Question 1

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

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Question 2

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

Accepted Answer

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.

Question 3

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

Accepted Answer

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.

Question 4

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

Accepted Answer

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.

Question 5

The age of a foreign subsidiary

Accepted Answer

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.

Question 6

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.

Accepted Answer

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.

Question 7

Describe the importance of accounting information in business.

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Question 8

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

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Question 9

________ is a term used to describe the mix of techniques used to transfer liquid funds from a foreign subsidiary to the parent company.

Accepted Answer

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.

Question 10

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

Accepted Answer

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.

Question 11

Firms use fronting loans to

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

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.

Accepted Answer

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.

Question 14

Part of the tax credit benefit that a parent company receives can be lost if the subsidiary's

Accepted Answer

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.

Question 15

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

Accepted Answer

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

Question 16

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

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Question 17

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

Accepted Answer

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.

Question 18

Briefly differentiate accounting standards and auditing standards.

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Question 19

What are the shortcomings of IASB?

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Question 20

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

Accepted Answer