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MULTIPLE CHOICE EXAM QUESTIONS

CHAPTER 1
Learning Objective #1: Identify the key trends in the development of accounting
through history

1. The Crusades were important in the development of accounting, because


__a. the Christians needed double entry accounting to keep track of the relative profitability of the
different Crusades.
__b. the trade routes shifted the commercial center from Italy to Constantinople
__c. the Arabs first developed double entry accounting, which was then adopted by the Italians.
**d. none of the above.

2. The major Genoese influence on accounting was


__a. the development of large associations and partnerships that pooled capital.
__b. the development of the gold florin, the standard gold piece used in Europe.
**c. the double entry books of the Massari (treasury officials), which date from 1340.
__d. the establishment of Luca Pacioli’s first accounting program at the University of Genoa.

3.Luca Pacioli (or Paciolo) is best known for


__a. developing the printing press.
**b. publishing a mathematics book that contains a chapter on double entry accounting.
__c. developing the commercial activities of the Franciscan monks, which resulted in the
development of double entry accounting.
__d. developing an accounting system based on the banks rather than non-bank commercial
enterprises.

4. Which of the following is not true about Luca Pacioli?


**a. He started the first accounting program in Italy.
__b. He was a Franciscan monk.
__c. He was not a merchant or bookkeeper.
__d. He did not claim that he developed double entry accounting.

Learning Objective #2: Introduce some of the key national differences in


accounting systems worldwide

5. During the 17th and 18th centuries,


__a. the center of commercial activity shifted from northern Europe to Italy and Spain.
__b. double entry accounting was finally developed.
__c. there was a standardization of credits on the left and debits on the right.
**d. the French adopted the first official accounting code.

6. Accounting diversity is illogical and leads to noncomparable results


__a. in dissimilar economic environments.
**b. in similar economic environments.
__c. where there are dissimilar company laws and tax rules.
__d. where there are dissimilar business customs and accounting cultures.

7. The underlying reason for national differences in accounting systems is:


**a. environmental
__b. computers
__c. globalization
__d. the invention of the printing press

8. When anyone analyzes a company balance sheet and income statement, there are obvious
differences in all of the following except
__a. currency
__b. terminology
__c. inflation effects
**d. the reason to analyze of credit worthiness

Learning Objective #3: Highlight the evolution of business to modern times

9. The major early Venetian influence on the development of accounting was


**a. the spread of double entry accounting.
__b. the initial development of double entry accounting.
__c. the establishment of the first banking institutions.
__d. the development of the gold florin, the standard gold piece used in Europe.

10. The major early influence of Florin, Italy, on accounting was


__a. the spread of double entry accounting.
**b. the development of large associations and partnerships that pooled capital.
__c. accounting records with pretty pictures.
__d. the double entry books of the Massari (treasury officials), which date from 1340.

11.Which of the following is not a part of Pacioli’s initial contributions to accounting?


__a. He believed that all transactions required both a debit and a credit in order for transactions to
remain in equilibrium.
__b. He introduced the memorandum book, the journal and the ledger.
__c. The center for the accounting system was the ledger.
**d. His objective was to publish a detailed, mathematical approach to accounting rather than a
popular version of accounting that could be used by all.

12. In the accounting system developed in Italy in the 1400s,


__a. quarterly financial statements were required.
__b. double entry accounting was unknown, so companies only recorded one side of a transaction.
**c. profit was calculated at the termination of a business venture.
__d. deferrals and accruals were common.

13. As a result of the industrial revolution in the 19th and early 20th centuries,
__a. it was finally necessary to develop double entry accounting.
**b. the basic form of business organization shifted to limited liability and joint stock companies.
__c. fixed assets diminished in importance.
__d. governments got together and decided to require firms to draw up balance sheets every two
years.

14. During the pre-industrial period,


__a. most of the world trade was taking place between the Greeks and Romans.
**b. the right to trade had become a privilege granted by the states.
__c. the principle of mercantilism implied that merchants had to provide financial information to
the state.
__d. governments invested in colonies in order to get access to their manufactured goods in
exchange for raw materials that came from the colonial power.

15. During the industrialization period,


**a. mass production and standardization of products increased dramatically.
__b. the center of commerce shifted from southern Europe to northern Europe.
__c. companies located in large domestic markets had to turn to exporting.
__d. trade restrictions were eliminated so that countries could trade freely with each other.

Learning Objective #4. Discuss the important accounting dimensions of global


business and major topics that comprise the field of international accounting

16.Which of the following is true concerning international business?


__a. Even if a firm establishes production facilities abroad, it is not engaging in international
business unless it also expands sales abroad.
__b. It has resulted in the shift of technological leadership from the industrial to the emerging
developing countries.
__c. It is conducted exclusively in the private rather than public sector.
**d. It includes business transactions that involve two or more countries.

17. Firms that have a worldwide view of production, sourcing raw materials and components, and
final markets are
**a. multinational enterprises.
__b. multidomestic enterprises.
__c. from the industrial but not developing countries.
__d. typical of industrial but not service firms.

18. When examining the lists of the largest corporations in the world, it is obvious that
**a. exchange rates have the potential of distorting the list.
__b. Japanese companies are the largest in sales and most profitable in the world.
__c. U.S. companies are the largest in sales but are not among the most profitable.
__d. European firms dominate the list of large and most profitable firms.

19. Which of the following is a true statement concerning MNEs?


__a. There are no MNEs from developing countries due to small market size.
__b. Top developing country MNEs tend to come from Eastern Europe.
**c. Latin American and Asian MNEs are the most significant of the emerging market companies.
__d. Developing country MNEs tend to come from the industrial sector rather than the services and
utilities sectors.

20. Firm-specific advantages refer to


__a. the fact that firms typically operate in specific industries.
__b. advantages that firms get from operating in specific countries or regions of the world.
**c. the intangible assets that firms own.
__d. assets that can be easily duplicated by competitors.

21. The first exposure a firm has to international accounting is usually


__a. the purchase of a subsidiary
__b. establishment of license of a foreign company
**c. unsolicited purchase order from a foreign buyer.
__d. joint venture with another MNE.
CHAPTER 2
Learning Objective #1: Identify the key environmental influences on business
and accounting
1. Cultural relativism implies that
**a. behavior should be judged in terms of its own cultural context.
__b. behavior should be judged in terms of a relative outside standard.
__c. secrecy and transparency cannot coexist.
__d. the customs and values of the United States can be used to evaluate behavior in Britain since
those two countries are related to each other.

2. Which of the following accurately reflects environmental influences on accounting?


__a. economic factors have proven to be very influential on accounting, but political factors are not.
**b.taxation is an important factor in situations where accounting systems are strongly influenced
by state objectives.
__c. where there is a more developed accounting profession, there is likely to be centralized and
uniform accounting systems, as opposed to judgementally-based systems.
__d. the social (employee) climate has had a strong impact on accounting in the United States, in
contrast to Europe where the social climate is almost irrelevant.

3. How do societal values and accounting values interact with each other to establish accounting
systems?
__a. Societal values affect accounting values, and accounting values also modify societal values.
__b. Accounting systems are influenced directly by societal values.
**c. Accounting systems are indirectly influenced by societal values through their impact on
accounting values and institutional consequences (such as legal systems, capital markets, etc.)
__d. Accounting values indirectly affect accounting systems through their impact on institutional
consequences.

4. Major international forces for change are:


__a. changes in corporate strategy and organization.
__b. new technology and the Internet.
__c. the internationalization of stock exchanges and financial markets.
__d. the International Accounting Standards Committee and the International Organization of
Securities Commissions.
__e. global economic integration, privatization, and deregulation.
**f. All of the above.

Learning Objective #2: Discuss the major factors influencing the development
of accounting and information disclosure in the global economy
5. The emergence of corporations has influenced financial accounting by
__a. combining ownership and control.
__b. making transparency less important.
**c. emphasizing disclosure as part of the necessary means of regulating corporate behavior.
__d. removing limited liability as a way of hiding corporate responsibility.

6. Securities markets influence corporate reporting


__a. in industrial but not developing countries.
__b. by requiring significant social disclosures due to pressure from Europe.
__c. by eliminating the need for voluntary disclosures.
**d. by forcing companies to increase the quantity and quality of their disclosures.

7. Which of the following is true concerning the impact of securities markets on corporate
reporting?
**a. There is a strong correlation between well-developed capital markets and the extent of
financial disclosure in corporate reports.
__b. The wave of privatization is hampering disclosure, because state-owned firms cannot disclose
the same information that private firms can.
__c. There is a strong convergence of opinions on what corporate management wants to disclose
and what financial providers want from management.
__d. Most investors and creditors know what information they want, how they can use the
information, and what the costs and benefits are of that information.

