SOLUTION MANUAL FOR International Accounting 7th Edition
by Frederick D. Choi, Gary K. Meek || LATEST EDITION||COMPLETE GUIDE
, Chapter 01 - Introduction To International Accounting
CHAPTER 1
INTRODUCTION TO INTERNATIONAL ACCOUNTING
Chapter Outline
I. International Accounting Is An Extremely Broad Topic.
A. At A Minimum, It Focuses On The Accounting Issues Unique To Multinational Corporations,
Especially With Respect To International Transactions And Foreign Investments.
B. At The Other Extreme, It Encompasses The Study Of The Various Functional Areas Of
Accounting In All Countries Of The World, As Well As The Activities Of A Number Of
Supranational Organizations.
C. This Book Provides An Overview Of The Broadly Defined Area Of International Accounting,
Including Certain Supranational Guidelines, But Focusing On The Accounting Issues Related To
International Business Activities And Foreign Investments. In Other Words, This Book Focuses
On International Accounting Issues At The Company Level That Are Specifically Relevant To
Multinational Corporations.
II. There Are Several Accounting Issues Encountered By Companies Involved In International Trade.
A. One Issue Is The Accounting For Foreign Currency-Denominated Export Sales And Import
Purchases. An Important Issue Is How To Account For Changes In The Value Of The Foreign
Currency-Denominated Account Receivable (Payable) That Occur As Exchange Rates Fluctuate.
B. A Related Issue Is The Accounting For Derivative Financial Instruments, Such As Forward
Contracts And Foreign Currency Options, Used To Hedge The Foreign Exchange Risk
Associated With Foreign Currency Transactions.
III. There Is An Even Greater Number Of Accounting Issues Encountered By Companies That Have Made
A Direct Investment In A Foreign Operation. These Issues Primarily Result From The Fact That
Accounting Rules, Tax Laws, And Other Regulations Differ Across Countries, And Include:
A. Figuring Out How To Make Sense Of The Financial Statements Of A Foreign Acquisition Target
Prepared In Accordance With An Unfamiliar GAAP When Making A Foreign Direct Investment
Decision.
B. Determining The Correct Amounts To Include In Consolidated Financial Statements For The
Assets, Liabilities, Revenues, And Expenses Of Foreign Operations. The Consolidation Of A
Foreign Subsidiary Involves A Two-Step Process: (1) Restate Foreign GAAP Financial Statements
Into Parent Company GAAP And (2) Translate Foreign Currency Amounts Into Parent Company
Currency. Determining The Appropriate Translation Method And Deciding How To Report The
Resulting Translation Adjustment Are Important Questions.
C. Complying With Host Country Income Tax Laws, As Well As Home Country Tax Laws Related To
Income Earned In A Foreign Country (Foreign Source Income). Double Taxation Of Income Is A
Potential Problem, And Foreign Tax Credits Are The Most Important Relief From This Problem.
D. Establishing Prices For Intercompany Transactions That Cross National Borders
(International Transfer Prices) To Achieve Corporate Objectives And At The Same Time
Comply With Governmental Regulations.
E. Evaluating The Performance Of Both A Foreign Operating Unit And Its Management. Decisions
Must Be Made With Respect To Issues Such As The Currency In Which A Foreign Operation
Should Be Evaluated And Whether Foreign Management Should Be Held Responsible For
Items Over Which They Have Little Control.
1-1
, Chapter 01 - Introduction To International Accounting
F. Establishing An Effective Internal Audit Function To Help Maintain Control Over Foreign
Operations. Differences In Culture, Customs, And Language Must Be Taken Into
Consideration.
G. Deciding Whether To Cross-List Securities On Foreign Stock Exchanges And Complying With Local
Stock Exchange Regulations To Do So. This Could Involve The Preparation Of Financial
Information In Accordance With A GAAP Different From That Used By The Company.
