international financial reporting standards. To issue a
new standard, 75 percent of the 15 members of the board must agree.

AACSB: Knowledge Application

20-78
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

90. Three sets of related decisions are involved in financial management in an international business.
Which of these involves making decisions about how to fund the chosen activities?

A. Investment decisions
B. Financing decisions
C. Bilateral decisions
D. Money management decisions

Financial management in an international business includes three sets of related decisions: (1)
investment decisions: decisions about what activities to finance, (2) financing decisions: decisions
about how to finance those activities, and (3) money management decisions: decisions about how
to manage the firm's financial resources most efficiently.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-79
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Education.
91. _____ enables top managers to compare, in a reasonably objective fashion, different investment
alternatives within and across countries so they can make informed choices about where the firm
should invest its scarce financial resources.

A. Auditing
B. Money management
C. Capital budgeting
D. Multilateral accounting

Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and
risks of an investment. This enables top managers to compare, in a reasonably objective fashion,
different investment alternatives within and across countries so they can make informed choices
about where the firm should invest its scarce financial resources.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

20-80
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Education.
92. Critics of adjusting discount rates to reflect a location's riskiness argue that it:

A. does not penalize either distant or early cash flows enough.


B. penalizes distant cash flows too heavily.
C. does not penalize early cash flows enough.
D. penalizes early cash flows too heavily.

Adjusting discount rates to reflect a location's riskiness seems to be fairly widely practiced.
However, critics of this method argue that it penalizes early cash flows too heavily and does not
penalize distant cash flows enough. They point out that if political or economic collapse were
expected in the near future, the investment would not occur anyway. So for any investment
decisions, the political and economic risk being assessed is not of immediate possibilities, but rather
at some distance in the future.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

93. Most banks charge a(n) _____ for moving cash from one location to another.

A. transfer fee
B. internal forward rate
C. accounting service fee
D. audit fee

Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into
another currency it must bear a transaction cost—the commission fee it pays to foreign exchange
dealers for performing the transaction. Most banks also charge a transfer fee for moving cash from
one location to another; this is another transaction cost. The commission and transfer fees arising
from intra-firm transactions can be substantial.

AACSB: Knowledge Application

20-81
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Education.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

94. Financial management in an international business includes three sets of related decisions. Which of
these involves making decisions about how to manage the firm's financial resources most
efficiently?

A. Multilateral decisions
B. Financing decisions
C. Investment decisions
D. Money management decisions

Financial management in an international business includes three sets of related decisions: (1)
investment decisions: decisions about what activities to finance, (2) financing decisions: decisions
about how to finance those activities, and (3) money management decisions: decisions about how
to manage the firm's financial resources most efficiently.

AACSB: Knowledge Application


Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-82
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Education.
95. Which of the following is one of the gains derived by adjusting transfer prices?

A. The firm can reduce its tax liabilities by using transfer prices to shift earnings from a low-tax
country to a high-tax one.
B. The firm can use transfer prices to move funds out of a country where a significant currency
appreciation is expected.
C. The firm can use transfer prices to move funds from a parent company to the subsidiary (or a
tax haven) when financial transfers in the form of dividends are restricted or blocked by host-
country government policies.
D. The firm can use transfer prices to reduce the import duties it must pay when an ad valorem
tariff is in force—a tariff assessed as a percentage of value.

At least four gains can be derived by adjusting transfer prices: 1. The firm can reduce its tax
liabilities by using transfer prices to shift earnings from a high-tax country to a low-tax one. 2. The
firm can use transfer prices to move funds out of a country where a significant currency devaluation
is expected, thereby reducing its exposure to foreign exchange risk. 3. The firm can use transfer
prices to move funds from a subsidiary to the parent company (or a tax haven) when financial
transfers in the form of dividends are restricted or blocked by host-country government policies. 4.
The firm can use transfer prices to reduce the import duties it must pay when an ad valorem tariff is
in force—a tariff assessed as a percentage of value. In this case, low transfer prices on goods or
services being imported into the country are required. Since this lowers the value of the goods or
services, it lowers the tariff.