8. The wider audience of users of financial information (employees, trade unions, consumers, etc.)
__a. want the same information as do providers of capital.
**b. tend to pursue a different set of information due to their nontraditional goals.
__c. want information that really doesn't affect corporate behavior and performance.
__d. is relatively unimportant in any country due to their lack of political and financial power.

Learning Objective #3: Examine some of the important accounting issues that
distinguish MNEs from purely domestic corporations
9. Multinational enterprises differ from strictly domestic enterprises in what way from an
accountability and disclosure perspective?
__a. MNEs typically don't pay taxes.
__b. MNEs usually are in conflict with the objectives of host countries, whereas domestic firms
tend to be compatible with home country objectives.
__c. strictly domestic companies do not operate on an arms-length basis with customers abroad.
**d. with MNEs, there is usually a significant volume of intercompany transactions in foreign
operations.

10. Voluntary disclosures by MNEs are influenced by


__a. size.
__b. international listing status.
__c. country of origin.
__d. industry.
**e. all of the above.

11. As a domestic firm evolves into an MNE,


**a. reporting and communication flows change.
__b. the organizational structure becomes more simplified.
__c. it changes from a product emphasis to an international division structure.
__d. the existing organizational structure cannot be changed because of the ensuing confusion.

12 All of the following issues distinguish MNEs from purely domestic companies except
__a. volume of transactions between countries
__b. cross-frontier relationships
__c. participation in different markets with different laws and currencies
**d. private stockholder ownership

Learning Objective #4: Discuss culture as an important determinant of


accounting systems worldwide

13. Shared values and attitudes


__a. affect business and managerial behavior, which is similar from country to country due to the
demand for the same capital.
__b. are so deeply ingrained that they are usually not influenced by external forces.
**c. are also known as culture.
__d. all of the above.

14. Accounting regulations tend to be more detailed and comprehensive in which of the following
systems?
__a. the common law system.
__b. countries that follow the British tradition.
**c. the civil law system.
__d. countries where culture is influential.

15. Information disclosure is constrained in countries where:


__a. shareholders are the most important user group.
__b. taxation rules influence amounts.
**c. companies are financed mainly by banks, family members and government agencies.
__d. the accounting profession is not well developed.

16. Which of the following is not an institutional consequence of societal values that impacts
accounting systems
**a. Trade
__b. Legal system
__c. Education
__d. Religion
Learning Objective #5: Identify the major international pressures for
accounting change
17. International forces for change:
__a. directly affect accounting values
**b. do not directly affect accounting values
__c. directly affect accounting systems
__d. do not directly affect physical environment factors

18. The EU has embarked on a major program of harmonization that will coordinate all of the
following except
__a. accounting
__b. company law
__c. monetary systems
**d. urbanization

19. Which group is providing environmental impact guidelines for MNEs


__a. NBA
__b. ATF
**c. OECD
__d. AAA

20. In order to foster international economic and social development the OECD has issued
__a. the General Agreement on Tariffs and Trade
__b. the G7 accord
__c. the Potsdam declaration
**d. a Code of Conduct
CHAPTER 3
Learning Objective #1: Discuss different ways to identify and classify
accounting systems internationally
1. According to the deductive approach to accounting classification,
__a. accounting practices are analyzed and used to develop accounting groups.
**b. international accounting groups are developed by linking environmental factors to national
practices.
__c. it is impossible to compare countries due to cultural differences.
__d. disclosure groups are not as significant as are measurement groups in classifying countries.

2. According to the inductive approach to accounting classification,


**a. accounting practices are analyzed and used to develop accounting groups.
__b. international accounting groups are developed by linking environmental factors to national
practices.
__c. it is impossible to compare countries due to political differences.
__d. Mueller classifies accounting systems into the following patterns: macroeconomic,
microeconomic, independent discipline, and uniform accounting.

3. The Mueller system of classifying countries for accounting purposes based on their business and
economic environments is an example of
**a. deductive classification.
__b. inductive classification.
__c. the inability to classify countries for accounting similarities.
__d. cultural relativism.

4. The hypothetical classification for financial reporting developed by Christopher Nobes


__a. is an inductive approach to classification.
**b. is a hierarchical scheme of classification that distinguishes countries according to
microeconomic and macroeconomic systems.
__c. uses the Price Waterhouse data to group countries.
__d. classifies countries according to measurement and disclosure practices.

5. The Nair and Frank approach to accounting classification


__a. classifies countries according to economic similarities.
__b. classifies countries according to cultural similarities.
__c. is a good example of a deductive approach to classifying countries.
**d. classifies countries according to similarities in measurement and disclosure practices.

6. Which of the following accurately reflects the status of research in the classification of countries
in terms of accounting practices?
__a. the deductive approach is superior to the inductive approach.
__b. the inductive approach focuses too much on environmental factors rather than accounting
practices.
__c. narrow country groupings are possible due to advances in research methodology.
**d. only very general relationships between environmental factors and accounting systems have
been established.

Learning Objective #2: Examine the key dimensions of national culture and
how they influence behavior in work situations

7. Which of the following are cultural values developed by Hofstede?


__a. professionalism.
__b. statutory control.
**c. power distance.
__d. conservatism.

8. Large power distance as a cultural value implies that


__a. people have a preference for a loosely knit social framework in society.
**b. people accept a hierarchical order.
__c. people strive for power equalization and demand justification for power inequities.
__d. people maintain a relaxed atmosphere in which practice counts more than principles and
deviance is more easily tolerated.

9. Individualism as a cultural value implies that


**a. people have a preference for a loosely knit social framework in society.
__b. people accept a hierarchical order.
__c. people strive for power equalization and demand justification for power inequities.
__d. people maintain a relaxed atmosphere in which practice counts more than principles and
deviance is more easily tolerated.

10. Small power distance as a cultural value implies that


__a. people have a preference for a loosely knit social framework in society.
__b. people accept a hierarchical order.
**c. people strive for power equalization and demand justification for power inequities.
__d. people maintain a relaxed atmosphere in which practice counts more than principles and
deviance is more easily tolerated.

11. Weak uncertainty avoidance as a cultural value implies that


__a. people have a preference for a loosely knit social framework in society.
__b. people accept a hierarchical order.
__c. people strive for power equalization and demand justification for power inequities.
**d. people maintain a relaxed atmosphere in which practice counts more than principles and
deviance is more easily tolerated.

12. Confucian dynamism is a cultural value which:


__a. emphasizes a dynamic approach to business.
**b. refers to a short-term versus long-term orientation to business.
__c. a Chinese value adopted as a Chinese accounting principle.
__. is associated with a religious order in China.
Learning Objective #3: Identify accounting values that influence comparative
accounting practice
13. Which of the following are accounting cultural values developed by Gray?
__a. individualism.
__b. large power distance.
__c. masculinity.
**d. professionalism.

14. According to the flexibility cultural value in accounting,


__a. there is a preference for permitting governments to establish uniform, yet flexible, standards.
__b. there is a preference for confidentiality and the restriction of disclosure of information.
__c. firms tend to be more open and publicly accountable.
**d. accountants are more concerned with the perceived circumstances of individual companies.

15. Large power distance is more compatible with which accounting value?
__a. professionalism.
**b. uniformity.
__c. transparency.
__d. none of the above.

16. Individualism is more compatible with which accounting value?


__a. statutory control.
__b. uniformity.
**c. flexibility.
__d. collectivism.

17. Conservatism is more compatible with


__a. individualism.
__b. collectivism.
**c. strong uncertainty avoidance.
__d. optimism.

Learning Objective #4: Show how cultural values and accounting values relate
to each other in the development of accounting standards and practices
worldwide
18. A major accounting value that relates to enforcement and authority of accounting systems is
**a. statutory control.
__b. secrecy.
__c. optimism.
__d. conservatism.

19. A major accounting cultural value that relates to accounting disclosure is


__a. professionalism.
__b. uniformity.
__c. individualism.
**d. transparency.

20. A major accounting cultural value that relates to accounting measurement is


__a. collectivism.
**b. conservatism.
__c. secrecy.
__d. power distance.

21. All of the following affect secrecy and transparency except


**a. measurement of assets and profits
__b. individualism and collectivism
__c. power distance
__d. uncertainty avoidance

Learning Objective #5: Compare accounting systems in the Anglo-American,


Nordic, German, Latin, and Asian countries

22. Anglo-Saxon countries would tend to reflect which of the following accounting values?
**a. transparency.
__b. secrecy.
__c. conservatism.
__d. uniformity.

