Financial and Managerial Accounting

Business

Quiz 15 :

Global Business and Accounting

Quiz 15 :

Global Business and Accounting

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The international business community has been calling for stronger corporate governance for companies around the globe. As a result, in 1999 the Organization for Economic Cooperation and Development (OECD) issued some principles that deal with the ethical and fair treatment of shareholders. the importance of transparency, and adequate disclosure. These OECD principles were revised in 2004. The World Bank and the international Monetary Fund support these efforts. In particular, principle number live, called Disclosure and Transparency, states: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company (see www.oecd.org). Required Form a group of four students. Visit the OECD Web site and use the information to write a one-page paper that explains why OECD corporate governance principle number five is important for international capital flows. Internet sites are lime and dale sensitive. it is the purpose of these exercises to have you explore the Internet. You may need to use the Yahoo! search engine http://www.yahoo.com ( or another favorite search engine) to find a company's current Web address.
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International demand for corporate governance:
The international business community has been calling for stronger corporate governance for companies around the globe. As a result, in 1991 the organization for Economic Cooperation and Development (OECD) issued some principles that deal with the ethical and fair treatment of shareholders, the importance of transparency, and adequate disclosure. These OECD principles were revised in 2004. The World Bank and the International Monetary Fund supports these efforts. In particular, principle number five, called disclosure and transparency, states as follows;
Many countries around the world have different standards for disclosure, timeliness of reporting, and accuracy. Importantly, only recently has corporate governance become an important issue for international companies. The OECD Web site says:
Corporate governance deals with the rights and the responsibilities of a company's management, its board, shareholders and various stakeholders. How well companies are run affects market confidence as well as company performance. Good corporate governance is therefore essential for companies that want access to capital and for countries that want to stimulate private sector investment. If companies are well run, they will prosper. This in turn will enable them to attract investors whose support can help to finance faster growth. Poor corporate governance on the other hand weakens a company's potential and at worst can pave the way for financial difficulties and even fraud (www.oecd.org)

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The International Organization of Securities Commissions (IOSCO) is a group of top securities administrators from about 50 countries. The Securities and Exchange Commission (SEC) is a member of IOSCO. IOSCO is a primary supporter of the internationalization of financial reporting standards through the International Accounting Standards Board (IASB). At a recent meeting, a discussion of the pros and cons of internationalizing financial reporting standards included the following arguments: Pro: Having the same accounting standards for external financial reporting for all securities markets will reduce misunderstandings and create comparable information. For example, investors will be able to compare the financial reports of similar companies located in the United States with those located in China and decide where best to allocate their investments. One set of accounting standards will also save corporations money because they will not need multiple sets of books to track their international operations. Con: Requiring companies that list on all global securities exchanges to use the same external reporting requirements will mislead investors. For example, in countries where the majority of investment funds come from banks in the form of long-term borrowing, debt to equity ratios will look very different than those of comparable U.S. firms. Accounting information must reflect its environment. Besides, as all business becomes global, reporting requirements will naturally evolve to what investors demand. Instructions Write a one-page summary reflecting your opinion about the value of harmonizing accounting standards for global equity markets. Support your opinions by referencing comparable cross country companies you have located on the Internet.
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Statement of cash flows is the kind of financial statements which basically depicts the changes in the balance sheet and the income statement with respect to the cash and the cash equivalents. They can be divided into three categories: operating, financial and investing activities.
Since the statement of cash flows depicts the effect of different types of the activities on the company's cash which in turn lets us know about the company's profitability.
Cash equivalents are the assets that can be converted in the cash quickly. These comprise bank balances, short term bank deposits and the cash
SEC (US security and Exchange Committee) is the organization in US which basically marks the protection of interests of investors in the different US companies. The speech made by Mr. Scott Taub emphasized on how financial reporting can be made better. The following options are as follows:
• Companies can improve their financial reporting by voluntarily providing the cash flow statements by direct method.
• Companies should not combine the operating segments of the different segment even for the one in which they qualify.
• Companies can eliminate the pension corridor to improve the financial reporting.
• Companies can choose the accounting policies which can identify the other than temporary impairments in a much quicker way.
Having the same accounting standards across the globe will really help all the companies to follow the same suit and will help the other accountants to read the reports in a much better way. This way they will be reducing the efforts of the other accountants and will make the process easier.