AACSB: Analytical Thinking


Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 19-07 Understand how organized labor can influence strategic choices in international business.
Topic: International Labor Relations

Essay Questions

20-83
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Education.
96. Describe importance of accounting information in business.

Accounting has often been referred to as "the language of business." This language finds
expression in profit-and-loss statements, balance sheets, budgets, investment analysis, and tax
analysis. Accounting information is the means by which firms communicate their financial position
to the providers of capital (investors, creditors, and government). It enables the providers of capital
to assess the value of their investments or the security of their loans and to make decisions about
future resource allocations. Accounting information is also the means by which firms report their
income to the government so the government can assess how much tax the firm owes. It is also the
means by which the firm can evaluate its performance, control its internal expenditures, and plan
for future expenditures and income.

AACSB: Knowledge Application


Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

97. Identify a key accounting problem that international businesses are confronted with but that does
not confront purely domestic businesses. Substantiate with a suitable example.

International businesses are confronted with a number of accounting problems that do not
confront purely domestic businesses. One of these problems is the lack of consistency in the
accounting standards of different countries. For example, the accounting rules currently used in
China are not the same as those used in more developed markets. This makes it very difficult for
international investors to accurately value Chinese firms, and it opens up the possibility that firms
that seem to be profitable and financially strong are in fact not.

AACSB: Reflective Thinking


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-84
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Education.
98. How is a country's accounting system affected by the providers of capital? Explain with the help of
suitable examples.

In countries where there were well-developed capital markets, such as the United States and Britain,
firms typically raised capital by issuing stock or bonds to investors. Investors in these countries
demanded detailed accounting disclosures so that they could better assess the risk and likely return
on their investments. The accounting system evolved to accommodate these requests. In contrast,
in Germany and Switzerland the banks emerged as the main providers of capital to enterprises.
Bank officers often sat on the boards of these companies and were privy to detailed information
about their operations and financial position. As a consequence, there were fewer demands for
detailed accounting disclosures, and public accounts tended to reveal less information.

AACSB: Reflective Thinking


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

99. Briefly differentiate accounting standards and auditing standards.

Accounting standards are rules for preparing financial statements. They define what is useful
accounting information. Auditing standards specify the rules for performing an audit—the technical
process by which an independent person (the auditor) gathers evidence for determining if financial
accounts conform to required accounting standards and if they are also reliable.

AACSB: Analytical Thinking


Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-01 Discuss the national differences in accounting standards.
Topic: National Differences in Accounting Standards

20-85
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Education.
100. What are the shortcomings of IASB?

To issue a new standard, 75 percent of the 15 members of the board must agree. It can be difficult
to get three-quarters agreement, particularly since members come from different cultures and legal
systems. Another hindrance to the development of international accounting standards is that
compliance is voluntary; the IASB has no power to enforce its standards.

AACSB: Reflective Thinking


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-02 Explain the implications of the rise of international accounting standards.
Topic: International Accounting Standards' Convergence Process

101. What are the main steps in the control process of a typical firm?

In a typical firm, the control process is annual and involves three main steps: (1) head office and
subunit management jointly determine subunit goals for the coming year; (2) throughout the year,
the head office monitors subunit performance against the agreed goals; (3) if a subunit fails to
achieve its goals, the head office intervenes in the subunit to learn why the shortfall occurred,
taking corrective action when appropriate.

AACSB: Knowledge Application


Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-86
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Education.
102. Describe the three exchange rates that Lessard and Lorange pointed out.

Lessard and Lorange pointed out three exchange rates that can be used to translate foreign
currencies into the corporate currency in setting budgets and in the subsequent tracking of
performance: (1) The initial rate, the spot exchange rate when the budget is adopted. (2) The
projected rate, the spot exchange rate forecast for the end of the budget period (i.e., the forward
rate). (3) The ending rate, the spot exchange rate when the budget and performance are being
compared.

AACSB: Knowledge Application


Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

103. What are the nine possible combinations of the three exchange rates proposed by Lessard and
Lorange in the control process?

These three exchange rates imply nine possible combinations. Lessard and Lorange ruled out four
of the nine combinations as illogical and unreasonable. An image comparable to Figure 20.1 would
be appropriate to answer this question.