23. Germanic countries would tend to reflect which of the following accounting values?
__a. optimism.
__b. transparency.
__c. flexibility.
**d. secrecy.

24. Which of the following accurately reflects Swedish accounting?


**a. There is a tradition of involvement of the accounting profession in the standard setting
process.
__b. There are no significant legal requirements due to the adherence to a flexible approach to
accounting.
__c. Due to the heavy social welfare influence in Sweden, taxes are collected aggressively and tax
breaks are not allowed.
__d. There is little tax and legal influence.

25. In the United Kingdom,


__a. the Company Law is only followed by listed companies.
__b. the "true and fair view" had to be adopted by the British, even though that is not what they
wanted.
__c. there is no accounting standard setting board due to the strength of the profession.
**d. the "true and fair view" represents a flexible approach.

26. Which of the following accurately reflects French accounting?


__a. The French have adopted more of an Anglo-Saxon approach to accounting.
__b. A business economics approach to accounting in France has resulted in widespread use of
current value accounting.
__c. The effect of tax law is minimal, because tax and book accounting are not allowed to be the
same.
**d. The legal tradition in France has had a strong impact on accounting standards and practices.

27. In Japanese accounting,


__a. all companies are required to follow the reporting requirements of the Securities and Exchange
Law.
**b. corporate tax rules are a major source of influence on income measurement practices.
__c. the Securities and Exchange Law was developed by the British.
__d. reserves are not permitted.

28. Which of the following accurately reflects Dutch accounting?


__a. Accounting standards tend to be more detailed in the law than is the case in Germany and
France.
__b. A true and fair view concept is not acceptable due to the strength of the law.
**c. There is a tendency to follow a business economics approach to valuation.
__d. There is little social reporting for employees since tax law dominates.

29. Which of the following accurately reflects British accounting?


__a. The company law in Britain is fairly narrow, because it only applies to companies listed on the
London Stock Exchange.
**b. There is significant influence by the accountancy profession and the stock exchange as
compared with Germany.
__c. The European Union has not had much of an influence on British accounting due to the
primacy of the true and fair view.
__d. The Accounting Standards Board is funded and controlled by the Ministry of Trade and
Industry rather than the independent profession.

30. Which of the following accurately reflects German accounting?


**a. Tax law is influential, because annual accounts are the basis for tax accounts.
__b. The stock market is the major source of funding in Germany, so accounting reflects the needs
of investors.
__c. The Germans influenced the 4th Directive of the European Union through the introduction of
the true and fair view.
__d. German companies depart from historical cost through widespread use of current value
accounting.

31. Which of the following accurately reflects French accounting?


__a. Due to their strong Latin cultural tradition, the French tend to be more judgmental than
legalistic.
__b. According to the authority and enforcement scales in Gray's model, the French would lean to
flexibility and professionalism.
**c. According to the measurement and disclosure scales in Gray's model, the French would lean
to secrecy and conservatism.
__d. The true and fair view of the 4th Directive was already a part of French tradition.

32. Which of the following accurately reflects Japanese accounting?


__a. On the authority and enforcement measures, the Japanese are professional and flexible.
__b. The Japanese lean to statutory control and professionalism.
__c. The Japanese have been heavily influenced by the Germans but not the Americans.
**d. The Ministry of Justice enforces the Companies Act and the Ministry of Finance enforces the
Securities and Exchange Act.

33. Which of the following accurately reflects Swiss accounting?


__a. There is fairly significant professional influence.
__b. Legal requirements are fairly extensive in comparison with the Germans.
__c. The true and fair view has been adopted as the primary factor to consider in accounting
measurement.
**d. The focus is on creditors.

34. Which of the following accurately reflects Chinese accounting?


__a. There is a strong Soviet-style accounting influence.
__b. The accounting system has been changed to conform with U.S. principles.
**c. A more micro-oriented decision-making approach is being encouraged.
__d. The Japanese system of accounting has been adopted.

35. Which of the following accurately reflects Italian accounting?


__a. There is a strong emphasis on shareholders.
**b. The interests of government and the taxation authorities take precedence over shareholders.
__c. Uniformity for planning purposes is emphasized.
__d. A flexible approach to valuation.
CHAPTER 4
Learning Objective #1: Assess the importance of international accounting
differences from the perspective of financial analysts and other users of
financial statements
1. For purposes of financial analysis it is important to assess the differential impact of accounting
principles on
**a. return on equity
__b. professionalism
__c. individualism
__d. power distance

2. The most popular exchange to be listed on is:


__a. Nasdaq
__b. New York
__c. Euronext
**d. London

3. In similar economic environments or situations


__a. accounting diversity is logical
**b. accounting diversity is illogical and leads to noncomparable results
__c. results may or may not be comparable
__d. accounting treatment does not matter

4. Problems and costs arising from international accounting diversity


__a. are not restated by financial statement users
__b. affect 95 percent of financial statement users according to Choi and Levich
**c. are very real
__d. affect 25 percent of financial statement users according to Choi and Levich

Learning Objective #2: Identify major differences in accounting principles


around the world that affect financial results
5. Historical cost is frequently modified by revaluations in
__a. the United States.
__b. the Asian countries.
**c. the United Kingdom and the Netherlands.
__d. Germany.

6. R&D costs are required to be expensed immediately in


__a. the Asian countries.
**b. the United States.
__c. Sweden.
__d. the United Kingdom.

7. Taxation accounting in the United States differs from that of Britain in that
__a. the British tax corporations and shareholders separately, whereas the Americans allow
shareholders to offset some of their tax burden with a tax credit for taxes paid by the
corporation.
**b. British companies account for deferred taxes only to the extent that the tax is actually expected
to be paid in the foreseeable future.
__c. the U.S. requires the partial method for deferred taxation.
__d. the U.S. does not allow firms to take into account changes in income tax rates when
computing deferred tax.

8. The treatment of inventory in Britain differs from that of the United States in that
__a. the British approach to inventory measurement is much less restrictive.
__b. FIFO is not permitted in Britain.
**c. LIFO is not permitted in Britain.
__d. in the United States, LIFO is not permitted.

Learning Objective #3: Provide a quantitative analysis of how differences in


accounting principles can impact on the reported earnings of U.S. and U.K.
firms and the analysis of comparative performance

9. Which of the following accurately describes the differences between the United States and the
United Kingdom in terms of conservatism in earnings measurement?
__a. The British tend to be more conservative in earnings measurements than do Americans.
__b. British earnings are higher than U.S. earnings because U.S. firms tend to capitalize interest
costs relating to certain types of assets during acquisition or construction.
**c. U.S. earnings tend to be lower than British earnings since U.S. firms capitalize and amortize
goodwill.
__d. none of the above.

10. Assume that translated U.K. earnings are $100 and U.S. earnings are $120. The index of
conservatism is
__a. .800 (U.S. is more conservative)
**b. .800 (British is more conservative)
__c. 1.200 (U.S. is more conservative)
__d. 1.200 (British is more conservative)

11. According to Form 20-F of the U.S. SEC,


__a. U.S. firms are required to disclose the amount of their foreign earnings.
**b. foreign firms are required to reconcile their earnings with what earnings would have been
under U.S. GAAP.
__c. foreign firms do not have to disclose the reasons why their GAAP differs from U.S. GAAP,
only the amount of the difference.
__d. the index of conservatism must be disclosed in order to determine the degree to which income
differs under different GAAP.

12. It is possible to determine the degree of conservatism of U.K versus U.S. GAAP, because
__a. British firms must disclose the difference due to London Stock Exchange requirements.
__b. British firms voluntarily disclose the difference in order to attract U.S. investors.
**c. British firms who list an American Depositary Receipt (ADR) or an actual share in the United
States must disclose the difference in earnings.
__d. all of the above.

13. As a result of research on the degree of conservatism among U.S. and British firms, it was
found that
__a. British and American firms are about the same in terms of the degree of conservatism.
__b. British earnings are more conservative than are U.S. earnings.
**c. U.S. earnings are more conservative than are British earnings.
__d. goodwill is not as significant a factor in determining earnings differences as was once thought.