IV. As Companies Have Become More Multinational, So Have Their External Auditors. The Big 4 Public
Accounting Firms Are Among The Most Multinational Business Organizations In The World.
V. Problems Encountered By Mncs When Confronted With Different Local GAAP In Different
Countries Lead To The Desire For A Single Set Of Global Accounting Standards. There Would Be
Significant Advantages To Mncs If All Countries Used The Same GAAP.
VI. The World Economy Is Becoming Increasingly More Integrated. International Trade (Imports And
Exports) Has Grown Substantially In Recent Years And Has Become A Normal Part Of Business For
Relatively Small Companies. The Number Of U.S. Exporting Companies Has Increased Four-Fold
Over The Last Three Decades.
VII. The Tremendous Growth In Foreign Direct Investment (FDI) Over The Last Several Decades Is
Partially Attributable To The Liberalization Of Investment Laws In Many Countries Specifically
Aimed At Attracting FDI. The Aggregate Revenues Generated By Foreign Operations Are More Than
Twice As Large As The Revenues Generated Through Exporting.
VIII. There Were More Than 82,000 Multinational Companies In The World In 2009 With 810,000
Foreign Subsidiaries. The 100 Largest Multinationals Generated Approximately 4% Of Global GDP.
A Disproportionate Number Of Multinational Corporations Are Headquartered In The United
States, China, Japan, And The European Union.
IX. According To One Definition Of Multinationality Used By The United Nations, Six Of The Ten Most
Multinational Companies In The World In 2020 Were Headquartered In Europe.
X. In Addition To Establishing Operations Overseas, Many Companies Also Cross-List Their Shares On
Stock Exchanges Outside Of Their Home Countries. There Are A Number Of Reasons For Doing This,
Including Having Access To A Larger Pool Of Capital.
Answers To Questions
1. In 2020, Companies Worldwide Exported Over $17.5 Trillion Worth Of Merchandise. Although
International Trade Has Existed For Thousands Of Years, Recent Growth In Trade Has Been
Phenomenal. Over The Period 2009–2019, U.S. Exports Increased From $1,056 Billion To
$1,645 Billion Per Year, A 56% Increase. During The Same Period, Chinese Exports More Than
Doubled To $2,499 Billion In 2019.
2. Companies Engaged In International Trade With Imports And Exports Denominated In Foreign
Currencies Are Faced With The Accounting Issue Of Translating Foreign Currency Amounts Into The
Company’s Reporting Currency And Reporting The Effects Of Changes In Exchange Rates In The
Financial Statements. Many Of These Companies Also Engage In Hedging Activities To Reduce The
Risk Of Changes In Exchange Rates. The Accounting For Derivative Financial Instruments Used To
Hedge Foreign Exchange Risk Can Be Quite Complicated.
1-2
, Chapter 01 - Introduction To International Accounting
3. Financial Reporting Issues That Result From Foreign Direct Investment Are (A) Conversion Of
Foreign GAAP To Parent Company GAAP And (B) Translation Of Foreign Currency To Parent
Company Reporting Currency To Prepare Consolidated Financial Statements.
4. Two Major Taxation Issues Related To A Foreign Direct Investment Are (A) Taxation Of The
Investee’s Income By The Host Country In Which The Investment Is Located And (B) Taxation Of
The Investee’s Income By The Investor’s Home Country. Companies With Foreign Direct
Investments Need To Develop An Expertise In The Host Country’s Income Tax Rules, As Well As In
The Home Country’s Tax Rules With Respect To Foreign Source Income.
5. Companies Must Make Several Decisions In Designing The System For Evaluating The Performance
Of Foreign Operations. Two Of These Are (A) Deciding Whether To Evaluate Performance On The
Basis Of Foreign Currency Or Parent Company Reporting Currency And (B) Deciding Whether To
Factor Out Of The Performance Measure Those Items Over Which The Foreign Operation’s
Managers Have No Control.