AACSB: Knowledge Application


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

20-87
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Education.
104. Explain the concept of transfer pricing.

Firms are continually shipping component parts and finished goods between subsidiaries in
different countries. The volume of intra-firm transactions in come firms is very high. The price at
which such goods and services are transferred is referred to as the transfer price.

AACSB: Knowledge Application


Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.
Topic: Accounting Aspects of Control Systems

105. Explain why the evaluation of a subsidiary should be kept separate from the evaluation of its
manager.

In many international businesses, the same quantitative criteria are used to assess the performance
of both a foreign subsidiary and its managers. Many accountants, however, argue that although it is
legitimate to compare subsidiaries against each other on the basis of return on investment (ROI) or
other indicators of profitability, it may not be appropriate to use these for comparing and
evaluating the managers of different subsidiaries. Foreign subsidiaries do not operate in uniform
environments; their environments have widely different economic, political, and social conditions,
all of which influence the costs of doing business in a country and hence the subsidiaries'
profitability. Thus, the manager of a subsidiary in an adverse environment that has an ROI of 5
percent may be doing a better job than the manager of a subsidiary in a benign environment that
has an ROI of 20 percent. Although the firm might want to pull out of a country where its ROI is
only 5 percent, it may also want to recognize the manager's achievement. Accordingly, it has been
suggested that the evaluation of a subsidiary should be kept separate from the evaluation of its
manager.

AACSB: Reflective Thinking


Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-03 Explain how accounting systems affect control systems within the multinational enterprise.

20-88
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Topic: Accounting Aspects of Control Systems

106. Describe three factors that complicate the process of an international business.

Among the factors complicating the process for an international business are these: (1) A distinction
must be made between cash flows to the project and cash flows to the parent company. (2)
Political and economic risks, including foreign exchange risk, can significantly change the value of a
foreign investment. (3) The connection between cash flows to the parent and the source of
financing must be recognized.

AACSB: Knowledge Application


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

107. Describe the problem of blocked earnings.

When evaluating a foreign investment opportunity, the parent should be interested in the cash
flows it will receive—as opposed to those the project generates—because those are the basis for
dividends to stockholders, investments elsewhere in the world, repayment of worldwide corporate
debt, and so on. Stockholders will not perceive blocked earnings as contributing to the value of the
firm, and creditors will not count them when calculating the parent's ability to service its debt.

AACSB: Reflective Thinking


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-04 Discuss how operating in different nations impacts investment decisions within the multinational enterprise.
Topic: International Investment Decisions

20-89
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Education.
108. What are the considerations when seeking external financing for international business?

If external financing is required, the firm must decide whether to tap the global capital market for
funds or borrow from sources in the host country. If the firm is going to seek external financing for
a project, it will want to borrow funds from the lowest-cost source of capital available. The cost of
capital is typically lower in the global capital market, by virtue of its size and liquidity, than in many
domestic capital markets, particularly those that are small and relatively illiquid. However, despite
the trends toward deregulation of financial services, in some cases host-country government
restrictions may rule out this option.

AACSB: Reflective Thinking


Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-05 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.
Topic: International Financing Options

109. Define tax credit and tax treaty.

A tax credit allows an entity to reduce the taxes paid to the home government by the amount of
taxes paid to the foreign government. A tax treaty between two countries is an agreement
specifying what items of income will be taxed by the authorities of the country where the income is
earned.

AACSB: Knowledge Application


Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 20-06 Understand how money management in the international business can be used to minimize cash balances,
transaction costs, and taxation.
Topic: Global Money Management

20-90
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Education.
110. What are the advantages of using royalties and fees to move money across borders?

Royalties and fees have certain tax advantages over dividends, particularly when the corporate tax
rate is higher in the host country than in the parent's home country. Royalties and fees are often
tax-deductible locally (because they are viewed as an expense), so arranging for payment in
royalties and fees will reduce the foreign subsidiary's tax liability. If the foreign subsidiary
compensates the parent company by dividend payments, local income taxes must be paid before
the dividend distribution, and withholding taxes must be paid on the dividend itself.

AACSB: Reflective Thinking


Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 20-07 Understand the basic techniques for global money management.
Topic: Global Money Management

20-91
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.