Learning Objective #4: Show how reported earnings are affected by differences
in accounting principles in other parts of the world, with special reference to
continental Europe and Japan.
14. In ranking countries in terms of conservatism,
__a. Japanese firms tend to be less conservative than U.S. firms.
__b. continental European firms tend to be more conservative than British but less conservative
than U.S. firms.
**c. the Anglo-Saxon countries are less conservative and Germanic countries more conservative in
terms of earnings.
__d. there has been no research on the conservatism of earnings of countries other than the U.S. and
U.K.

15. When comparing the relative conservatism of U.S. versus foreign companies,
**a. U.S. firms tend to be less conservative than Japanese firms, because Japanese firms are more
heavily influenced by tax law.
__b. U.S. firms are more conservative than Continental European firms due to the dominance of
capital market disclosures in the United States.
__c. European firms are less focused on tax law than are the U.S. firms.
__d. British firms are more conservative than U.S. firms, because they tend to take goodwill to
income rather than to equity as is the case in the United States.

16. Given what you know about the differences in conservatism between the U.S. and U.K. and
what you learned from the ICI data, which of the following statements is most accurate?
__a. return on equity and the debt/equity ratio would usually be lower under U.K. GAAP than it
would be under U.S. GAAP.
__b. return on equity would usually be higher and the debt/equity ratio lower under U.K. GAAP
than under U.S. GAAP.
__c. return on equity would usually be lower and the debt/equity ratio higher under U.K. GAAP
than under U.S. GAAP.
**d. return on equity and the debt/equity ratio would usually be higher under U.K. GAAP than
under U.S. GAAP.

17. An earnings adjustment index based on US GAAP showing the comparative impact of
international accounting differences on earnings
__a. has Germany at the top
**b. has Japan on the bottom
__c. has the U.S. at the top
__d. has the U.K. at the bottom

Learning Objective #5: Review developments in an effort to achieve global


accounting harmonization.
18. Research on the stock market
__a. is certain about the international accounting differences and the US stock market
**b. shows value relevance for Form 20-F reconciliations
__c. of Pope and Rees indicates that the UK GAAP earnings adjustment information has
incremental information for dual listed firms in the US and UK
__d. greater power distance for non US firms

19. The stock market is a dominant influence on earnings in


**a. the UK and US
__b. Japan
__c. continental europe
__d. countries with extensive infrastructure

20. The IASC was founded by


__a. the UN
__b. the OECD
__c. the AICPA
**d. professional national accounting organizations

21. The number of companies that follow IASC standards


__a. has declined from its founding
__b. has remained about the same from its founding
**c. has increased from its founding
__d. none of the above
CHAPTER 5
Learning Objective #1: Explain the importance of corporate transparency and
information disclosure
1. The increased supply of financial information by MNEs appears to have
__a. satisfied labor unions but not governments.
__b. resulted in more precise disclosure requirements by governments.
**c. resulted in the demand for additional information.
__d. resulted in a greater simplification in financial statements.

2. The concept of user comprehension implies that


__a. understandability is improved with more information.
**b. greater information is making financial analysis more complex.
__c. the simplification of annual reports is leaving out information not necessary for financial
analysis.
__d. all of the above.

3. All of the following international organizations are now issuing more detailed accounting
requirements except
**a. PGA
__b. UN
__c. OECD
__D. IASC

4. The recent Asian financial crisis


__a. might have been prevented with decreased transparency
__b. was the result of inconsistent accounting standards
__c. could have been prevented with better computer systems
**d. might have been prevented with increased transparency

Learning Objective #2: Show how annual report disclosures are an important
way of communicating to stakeholders
5. Which of the following is true concerning managerial incentives to disclose information?
__a. More information increases uncertainty about financial performance.
__b. More disclosure increases the cost of capital, causing stock prices to fall.
__c. Information disclosure is usually neutral.
**d. More information usually helps managers get better access to external capital.

6. The disclosure of information that would help another firm know more about your firm would be
an example of
__a. the direct cost of disclosure.
__b. the cost of information production.
**c. the cost of competitive disadvantage.
__d. why government needs to regulate accounting disclosure.

7. Which of the following are considered by managers to generate the greatest cost of competitive
disadvantage?
**a. line of business profits, narrowly defined.
__b. inflation adjusted profits.
__c. a description of organizational structure.
__d. quarterly interim financial statements.

8. The value of the annual report as opposed to just the financial statements is that
__a. the annual report must contain a quantitative forecast of earnings.
**b. management can provide a good qualitative discussion of the financial information.
__c. financial information is usually not very accurate, so potential investors can rely more on
management impressions.
__d. management is more likely to provide more financial information in its annual report than it
is in its financial statements.

Learning Objective #3: Evaluate the incentives to disclose information and the
costs involved
9. The mutuality of interests concept related to information disclosure implies that
**a. disclosure may help users be more aware of common interests, improving cooperation.
__b. increased disclosure increases uncertainty about financial performance.
__c. user benefits always exceed costs.
__d. it is difficult to measure the costs and benefits of disclosure.

10. The direct costs of disclosure involve the


__a. threat of takeover or merger.
**b. cost of data collection and processing.
__c. possibility of intervention by government agencies.
__d. possibility of claims from political or consumer groups.
__e. all of the above.

11. The cost of audit and communication is an example of


**a. the direct costs of disclosure.
__b. cost of competitive disadvantage.
__c. indirect costs of disclosure.
__d. the benefits of increased disclosure.

12. The indirect costs of disclosure involve the


**a. threat of takeover or merger.
__b. cost of data collection and processing.
__c. cost of auditing.
__d. cost of publication.

Learning Objective #4: Review international disclosure regulation and


reporting

13. The EU 4th and 7th Directives require


__a. the quantification of a forecast of earnings.
__b. the discussion of R&D analyzed by product.
**c. an indication of important events since the end of the year and any likely future development.
__d. any environmental measures taken.

14. In terms of Research and Development (R&D) and capital investments,


__a. few firms disclose R&D information.
**b. Germany, Japan, the Netherlands, Switzerland, and U.K. all exhibit higher levels of disclosure
in both R&D and investment programs than most other countries.
__c. all firms are required by the U.N. to disclose their capital investment program, and compliance
is quite high.
__d. it is very common for companies to disclose their investment program by geographical area.

15. The overall amount of voluntary disclosures is


**a. highest from continental European companies
__b. highest from US companies
__c. highest from UK companies
__d. lowest from continental European companies

16. Why does Switzerland have one of the lowest levels of disclosure
__a. the size of the market is very high
__b. the size of the market is small
__c. a sophisticated regulation system
**d. secrecy is highest

Learning Objective #5: Highlight important issues found in corporate reports,


such as the chairperson's statement, the review of corporate strategy and result,
external and unusual events, acquisitions and disposals, human resources, social
responsibility, R&D, capital investment, and future prospect
17. Human resource information
__a. is essential for investors and shareholders.
__b. especially in the area of labor and employment is more detailed and helpful in U.S. reports
than in European reports.
__c. is provided in a format that is required by the IASC.
**d. none of the above.
18. The value added statement
**a. provides information about the contribution of all corporate stakeholders to the success of the
business.
__b. is used to determine how much value-added tax corporations pay.
__c. is generated primarily for potential investors and shareholders.
__d. is provided by the majority of European companies, although it is rarely provided by U.S.
firms.

19. Social responsibility information


**a. focuses on accountability to society as a whole rather than just employees.
__b. deals with issues other than community welfare, public safety, and the environment.
__c. is easy to provide, since firms can easily measure the costs and benefits of providing the
information.
__d. all of the above.

20. Information regarding to future prospects


__a. is rarely provided in annual reports.
**b. is usually in the form of a narrative rather than in quantitative terms.
__c. is not considered to be a threat from a competitive disadvantage point of view since all firms
are required to disclose this information if they list on a stock exchange.
__d. is not very high in the United States due to the investor orientation.

Learning Objective #6: Describe other types of corporate disclosures, such as


the review of operations, including segmental information and results

21. In terms of segment information,


__a. segment reviews of operations are not very well established.
__b. segment disclosures are required by the U.N. but only recommended by the EU.
**c. it is common to find a review of business segments.
__d. the review of business segments rarely provides information in excess of the actual segments.

22. Segment reviews of operations on a geographical basis are


**a. usually incorporated in the review of business segments.
__b. separately discussed by a majority of MNEs.
__. rarely provided by MNEs.
__. provided by most MNEs except those from Japan.

23. In terms of the financial review,


__a. it is not very common for companies to provide an analysis of results.
**b. U.S. companies tend to provide more detailed information in their financial review, especially
with regard to events having a potential impact on earnings.
__c. most companies analyze their asset values and the impact of inflation on values.
__d. very few companies analyze liquidity and capital resources.

