International Accounting Exam 1 CH 1-3 Questions with 100% Correct Answers

International Accounting Exam 1 CH 1-3

Questions with 100% Correct Answers


International Accounting - ✔✔Focuses on the accounting issues unique to

multinational corporations

Three levels of international accounting - ✔✔1. Supranational accounting

2. Company Level

3. International Accounting

1. Supranational accounting - ✔✔Standards, guidelines, rules followed by

supranational organizations (ex. European Union). No jurisdiction over the

US.

2. Company Level - ✔✔followed by the company in international activities

and foreign investments. Ex. US is not supranational so we have FASB and

GAAP

3. International Accounting - ✔✔study of the standards, guidelines, and

rules of accounting, auditing and taxation existing within each country and

comparison across countries



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,Issues - ✔✔Foreign Currency risk, capital domestically is limited so list

stocks internationally

Foreign currency Risk - ✔✔Countries you sell to will pay in their own

currency. That currency has to be converted back using the exchange risk

at that time. Exchange rate is volatile, constantly changing.



It is riskier as time passes.

Use Foreign currency options or forward contracts to hedge this risk

What time should you use the exchange rate? - ✔✔Revenue is recognized

when delivered to customer, so use the exchange rate from that time.

Record the Journal Entry in your own currency

Foreign currency option - ✔✔The right to sell foreign currency at a

predetermined exchange rate and time



Call Option- the right to buy

Put Option- the right to sell



If "in the money" you sell and make money.




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,If "out of the money" the exchange rate got better so you rip of the paper

and use the rate it is trading at now.

Forward Contract - ✔✔Obligation to exchange foreign currency at a future

date

Foreign Direct Investment - ✔✔Ownership and control of foreign assets

through:



Acquisition- investment in existing operations in foreign countries



Greenfield Investment- new operation in foreign countries

Reasons for Foreign Direct Investment - ✔✔-Increase sales and profits

-Enter rapidly growing/emerging markets

-Reduce Costs

-Gain foothold in economic blocs

-Protect domestic markets

-Protect foreign markets

-Acquire technological and managerial know-how

Steps in reporting for Foreign Operations - ✔✔1. Convert from local to U.S.

GAAP


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, 2. Translate from local currency to U.S. dollars

Double Taxation - ✔✔1. Foreign income taxes- the company's profit is

taxed at foreign rates

2. U.S. income taxes- the US also taxes the company's foreign based

income



Tax treaties to provide some relief from double taxation



Because taxes are higher in some countries than others, the goal is to

legally minimize the taxes in the foreign country and home country, and

then maximize the after tax cash flows. Ex if the marginal tax rate in the US

is 30% and In Mexico it is 20%, you would want to pay most of the taxes in

Mexico so people may artificially inflate selling price for Mexico or artificially

inflate US costs.

International Transfer Pricing - ✔✔An issue for multinational companies

making intercompany sales



Companies use of discretionary transfer pricing:

Price negotiation between buyer and seller is not feasible because of the

differences in tax rates

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