6. Two Reasons To Have Stock Listed On The Stock Exchange Of A Foreign Country Are (A) To Obtain
Capital In That Country, Perhaps At A More Reasonable Cost Than Is Available At Home, And (B) To
Have An “Acquisition Currency” For Acquiring Firms In That Country Through Stock Swaps.
7. The United Nations, As An Example, Measures The Multinationality Of Companies Based On The
Average Of Three Factors: The Ratio Of Foreign Sales To Total Sales, The Ratio Of Foreign Assets
To Total Assets, And The Ratio Of Foreign Employees To Total Employees. Information About
Foreign Sales And Foreign Assets Generally Is Provided In A Company’s Annual Report.
Information About The Number Of Foreign Employees Also Might Be Provided In The Annual
Report Or Other Publications Through Which A Company Provides Information To The Public.
8. A Single Set Of Accounting Standards Used Worldwide Would Have The Following Benefits For
Multinational Corporations:
• Reduce The Cost Of Preparing Consolidated Financial Statements
• Reduce The Cost Of Gaining Access To Capital In Foreign Countries
• Facilitate The Analysis And Comparison Of Financial Statements Of Competitors And
Potential Acquisitions
Solutions To Exercises And Problems
1. Sony Uses The Following Procedures To Translate The Foreign Currency Financial Statements Of Its
Foreign Subsidiaries Into Japanese Yen:
• All Assets And Liabilities Are Translated At The Year-End Exchange Rate
• All Income And Expense Accounts Are Translated At The Exchange Rate Prevailing On The
Transaction Date
• The Resulting Translation Adjustment Is Included In Accumulated Other Comprehensive
Income (Stockholders’ Equity)
Sony Uses The Following Procedures To Translate Foreign Currency Payables And Receivables Into
Japanese Yen:
• All Foreign Currency Receivables And Payables Are Translated Into Japanese Yen At The Year-
End Exchange Rate
• Changes In The Japanese Yen Value Of Foreign Currency Receivables And Payables Are
Reported As Gains And Losses In Income
1-3
by Frederick D. Choi, Gary K. Meek || LATEST EDITION||COMPLETE GUIDE
, Chapter 01 - Introduction To International Accounting
CHAPTER 1
INTRODUCTION TO INTERNATIONAL ACCOUNTING
Chapter Outline
I. International Accounting Is An Extremely Broad Topic.
A. At A Minimum, It Focuses On The Accounting Issues Unique To Multinational Corporations,
Especially With Respect To International Transactions And Foreign Investments.
B. At The Other Extreme, It Encompasses The Study Of The Various Functional Areas Of
Accounting In All Countries Of The World, As Well As The Activities Of A Number Of
Supranational Organizations.
C. This Book Provides An Overview Of The Broadly Defined Area Of International Accounting,
Including Certain Supranational Guidelines, But Focusing On The Accounting Issues Related To
International Business Activities And Foreign Investments. In Other Words, This Book Focuses
On International Accounting Issues At The Company Level That Are Specifically Relevant To
Multinational Corporations.
II. There Are Several Accounting Issues Encountered By Companies Involved In International Trade.
A. One Issue Is The Accounting For Foreign Currency-Denominated Export Sales And Import
Purchases. An Important Issue Is How To Account For Changes In The Value Of The Foreign
Currency-Denominated Account Receivable (Payable) That Occur As Exchange Rates Fluctuate.
B. A Related Issue Is The Accounting For Derivative Financial Instruments, Such As Forward
Contracts And Foreign Currency Options, Used To Hedge The Foreign Exchange Risk
Associated With Foreign Currency Transactions.
III. There Is An Even Greater Number Of Accounting Issues Encountered By Companies That Have Made
A Direct Investment In A Foreign Operation. These Issues Primarily Result From The Fact That
Accounting Rules, Tax Laws, And Other Regulations Differ Across Countries, And Include:
A. Figuring Out How To Make Sense Of The Financial Statements Of A Foreign Acquisition Target
Prepared In Accordance With An Unfamiliar GAAP When Making A Foreign Direct Investment
Decision.