24. Which country provides segment disclosure on a basis of managerial organization


__a. UK
__b. Japan
__c. Italy
**d. US

Learning Objective #7: Review issues relating to the frequency and timeliness of
corporate reporting internationally

25. Which of the following are considered by managers to generate the greatest net costs?
__a. a description of major environmental projects.
__b. geographical sales, broadly defined.
__c. a description of major new products.
**d. inflation adjusted profits.

26. In terms of interim reports,


__a. the EU 4th Directive requires that companies disclose quarterly reports.
__b. a major difference between the U.S. and Canada is that the U.S. requires quarterly reports, but
the Canadians follow the European tradition of not requiring quarterly reports.
**c. EU companies are required to provide semiannual reports of abridged information.
__d. the SEC requires all foreign firms that list in the United States to provide quarterly earnings
information.

27. The EU Directive on Interim Reports


__a. makes no requirement how often reports must be issued
**b. requires half yearly reports
__c. requires annual reports
__d. requires quarterly reports
CHAPTER 6
Learning Objective #1: Identify the impact on MNEs of the different pressures
leading to accounting harmonization and disclosure
1. As a result of the call for harmonization and better disclosure,
__a. global investors are now able to make more informed international comparisons.
__b. governments are better able to understand and constrain the activities of MNEs.
**c. different information needs between and within groups may lead to conflicting demands for
information.
__d. all of the above.

2. Which of the following is true concerning the pressures for information disclosure?
__a. Companies are not overly concerned about the demand for disclosure due to increasing
sophistication of information systems.
**b. The internationalization of capital markets is leading to the demand for more comparable
information.
__c. Corporate annual reports contain sufficient information for all user groups.
__d. The simplification of information is leading to greater understandability of financial
statements.

3. Disclosure levels vary across the world's stock markets but


__a. disclosure in the U.S. is among the lowest.
**b disclosure levels in the U.K. ranks among the highest.
__c. Swiss disclosure levels are the highest in the world.
__d. German disclosure levels are comparable with the U.S.

4. When comparing disclosure practices of MNE worldwide,


__a. very few firms other than those in Anglo-Saxon countries provide a review of business.
**b. Europeans tend to disclose more information about employees than do U.S. firms.
__c. stock market pressures are not as important a source of influence on corporate review
information as are employees and governments.
__d. none of the above.

Learning Objective #2: Show how governments get involved in the


harmonization of accounting directly or indirectly through groups such as the
UN, the OECD, and the European Union
5. Which of the following is true concerning the demand by governments for information?
**a. Intergovernmental organizations are better than individual countries at gaining access to better
information from MNEs.
__b. Governments have not been very active in leading the call for better information.
__c. Governments are relatively pleased with the quality of the information that they can extract
from MNEs to evaluate their impact on countries.
__d. Since all government agencies need the same information from MNEs, it is highly efficient to
use published annual reports.

6. Which of the following organizations has been the most effective government organization at
harmonizing accounting practices?
__a. the United Nations.
__b. the Organization for Economic Cooperation and Development.
__c. the International Accounting Standards Committee.
**d. the European Union.

7. Which of the following is true concerning the impact of the United Nations on accounting?
__a. The U.N. generally represents the wishes of industrial countries.
**b. It has been more effective at monitoring accounting practices than at setting accounting
standards.
__c. It has not been able to establish guidelines for accounting practices due to internal
disagreements.
__d. It has been interested in nonfinancial rather than financial disclosures.

8. The European Union and the Organization for Economic Cooperation and Development differ
from each other in terms of their accounting harmonization efforts, because
__a. the OECD represents primarily developing countries, whereas the EU represents industrial
countries.
**b. the EU has the force of law behind it, whereas the OECD can only recommend disclosure
practices.
__c. the EU is involved only in measurement, whereas the OECD is only interested in disclosure.
__d. the OECD represents the profession, whereas the EU represents governments.

9. According to the 4th Directive of the EC,


__a. the "true and fair view" must be used by countries that do not have an adequate companies
law.
__b. accounting directives must be adopted by the accounting profession rather than included in
national law.
__c. all companies, regardless of size, will have to use the same financial statement formats.
**d. EU companies must now adopt more similar approaches to information disclosure,
classification and presentation of information, and methods of valuation.

10. According to the 4th Directive of the EU, the operational basis for the income statement means
that
__a. a horizontal format must be used.
__b. there is a separate line item for staff costs.
__c. depreciation is considered a liability.
**d. cost of goods sold is presented as a line item.

11. According to the 7th Directive of the EU,


**a. worldwide consolidation is required.
__b. companies are required to consolidate domestic but not foreign subsidiaries.
__c. a group is defined by share ownership and legal rights rather than by effective management
control.
__d. the equity method cannot be used for accounting for affiliates.

12. Following the issuance of several directives in the EU, including the 4th, 7th and 8th, it appears
that
__a. the EU is ready to issue a series of new accounting regulations.
__b. Europeans prefer to have a set of standards that all countries would follow rather than the
current level of flexibility.
__c. stock exchanges are losing their influence.
**d. mutual recognition of each other's accounting standards and practices is becoming the norm.

Learning Objective #3: Discuss how trade unions and employees are interested
in harmonizing accounting to get information that will help them formulate
policy concerning MNEs

13. According to the 4th Directive of the EU,


__a. companies must use the horizontal format for the balance sheet.
**b. the vertical balance sheet includes current liabilities with current assets.
__c. companies must report a cost of goods sold.
__d. all personnel expenses must be included as a separate line item on the income statement due to
the strength of unions in Europe.

14. All of the following are trade unions except


__a. ETUC
__b. ICFTU
__c. WCL
**d. IASC

15. The main information concern of trade unions is


**a. transfer pricing
__b. inflation data
__c. production quotas
__d. stock prices

16. Trade unions do not want accounting information for interfirm comparisons, but for
__a. specific line item analysis
**b. policy formulation
__c. checking MNE labor law violations
__d. tax avoidance
Learning Objective #4: Describe how the International Organization of
Securities Commission (IOSCO) is representing investors in pushing for
harmonization of accounting to facilitate cross-border comparisons

17. IOSCO is
__a. a part of the UN
__b. a relic of the European customs union
**c. an organization of securities market regulators
__d. a group of accountants

18. Investors are concerned about


__a. up-to-date measurements of earnings
__b. lack of comparability of MNEs
__c. the informational content of MNE reports
**d. all of the above

19. Analysis of MNE aggregate results requires knowledge of the component parts of the following
except
**a. certification of the COFRI
__b. profitability
__c. degree of risk
__d. potential for growth

20. Who is most concerned about the risk of default?


__a. stock investors
**b. lenders
__c. unions
__d. governments

Learning Objective #5: Examine how accountants, through the International


Accounting Standards Committee (IASC) are pushing for harmonization

21. According to the IASC's project on "Comparability of Financial Statements,"


**a. most of the choices of accounting treatment currently permitted under International
Accounting Standards have been eliminated.
__b. all alternative treatments to accounting issues must be eliminated.
__c. global securities exchanges are required to use IASC standards.
__d. firms desiring to list on global exchanges must have financial statements that are comparable
to national firms listed on the same exchanges.

22. Which of the following is an example of a group involved in harmonization of accounting that
represents the accounting profession?
**a. the IASC.
__b. the EU.
__c. the OECD.
__d. the UN.

23. The International Accounting Standards Committee requires the following segment
information:
__a. There is no IASC standard at this point.
**b. sales and profits by line of business.
__c. sales but not profits for geographic areas.
__d. sales but not profits for line of business.

24. The IASC stated objectives are to


I. formulate and publish in the public interest accounting standards
II. work for the improvement and harmonization of regulations
III. try to raise stock prices

__a. I only
__b. II only
__c. III only
**d. I and II
__e. I and III
CHAPTER 7
Learning Objective #1: Show how countries aggregate information through the
process of consolidating financial statements

1. The best means of accounting for business combinations in most of the world is
__a. by disaggregating data by line of business.
__b. by disaggregating data by geographic area.
**c. consolidation of financial information.
__d. through parent company statements only, except in Anglo-Saxon countries.

2. Proportional consolidation involves


__a. including a proportion of the firm's income and equity.
__b. using the cost but not the equity method.
**c. consolidating the ownership share of assets and liabilities on a pro-rata basis.
__d. having a proportion of companies in a country (usually the internationally-traded companies)
consolidate their financial statements.