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The following are nine global business terms used in this chapter: img Each of the following statements may describe one of these terms. For each statement, indicate the global business term described, or answer" None" if the statement does not correctly describe any of the terms. a. The amount it costs to purchase one unit of currency with another currency. b. Selling a good or service lo a foreign customer. c. A cross-border contractual agreement allowing one company to use the trademarks, patents, or technology of another company. d. Distinguishes between illegal influence peddling and legal facilitating payments. e. The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations. f. Markets dictate the allocation of resources and output among segments of the economy. g. The group charged with the responsibility of creating and encouraging the use of international financial reporting standards.
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(a) The amount it costs to purchase one unit of currency with another currency.
This is Exchange Rate
None
(b) Selling a good or service to a foreign customer.
Exporting
(c) A cross-boarder contractual agreement allowing one company to use the trademarks, patents, or technology of another company.
International licensing
(d) Distinguishes between illegal influence peddling and legal facilitating payments.
Foreign Corrupt Practices Act
(e) The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations.
Hedging
(f) Markets dictate the allocation of resources and output among segments of the economy.
None
(g) The group charged with the responsibility of creating and encouraging the use of international financial reporting standards.
International Accounting Standards Board

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Gains and Losses Journalizing Exchange Rate Euroam is a U.S. corporation that purchases motors from European manufacturers for distribution in the United States. A recent purchase involved the following events: img Instructions a. Prepare in general journal form the entries necessary to record the preceding events. b. Compute the exchange rate (price) of the Swiss franc in U.S. dollars on January 15. c. Explain a hedging technique that Euroam might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the Swiss franc.
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Monster Cookie Company is located in Denmark. It is a relatively new company and so far has sold its products only in its home country: In December. Monster determined that it had excess capacity to produce more of its special Halloween cookies. it is trying to decide whether to use that capacity to ship a batch of cookies overseas. The marketing department has determined that the United States and Great Britain are the two most viable markets. Monster has enough excess capacity to produce only one batch, which can be shipped to either country. The materials and labor cost to produce the batch amount to 9,000 kroner. The marketing department, which located a U.S. shipping company that could deliver to either location, also provided the following information: img Instructions a. If Monster exports the batch to the United States, what is its estimated profit/loss in Danish kroner? b. If Monster exports the batch to Great Britain, what is its estimated profit/loss in Danish kroner? c. If the British pound has exhibited rather large fluctuations relative to the Danish krone recently, how might this impact Monster's decision as to which country to ship to?
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Exchange Rates and Export Decision Crackle Cookie Company is a relatively new company and so far has sold it's products only in its home country, Denmark. In December, Crackle determined that it had excess capacity to produce more of its special Christmas cookies. It is trying to decide whether to use that capacity to ship a batch of cookies overseas. The marketing department has determined that the United States and Great Britain are the two most viable markets. Crackle has enough excess capacity to produce only one batch, which can be shipped to either country. The materials and labor cost to produce the batch amount to 8,500 kroner. The marketing department, which located a U.S. shipping company that could deliver to either location, also provided the following information: img Instructions a. If Crackle exports the batch to the United States, what is its estimated profit/loss in Danish kroner? b. If Crackle exports the batch to Great Britain, what is its estimated profit/loss in Danish kroner? c. If the British pound has exhibited rather large fluctuations relative to the Danish kroner recently, how might this impact Crackle's decision as to which country to ship to?
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Foreign Currency Translations Translate the following amounts of foreign currency into an equivalent number of U.S. dollars using the exchange rates in Exhibit 15.7. a. £800,000. b. ¥350,000. c. €50,000. EXHIBIT 15-7 U.S. Dollar Equivalents for Five Foreign Currencies img
