The importance and widespread use of transfer pricing in international trade makes capital budgeting in MNCs very difficult unless the transfer prices that are used accurately reflect actual costs and incremental cash flows.

Question

Quizplus · Accepted Answer

Transfer pricing is the process of pricing goods and services that are exchanged between different divisions or entities within a multinational corporation. Accurate transfer pricing is crucial for determining the true profitability of each division and for making informed decisions about capital budgeting. If transfer prices do not reflect actual costs and incremental cash flows, it can distort the financial data used in capital budgeting, leading to flawed investment decisions.

The Importance and Widespread Use of Transfer Pricing in International