3. Parent company balance sheets


__a. are not permitted for U.K. companies.
__b. usually accompany consolidated statements in the United States.
**c. are always provided by U.K. companies in addition to a consolidated balance sheet and
income statement.
__d. are not common in continental Europe.

4. An alternative to line-by-line consolidation is


**a. proportional consolidation
__b. minority interest accounting
__c. joint-venture accounting
__d. the cost method

Learning Objective #2: Differentiate between acquisition and merger


accounting

5. With respect to business combinations resulting from mergers and acquisitions,


**a. British firms tend to use the purchase method, whereby assets are revalued to "fair values" at
the date of acquisition.
__b. merger accounting (pooling of interests) requires that firms revalue assets to "fair value."
__c. the purchase method allows the acquiring firm to include prior years' profits from the acquired
firm.
__d. the pooling of interests method is widely used outside of the United States, especially in Japan
and other Asian countries.

6. According to purchase accounting,


__a. assets are revalued to book value upon acquisition.
**b. assets are revalued to fair market value upon acquisition.
__c. earnings are usually enhanced due to the amortization of goodwill.
__d. there is no resulting goodwill since the purchase price of the assets must equal their fair value.

7. In the UK merger accounting means


__a. purchase accounting
__b. joint-venture accounting
**c. pooling accounting
__d. goodwill accounting

8. All of the following are MNE consolidation methods except


__a. full consolidation
__b. proportional consolidation
__c. equity method
_X_d. intangible elimination method

Learning Objective #3: Describe the treatment of nonconsolidated subsidiaries


9. Which of the following accurately reflects the accounting for non-consolidated subsidiaries in
Japan?
**a. Cross-holdings of related companies makes it difficult to identify a parent company.
__b. Japanese companies are not permitted to use the equity method.
__c. Keiretsu relationships usually have a bank as the major shareholder in related companies.
__d. Earnings and assets of Japanese companies tend to be overstated due to the inclusion of group
members in consolidated financial statements.

10. For non-consolidated subsidiaries where the parent owns less than a majority interest but more
than a 20 percent interest,
__a. the equity method is used by a majority of corporations worldwide.
**b. the equity method must be used by U.S. companies.
__c. the cost method recognizes income when earned by the subsidiary.
__d. the equity method recognizes income when a dividend is received by the parent.

11. Which of the following accurately reflects the accounting for non-consolidated subsidiaries in
Japan?
**a. Cross-holdings of related companies makes it difficult to identify a parent company.
__b. Japanese companies are not permitted to use the equity method.
__c. Keiretsu relationships usually have a bank as the major shareholder in related companies.
__d. Earnings and assets of Japanese companies tend to be overstated due to the inclusion of group
members in consolidated financial statements.

12. For non-consolidated subsidiaries where the parent owns less than a majority interest but more
than a 20 percent interest,
__a. the equity method is used by a majority of corporations worldwide.
**b. the equity method must be used by U.S. companies.
__c. the cost method recognizes income when earned by the subsidiary.
__d. the equity method recognizes income when a dividend is received by the parent.

Learning Objective #4: Discuss the various efforts at harmonization of


consolidation practices by the International Accounting Standards Committee
(IASC) and also the European Union

13. According to the 7th Directive of the EU,


__a. proportional consolidation is not permitted.
__b. consolidation can only occur when one firm owns a majority of the shares with voting rights
of another company.
**c. the definition of a group is a good example of a compromise between the British and Germans.
__d. the Germans did not have to make many changes in their consolidation practices.

14. According to the 7th Directive of the EU,


**a. worldwide consolidation is required.
__b. companies must consolidate domestic subsidiaries, but foreign subsidiaries are optional.
__c. the more conservative cost method must be used to account for subsidiaries for which the
parent owns less than a majority interest.
__d. assets must be revalued to book values in the case of an acquisition.

15. According to the International Accounting Standards Committee,


__a. the cost method must be used instead of the equity method.
**b. consolidated financial statements are required.
__c. companies may choose between issuing parent company or consolidated financial statements.
__d. the pooling of interests method may not be used.

16. The trend of IASC accounting for combinations is becoming


__a. less restrictive
__b. no trend is present
__c. dependent on business cycles
**d. more restrictive

Learning Objective #5: Compare the different attitudes toward the cash-flow
statement worldwide

17. In terms of funds and cash flow statements,


**a. there is a lack of regulation worldwide on their use.
__b. fewer and fewer companies are providing cash flow statements due to the cost of competitive
disadvantage.
__c. firms are shifting away from cash flow statements and moving to working capital as a
definition of funds.
__d. most countries require cash flow rather than funds statements.
18. Cash flow statements
__a. are required by the EU 4th Directive.
__b. are already required by most members of the EU, so it was not necessary to include a
requirement for cash flow statements in the 4th Directive.
**c. are required by IAS 7.
__d. are not required by IOSCO.

19. The MNE disclosure of cash flow statements


__a. is decreasing in favor of working capital funds statements
**b. is increasing over time
__c. is limited by a lack of a restrictive consolidation standard
__d. helps the analysis of barter transactions

20. Most countries


__a. require the direct method of cash flow statements
__b. require the indirect method of cash flow statements
__c. require the working capital approach
**d. don’t require any specific method in cash flow statements

Learning Objective #6: Identify the issues involved in joint-venture accounting


worldwide

21. AT&T has a 60 percent equity interest in a joint venture with Marubeni Corporation in Japan to
develop and market laptop notebook portable computers, notably the Safari notebook. Would you
classify this operation as an
__a. implementor.
**b. integrated player.
__c. local innovator.
__d. multidomestic operation.

22. Which of the following is not a type of joint controlled venture


__a. operations
**b. accounting practice
__c. assets
__d. entities

23. A contractual arrangement whereby two or more parties undertake an activity which is subject
to joint control
__a. a consol
__b. a preferred stock
**c. a joint venture
__d. a mutual fund

24. The IASC recommends a “Benchmark Treatment” of


__a. accrual accounting
__b. fair value accounting
__c. full translation
**d. proportionate consolidation

Learning Objective #7: Examine the conceptual issues involved in accounting


for goodwill and other intangible assets

25. According to the efficient market hypothesis as it relates to goodwill,


__a. share prices do not accurately reflect all publicly available information.
**b. accounting treatment of intangibles is not as important as the disclosure of information on how
they are accounted for.
__c. goodwill should be set up as an asset and amortized.
__d. goodwill should be written off to reserves.

26. A major argument against the systematic amortization of goodwill is that


__a. it is not consistent with accrual accounting.
__b. it tends to overstate earnings.
**c. it represents an unrealized loss, not a cash flow.
__d. its future value is not being continuously maintained.

27. A focus of stock market valuation is on


**a. recurring profits and cash flow
__b. payback
__c. activity based costing
__d. transfer pricing

28. Analysts
__a. do not adjust corporate profits to exclude profit/losses from goodwill
__b. do not consider the market as efficient
__c. do not regard intangible accounting as full disclosure
**d. do adjust corporate profits to exclude profit/losses from goodwill

Learning Objective #8: Identify the major approaches to accounting for


goodwill: asset without amortization, asset with systematic amortization, and
immediate write-off

29. A major argument in favor of setting up goodwill as an asset without amortization is that
__a. it is inconsistent to amortize purchased but not internally generated goodwill.
__b. it is the cost of resources which will be used up.
**c. its future value is being continuously maintained.
__d. everything needs to pass through the income statement sometime.

30. A major argument in favor of the immediate write-off approach to goodwill is that
__a. it is an asset with future economic benefit.
**b. its true value has no predictive relationship to the cost paid on acquisition.
__c. it does not distort the financial statements.
__d. It provides a more accurate relationship between debt and total assets.

31. A major argument in favor of setting up goodwill as an asset with amortization is that
**a. goodwill is a cost of resources that will be used up
__b. its future value is being continuously maintained.
__c. its true value has no predictive relationship to the cost paid on acquisition.
__d. it does not distort the financial statements.

32. What is the problem of writing off goodwill in service companies


__a. leverage will become low
__b. the price earnings ratio will not change
__c. the stated financial position will not change
**d. equity maybe become depleted

Learning Objective #9: Describe the different national practices of accounting


for goodwill and the major international efforts at harmonizing these practices

33. The dominant approach to accounting for goodwill in the United Kingdom is the
**a. immediate write-off to reserves.
__b. immediate write-off to income.
__c. set up as an asset with amortization.
__d. set up as an asset without amortization.

34. The dominant approach to accounting for goodwill in the United States is the
__a. immediate write-off to reserves.
__b. immediate write-off to income.
**c. set up as an asset with amortization.
__d. set up as an asset without amortization.