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What is the International Accounting Standards Board? Why has the board been unable to obtain global application of its standards?
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A recent newspaper shows the exchange rate for the British pound at $ l.74 and the yen at $0.0106. Does this indicate that the pound is stronger than the yen? Explain.
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U.S. Foreign Trade Zones The National Association of Foreign Trade Zones (FTZs) maintains an Internet site containing information on U.S. foreign trade zones. Locate the site by searching under "foreign trade zone," or go to: www.naftz.org Instructions a. Explain the key characteristics of a foreign trade zone (FTZ). b. Identify an FTZ in your state. Where is it located? What types of business use it? c. Other information is available at the site. Use that information to answer the following: 1. How are FTZs created? 2. What businesses utilize FTZs? 3. What benefits can firms obtain from operating in FTZs?
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With a group of two or three students, choose a publicly traded global company that you think you might want to invest in some time in the future. Use the Internet or annual report data to answer the following questions. a. In which geographical regions does the company operate? b. What is the proportion of total sales represented by foreign, sales? How has this changed over the past five years? c. What efforts has the company recently undertaken to increase/decrease globalization (for example, joint ventures, licensing agreements, etc.)? d. What are the company's hedging practices/policies? e. Have any overseas activities been unsuccessful, discontinued, or resulted in asset losses? If so, what happened? f. Overall, how aggressively do you feel this company is pursuing globalization?
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Bristow Inc. is interested in establishing a presence in Country Y. Bristow is expecting demand for several of its products to increase in that country because a major customer. Kale Enterprises, is building a large manufacturing plant in V. Bristow has been supplying Kale's other foreign manufacturing operations mainly through exporting. However, shipping costs and long delivery times have been somewhat troublesome to both companies in the past. Bristow has also identified several other companies native lo Country Y as potential customers. Bristow currently has operations only in the United States. Kale Enterprises is a successful global company with operations in over 20 countries. Bristow's managers have identified the following possible options: a. Simply export to Country Y. b. A company in Y has expressed an interest in licensing Bristow's technology and has the capability and capacity to produce the products used by Kale. c. A joint venture with Kale may be possible, but managers for Kale would be willing to enter into an agreement only if substantial control for Bristow s operations is given lo Kale managers. d. Bristow' s managers have located a company that could be purchased and operated as a subsidiary. The company currently produces products similar to Bristow, but it is using outdated technology. Instructions Discuss what factors should be considered when choosing among the above options. Develop a list of additional information you believe would be useful in making the decision.
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Europa-West is a U.S. corporation that purchases automobiles from European manufacturers for distribution in the United States. A recent purchase involved the following events: img Instructions a. Prepare in general journal form the entries necessary to record the preceding events. b. Compute the exchange rate (price) of the krona in U.S. dollars on January 11. c. Explain a hedging technique that Europa-West might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the krona.
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In general terms, identify several factors that prompt different countries to develop different accounting principles.
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Explain how an increase in a foreign exchange rate will affect a U.S. company that makes: a. Credit sales to a foreign company at prices stated in the foreign currency. b. Credit purchases from a foreign company at prices stated in the foreign currency. c. Credit sales to a foreign company at prices stated in U.S. dollars.