B. Determining The Correct Amounts To Include In Consolidated Financial Statements For The
Assets, Liabilities, Revenues, And Expenses Of Foreign Operations. The Consolidation Of A
Foreign Subsidiary Involves A Two-Step Process: (1) Restate Foreign GAAP Financial Statements
Into Parent Company GAAP And (2) Translate Foreign Currency Amounts Into Parent Company
Currency. Determining The Appropriate Translation Method And Deciding How To Report The
Resulting Translation Adjustment Are Important Questions.
C. Complying With Host Country Income Tax Laws, As Well As Home Country Tax Laws Related To
Income Earned In A Foreign Country (Foreign Source Income). Double Taxation Of Income Is A
Potential Problem, And Foreign Tax Credits Are The Most Important Relief From This Problem.
D. Establishing Prices For Intercompany Transactions That Cross National Borders
(International Transfer Prices) To Achieve Corporate Objectives And At The Same Time
Comply With Governmental Regulations.
E. Evaluating The Performance Of Both A Foreign Operating Unit And Its Management. Decisions
Must Be Made With Respect To Issues Such As The Currency In Which A Foreign Operation
Should Be Evaluated And Whether Foreign Management Should Be Held Responsible For
Items Over Which They Have Little Control.
1-1
, Chapter 01 - Introduction To International Accounting
F. Establishing An Effective Internal Audit Function To Help Maintain Control Over Foreign
Operations. Differences In Culture, Customs, And Language Must Be Taken Into
Consideration.
G. Deciding Whether To Cross-List Securities On Foreign Stock Exchanges And Complying With Local
Stock Exchange Regulations To Do So. This Could Involve The Preparation Of Financial
Information In Accordance With A GAAP Different From That Used By The Company.
IV. As Companies Have Become More Multinational, So Have Their External Auditors. The Big 4 Public
Accounting Firms Are Among The Most Multinational Business Organizations In The World.
V. Problems Encountered By Mncs When Confronted With Different Local GAAP In Different
Countries Lead To The Desire For A Single Set Of Global Accounting Standards. There Would Be
Significant Advantages To Mncs If All Countries Used The Same GAAP.
VI. The World Economy Is Becoming Increasingly More Integrated. International Trade (Imports And
Exports) Has Grown Substantially In Recent Years And Has Become A Normal Part Of Business For
Relatively Small Companies. The Number Of U.S. Exporting Companies Has Increased Four-Fold
Over The Last Three Decades.
VII. The Tremendous Growth In Foreign Direct Investment (FDI) Over The Last Several Decades Is
Partially Attributable To The Liberalization Of Investment Laws In Many Countries Specifically
Aimed At Attracting FDI. The Aggregate Revenues Generated By Foreign Operations Are More Than
Twice As Large As The Revenues Generated Through Exporting.
VIII. There Were More Than 82,000 Multinational Companies In The World In 2009 With 810,000
Foreign Subsidiaries. The 100 Largest Multinationals Generated Approximately 4% Of Global GDP.
A Disproportionate Number Of Multinational Corporations Are Headquartered In The United
States, China, Japan, And The European Union.
IX. According To One Definition Of Multinationality Used By The United Nations, Six Of The Ten Most
Multinational Companies In The World In 2020 Were Headquartered In Europe.
X. In Addition To Establishing Operations Overseas, Many Companies Also Cross-List Their Shares On
Stock Exchanges Outside Of Their Home Countries. There Are A Number Of Reasons For Doing This,
Including Having Access To A Larger Pool Of Capital.
Answers To Questions
1. In 2020, Companies Worldwide Exported Over $17.5 Trillion Worth Of Merchandise. Although
International Trade Has Existed For Thousands Of Years, Recent Growth In Trade Has Been
Phenomenal. Over The Period 2009–2019, U.S. Exports Increased From $1,056 Billion To
$1,645 Billion Per Year, A 56% Increase. During The Same Period, Chinese Exports More Than
Doubled To $2,499 Billion In 2019.