35. A major concern over the treatment of goodwill by the British in comparison with the
Americans is that
**a. the British may be able to offer more for an acquisition than an American firm.
__b. British income tends to be lower than U.S. income.
__c. British firms would have a more difficult time acquiring firms that have brand names.
__d. British firms are able to pay more for new greenfield (as opposed to acquisition) investments
than are U.S. firms.

36. Greatbrit PLC, a British firm, acquired a foreign corporation for a purchase price of $500
million. The book value of the net assets was stated at $350 million, but the fair market value of
the net assets is $420 million. Assume the useful life of the goodwill to be 10 years. If the
goodwill is systematically amortized over its useful life, what would be the amount per year?
__a. $15 million per year
**b. $8 million per year
__c. $7 million per year
__d. Goodwill cannot be systematically amortized in Britain.

37. Using the same assumptions as given in question 5, but assume that Lewis PLC is Japanese.
What would be the amount of goodwill recognized on an annual basis under their GAAP?
**a. $30 million per year
__b. $15 million per year
__c. $8 million per year
__d. Goodwill cannot be systematically amortized.

Learning Objective #10: Examine the choice of accounting methods, national


practices, and harmonization efforts with respect brands, trademarks, patents,
and related intangibles

38. The advantage of setting up brands as an asset without amortization is that


**a. brand names have value and are being maintained through advertising.
__b. it is relatively easy to assess the future value of well-known brands.
__c. it is consistent with accrual accounting.
__d. it is the most conservative approach to accounting for brands.

39. The International Accounting Standards Committee requires that brands


__a. be set up as an asset and amortized over its useful life.
__b. be set up as an asset but not amortized.
__c. be written off immediately.
**d. The IASC has no standard relating to brands.

40. Research and development costs


**a. are generally written off immediately to earnings in the United States.
__b. are typically capitalized and amortized.
__c. are not very significant due to the lack of R&D being done in the U.S. currently.
__d. are split into two parts by the IASC. Research costs should be capitalized, whereas
development costs should be written off.

41. In the case of brands, which separability treatment is accurate?


__a. Amortization is not an issue.
__b. U.K. firms must amortize brands over a maximum of 20 years.
**c. Brands may qualify as assets.
__d. Brands may qualify as a liability.

CHAPTER 8
Learning Objective #1: Identify the major uses and users of segment information

1. A major value of segment information for users is that


__a. it focuses on issues other than cash flows.
__b. in the United States, GAAP requires firms to disclose segment information by major country.
__c. it provides information to investors that might involve cost of preparation but not cost of competitive
advantage.
**d. it allows users who have different information needs to get disaggregated information that might be of
use to them.

2. Segment information
I. Permits a better assessment of risk
II. Gives a more accurate assessment of potential growth
__a. I only
__b. II only
__c. neither I or I
**d. both I and II

3. The demand for segment information has been


**a. prompted by a continuing diversification trend
__b. forced by competitors
__c. accelerated by class action suits
__d. reduced by investors

4. Segment information is
__a. very easy for MNEs to compute
**b. useful because some users only want part of the MNE data
__c. does not require cost allocations
__d. does not concern transfer pricing

Learning Objective #2: Discuss the major benefits of segment disclosure from the
perspective of predictive ability tests and stock market studies

5. According to predictive ability tests of segment reports,


__a. it has clearly been proven that users use disaggregated information to make forecasts.
__b. forecasts based on line of business data are not as accurate as those based on geographic segments.
**c. forecasts based on segment earnings are more accurate than those based on segment sales.
__d. segment information is not useful for small firms.

6. Evidence about stock market tests of segment information


**a. is presently subject to uncertainty
__b. find no value to line of business disclosures
__c. has yet to be produced
__d. only applies to profits
7. Segment-based forecasts
__a. underperform consolidated-based forecasts
**b. out perform consolidated-based forecasts
__c. do not depend on firm size
__d. do not apply to OECD MNEs

8. Segment disclosures
__a. do not affect firm risk
__b. increase firm risk
__c. increase the MNE price variability
**d. decrease the MNE price variability

Learning Objective #3: Highlight the costs of segment disclosures from the standpoint
of preparation and disclosure of information to competitors

9. From a competitive standpoint, segment reporting


**a. is closer to a level playing field for single industry or single country firms.
__b. does not create problems since most countries have similar reporting requirements.
__c. creates a real cost of compiling, processing and disseminating information.
__d. requires the disclosure of business dealings with major competitors.

10. MNEs often make the argument against segment disclosure that
__a. economic efficiency will result
**b. they will be put at a competitive disadvantage
__c. there will be an affect on global comparative advantage
__d. turnover rates will decrease

11. A major argument against segment disclosure is that


__a. gross margins will fall
__b. transfer pricing activity will increase
**c. in some cases it may be misleading
__d. MNEs will have to do more mergers

12. Segment disclosure should not be expensive because of


__a. jet travel
__b. stock market analysts
__c. resultant lower leverage
**d. computer systems

Learning Objective #4: Review the segment reporting requirements of the


International Accounting Standards Committee (IASC)
13. The IASC's segment reporting standard IAS 14
__a. give management more discretion to identify geographic segments.
**b. bases its requirements on the company's organization structure and internal reporting system.
__c. contradict proposals for reform issued by the FASB.
__d. restricts the criteria for identifying segments to assessing "risks and returns".

14. The European Union requires the following segment information:


__a. sales and profits by line of business only.
__b. sales and profits by line of business, but sales only for geographic segments.
**c. sales by line of business and geographic area.
__d. profits by geographic area but not line of business.

15. Which of the following is true concerning segment disclosures?


**a. The European Union requires sales but not profit data by segments.
__b. Forecasts based on consolidated data are more accurate than those based on segmented data due to
intercompany transfers.
__c. The U.S. requires extensive social disclosures of its segmented data.
__d. The British require segment sales based on source but not destination.

16. Eliminations are


**a. are a necessary part of segment reporting
__b. only required in consolidations
__c. not required in segment reporting
__d. are being considered in an IASC proposal

Learning Objective #5: Compare the different regulations for segment disclosures
around the world, especially in the United States and the United Kingdom

17. A major difference between U.S. segment disclosures and those of other countries is that
__a. U.S. companies tend to disclose more segments on average than do U.K. companies.
**b. U.K. companies have several different sources of standards, whereas U.S. companies only have to
worry about the FASB and SEC.
__c. U.K. company law gives significant direction to companies on establishing segments, whereas the
FASB gives no discretion to management on the establishment of segments.
__d. U.S. companies have to report geographic sales by source and destination, whereas British companies
are only allowed to report geographic sales by destination.

18. According to the British approach to segment disclosures,


__a. the Companies Act requires line of business sales but not geographic sales.
__b. there is significant guidance as to what is material or what a reportable segment is.
__c. the London Stock Exchange requires that firms provide geographic segments by country.
**d. SSAP 25 requires geographic segments by source and destination.
19. According to U.S. and British companies, narrowly-defined line of business and geographic segments
are
__a. a cost of preparation but not a cost of competitive disadvantage.
__b. difficult to determine because of their highly aggregated organizational structures.
__c. easy to determine, because they only have to report sales data.
**d. a competitive disadvantage cost since not everyone in the world has to account for segments the same
way.

20. US SFAS 131


**a. is very similar to the IAS 14
__b. was created ten years before the IAS 14
__c. concerns mergers and acquisitions
__d. does not require sales information by segments

Learning Objective #6: Examine the problems of segment reporting in practice and
discuss ways to make segment disclosures more useful

21. Which of the following is not a major problem for segment reporting?
__a. There are problems with verification of information.
__b. There are problems with segment identification.
__c. The greater the disaggregation, the more likely the need to allocate common costs, which could distort
profits.
**d. U.S. firms do not provide much information about their segments.

22. The dual-yardstick proposal for segment disclosures


**a. suggests that segments be established consistent with the company's organizational structure.
__b. suggests that industry and country groupings be related to each other rather than an external standard.
__c. requires geographic segmentation along country lines.
__d. requires that geographic and industry data be combined together in a matrix reporting format.

23. Most corporations do not provide segment reponting


__a. LOB information separately
**b. LOB information in matrix form
__c. of sales data
__d. identified by SIC

24. A problem with segment disclosure is that


__a. IAS 14 has been rejected by MNEs
__b. there are too many segments
__c. segment reporting is only within the UK scope of the audit
**d. management will be disclosing its own view of segments with significant differences in risk and
return
6.