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Exchange Rates and Performance Evaluation A U.S.-based company, Global Products Inc., has wholly owned subsidiaries across the world. Global Products Inc. sells products linked to major holidays in each country. The president and board members of Global Products Inc. believe that the managers of their wholly owned country-level subsidiaries are best motivated and rewarded with both annual salaries and annual bonuses. The bonuses are calculated as a predetermined percentage of pretax annual income. Senora Larza, the president of Global Products of Mexico, has worked hard this year to make her Mexican subsidiary profitable. She is looking forward to receiving her annual bonus, which is calculated as a predetermined percentage of this year's pretax annual income earned by Global Products of Mexico. A condensed income statement for Global Products of Mexico for the most recent year is as follows (amounts in thousands of pesos): img The U.S. headquarters financial group translates each of its wholly owned subsidiary's results into U.S. dollars for evaluation. After translating the Mexican pesos income statement into U.S. dollars, the condensed income statement for Global Products of Mexico is as follows (amounts in thousands of dollars): img Instructions a. Calculate the bonus amount based on (1) the Mexican pesos-based Pretax Income and (2) the U.S. dollar-based Pretax Income. Translate the pesos-based bonus to U.S. dollars using a current exchange rate. b. Calculate the average exchange rate used to translate the Mexican pesos income statement into the U.S. dollar statement for the categories: (1) Sales and (2) Expenses. c. Refer to the answers in parts a and b. Use those answers to explain why or how Global Products of Mexico's pretax income became a U.S.-dollar pretax loss. d. Explain one reason why the dollar-based pretax income would be appropriate for evaluating Senora Larza and one reason why the pesos-based pretax income would be appropriate. Which would you choose and why?
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An American company is considering entering into a joint venture with a Korean firm. Describe what cultural differences each party should consider.
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Assume that a U.S. company makes a purchase from a British company and agrees to pay a price of £2 million. a. How will the U.S. company determine the cost of this purchase for the purpose of recording it in its accounting records? b. Briefly explain how the U.S. company can arrange for the payment of pounds to the British company.
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Understanding Exchange Rate Conversions For each of the following scenarios, use the current exchange rates in The Wall Street Journal or from an Internet site such as www.xe.com/ucc to compute the required amount: a. A Citroën automobile is advertised in France for 17,990 euros. What is the dollar equivalent of 17,990 euros? b. Jackk's food emporium is importing foreign hot sauce from Brazil for 7,000 reals. What is the dollar equivalent? c. You are traveling on safari in South Africa and have brought $3,000 in spending money. How many South African rand will you receive for spending money? d. While traveling in Europe, you cross the border between Germany and Switzerland. You have 150 euros left from your German travels when you spot a souvenir in a Swiss shop for 250 Swiss francs. Do you have enough spending money to buy the souvenir if you convert your euros to Swiss francs?
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Exchange Rates and Performance Evaluation A U.S.-based company, IBC, has wholly owned subsidiaries across the world. IBC is in the medical products market and sources most of its sales of medical devices from the United States, but sells most of those devices to the European market. The president and board members of IBC believe the managers of IBC's wholly owned countrylevel subsidiaries are best motivated and rewarded with both annual salaries and annual bonuses. The bonuses are calculated as a predetermined percentage of pretax annual income. Michael O'Brien, the president of IBC of Ireland, has worked hard to make the Ireland subsidiary profitable, although sales have lagged projections. He is looking forward to receiving his annual bonus, which is calculated as a predetermined percentage of this year's pretax annual income earned by IBC of Ireland. A condensed income statement for IBC of Ireland for the most recent year is as follows (amounts in thousands of euros). img The U.S. headquarters financial group translates each of its wholly owned subsidiary's results into U.S. dollars for evaluation. After translating the euros income statement into U.S. dollars, the condensed income statement for IBC of Ireland is as follows (amounts in thousands of dollars): img Instructions a. Calculate the bonus based on the subsidiary's results in euros and U.S. dollars. Translate the euro result to U.S. dollars using a current exchange rate. Compare the results. b. Calculate the average exchange rate used to translate the euro statement into the U.S. dollar-based statement for: (1) Sales and (2) Expenses. c. Refer to the answers in parts a. and b. Use those answers to explain why or how IBC of Ireland's euro pretax income differs from the U.S.-dollar pretax income. d. Explain one reason why the dollar-based pretax income would be appropriate for evaluating Michael O'Brien and one reason why the euros-based pretax income would be appropriate. Which would you choose and why?
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