2. Companies Engaged In International Trade With Imports And Exports Denominated In Foreign
Currencies Are Faced With The Accounting Issue Of Translating Foreign Currency Amounts Into The
Company’s Reporting Currency And Reporting The Effects Of Changes In Exchange Rates In The
Financial Statements. Many Of These Companies Also Engage In Hedging Activities To Reduce The
Risk Of Changes In Exchange Rates. The Accounting For Derivative Financial Instruments Used To
Hedge Foreign Exchange Risk Can Be Quite Complicated.
1-2
, Chapter 01 - Introduction To International Accounting
3. Financial Reporting Issues That Result From Foreign Direct Investment Are (A) Conversion Of
Foreign GAAP To Parent Company GAAP And (B) Translation Of Foreign Currency To Parent
Company Reporting Currency To Prepare Consolidated Financial Statements.
4. Two Major Taxation Issues Related To A Foreign Direct Investment Are (A) Taxation Of The
Investee’s Income By The Host Country In Which The Investment Is Located And (B) Taxation Of
The Investee’s Income By The Investor’s Home Country. Companies With Foreign Direct
Investments Need To Develop An Expertise In The Host Country’s Income Tax Rules, As Well As In
The Home Country’s Tax Rules With Respect To Foreign Source Income.
5. Companies Must Make Several Decisions In Designing The System For Evaluating The Performance
Of Foreign Operations. Two Of These Are (A) Deciding Whether To Evaluate Performance On The
Basis Of Foreign Currency Or Parent Company Reporting Currency And (B) Deciding Whether To
Factor Out Of The Performance Measure Those Items Over Which The Foreign Operation’s
Managers Have No Control.
6. Two Reasons To Have Stock Listed On The Stock Exchange Of A Foreign Country Are (A) To Obtain
Capital In That Country, Perhaps At A More Reasonable Cost Than Is Available At Home, And (B) To
Have An “Acquisition Currency” For Acquiring Firms In That Country Through Stock Swaps.
7. The United Nations, As An Example, Measures The Multinationality Of Companies Based On The
Average Of Three Factors: The Ratio Of Foreign Sales To Total Sales, The Ratio Of Foreign Assets
To Total Assets, And The Ratio Of Foreign Employees To Total Employees. Information About
Foreign Sales And Foreign Assets Generally Is Provided In A Company’s Annual Report.
Information About The Number Of Foreign Employees Also Might Be Provided In The Annual
Report Or Other Publications Through Which A Company Provides Information To The Public.
8. A Single Set Of Accounting Standards Used Worldwide Would Have The Following Benefits For
Multinational Corporations:
• Reduce The Cost Of Preparing Consolidated Financial Statements
• Reduce The Cost Of Gaining Access To Capital In Foreign Countries
• Facilitate The Analysis And Comparison Of Financial Statements Of Competitors And
Potential Acquisitions
Solutions To Exercises And Problems
1. Sony Uses The Following Procedures To Translate The Foreign Currency Financial Statements Of Its
Foreign Subsidiaries Into Japanese Yen:
• All Assets And Liabilities Are Translated At The Year-End Exchange Rate
• All Income And Expense Accounts Are Translated At The Exchange Rate Prevailing On The
Transaction Date
• The Resulting Translation Adjustment Is Included In Accumulated Other Comprehensive
Income (Stockholders’ Equity)
Sony Uses The Following Procedures To Translate Foreign Currency Payables And Receivables Into
Japanese Yen:
• All Foreign Currency Receivables And Payables Are Translated Into Japanese Yen At The Year-
End Exchange Rate
• Changes In The Japanese Yen Value Of Foreign Currency Receivables And Payables Are
Reported As Gains And Losses In Income
1-3