The trend of IASB accounting for combinations is becoming

Student Response Feedback


A. less restrictive
B. no trend is present
C. dependent on business cycles
D. more restrictive
CHAPTER 9
Chapter 9

Learning Objective #1: Examine exchange rates and the nature of the foreign exchange
markets

1. The exchange rate quoted for transactions within two business days is the
**a. spot rate.
__b. the forward rate.
__c. the current rate.
__d. the swap rate.

2. The spot rate is


**a. the rate quoted for delivery within two business days.
__b. usually higher than the forward rate.
__c. a contract rate between the corporation and the foreign exchange trader at the bank for future
delivery.
__d. usually at a premium for sales and a discount for purchases.

3. The exchange rate which is a contract rate between the company and the foreign exchange trader
at the bank for delivery in the future is the
__a. spot rate
**b. forward rate.
__c. future spot rate.
__d. current rate.

4. The forward exchange rate is


__a. the rate quoted for delivery within two business days.
__b. usually higher than the spot rate.
**c. a contract rate between the corporation and the foreign exchange trader at the bank.
__d. usually at a premium for sales and a discount for purchases.

5. The bid rate is


**a. the rate at which the foreign exchange trader will buy foreign currency.
__b. the rate at which the foreign exchange trader will sell foreign currency.
__c. the rate at which the company doing business with the trader will buy foreign currency.
__d. the rate at which the company doing business with the trader will sell foreign currency.

6. The offer rate is


__a. the rate at which the foreign exchange trader will buy foreign currency.
**b. the rate at which the foreign exchange trader will sell foreign currency.
__c. the rate at which the company doing business with the trader will buy foreign currency.
__d. the rate at which the company doing business with the trader will sell foreign currency.
7. The amount of the local currency equivalent to one unit of the foreign currency is the
**a. direct rate.
__b. indirect rate.
__c. bid rate.
__d. offer rate.

8. The amount of foreign currency required for one unit of the local currency is the
__a. direct rate.
**b. indirect rate.
__c. bid rate.
__d. offer rate.

9. The major market for foreign exchange is


**a. the interbank market.
__b. between banks and their non-bank corporate clients.
__c. between banks and speculators.
__d. between foreign exchange brokers and non-bank financial institutions.

10. The most widely traded currency in the world is the


__a. Japanese yen.
__b. German mark.
__c. British pound.
**d. U.S. dollar.

13. The foreign exchange market where the most foreign currency traded is
__a. New York.
**b. London.
__c. Tokyo.
__d. Frankfurt.

14. The institution established to promote exchange rate stability worldwide is the
__a. United Nations.
__b. Organization for Monetary Union.
**c. International Monetary Fund.
__d. Global Exchange Rate Coordinating Commission.

15. The most widely used exchange rate regime is the


__a. pegged system with one percent flexibility.
__b. limited flexibility system with 2 1/4 percent flexibility.
**c. floating exchange rate system.
__d. dollar-based system.

16. The economic theory that explains exchange rate movements by looking at the relative prices in
one country versus another is
**a. purchasing power parity.
__b. the Fisher Effect.
__c. the International Fischer Effect.
__d. the Foreign Exchange Reserves Effect.

17. The economic theory that explains how a country with a higher nominal interest rate should
have a higher inflation rate is
__a. purchasing power parity.
**b. the Fisher Effect.
__c. the International Fischer Effect.
__d. the Foreign Exchange Reserves Effect.

Learning Objective #2: Describe the foreign exchange derivatives market, especially in the
context of forward contracts, swaps, and options
18. If the forward rate is greater than the spot rate on a direct quote basis, the foreign currency
would be selling at a
__a. cross rate.
**b. premium.
__c. discount.
__d. bid rate.

19. If the forward rate is less than the spot rate on a direct quote basis, the foreign currency would
be selling at a
__a. cross rate.
__b. premium.
**c. discount.
__d. bid rate.

20. A simultaneous spot and forward transaction is a (an)


__a. direct transaction.
__b. indirect transaction.
**c. swap.
__d. option.

21. The right but not the obligation to trade foreign currency in the future is a
__a. forward contract.
__b. swap.
__c. premium.
**d. option.

22. An option where the holder has the right to sell foreign currency to the writer of the option is a
__a. forward option.
**b. put option.
__c. call option.
__d. swap option.

23. An option where the holder has the right to buy foreign currency from the writer of the option is
a
__a. forward option.
__b. put option.
**c. call option.
__d. swap option.

Learning Objective #3: Identify the different ways that companies can account for
transactions denominated in a foreign currency
The following information will be used for questions 22-34. Assume that Lewis International sells
running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will
be collected on July 15. Also assume that Lewis closes its books at the end of each month. The
following are the relevant exchange rates.

Spot rate on June 1 $1.6200


Forward rate for July
15 delivery $1.6000
Spot rate on June 30 $1.6100
Spot rate on July 15 $1.5950

For questions 23-28, assume the treatment of FASB Statement 52 and that no forward contract is
entered into.

23 What is the dollar value of the sale as carried on the books on June 30?
__a. $120,750
__b. $120,000
__c. $119,625
**d. $121,500

24. How much cash will Lewis receive on July 15?


__a. $120,750
__b. $120,000
**c. $119,625
__d. $121,500

25. What is the amount of the foreign exchange gain or loss that it will recognize on June 30?
__a. $1500 loss
**b. $ 750 loss
__c. $1125 loss
__d. $1875 loss
__e. gain or loss is deferred

26. What is the amount of the foreign exchange gain or loss that it will recognize on July 15?
__a. $1875 loss
__b. $ 750 loss
**c. $1125 loss
__d. $ 750 gain
__e. gain or loss is deferred
27. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on June 30?
__a. $ 750 loss
__b. $ 750 gain
__c. $1125 loss
__d. $1875 loss
**e. gain or loss is deferred

28. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on July 15?
**a. $1875 loss
__b. $1125 loss
__c. $ 375 loss
__d. $ 750 loss
__e. gain or loss is deferred

Learning Objective #4: Discuss how companies can account for forward contracts, swaps,
and options in the context of foreign currency transactions, commitments, and anticipated
future transactions

For questions 29-32, assume FASB Statement 52 treatment and that Lewis enters into a forward
contract.

29. What is the dollar value of the sale on July 15?


**a. $120,750
__b. $120,000
__c. $119,625
__d. $121,500

30. What is the amount of cash that Lewis will receive for the sale?
__a. $120,750
**b. $120,000
__c. $119,625
__d. $121,500

31. The difference between the spot rate on June 1 and the forward rate is a
__a. $375 foreign exchange gain
__b. $375 foreign exchange loss
**c. $1500 foreign exchange loss
__d. $1500 foreign exchange gain

32. If Lewis had purchased merchandise rather than sold it, what would be your answer to question
30?
__a. $375 foreign exchange gain
__b. $375 foreign exchange loss
__c. $1500 foreign exchange loss
**d. $1500 foreign exchange gain

33. The difference between the spot and forward rate is


__a. deferred until Lewis receives payment from the British importer.
__b. taken to the income statement when the contract is entered into.
__c. an adjustment to retained earnings.
**d. adjusted for foreign exchange gains and losses over the life of the contract.

34. Using the data for the problem, assume that you entered into an option with Goldman Sachs for
one contract worth £75,000 at a premium of $.0325, a strike price of 162 and a brokerage fee of
$25 to get into the option and also to exercise the option. Would you exercise the option?
**a. yes
__b. no
__c. It depends on the June 1 spot rate.
__d. This is not an appropriate situation for an option.

35. Using the data for the problem, assume that you entered into an option with Goldman Sachs for
one contract worth £75,000 at a premium of $.0325, a strike price of 155 and a brokerage fee of
$25 to get into the option and also to exercise the option. Would you exercise the option?
__a. yes.
**b. no
__c. It depends on the June 1 spot rate.
__d. This is not an appropriate situation for an option.

36. Assuming that you entered into the option and the strike price were 154, what would be your
net cash proceeds on July 15?
__a. $117,000.00
**b. $114,537.50
__c. $114,512.50
__d. $115,500.00

37. Assuming that you entered into the option and the strike price were 160, what would be your
net cash proceeds on July 15?
__a. $117,000.00
__b. $120,000.00
__c. $117,537.50
**d. $117,512.50
Use the following information for problems 39-47
Assume that RadCo International purchases ski equipment on account from a German exporter on
October 1 and that the sale is denominated in 500,000 German marks. RadCo closes its books at
the end of each month, and the payable is due on November 15. The following are the relevant
exchange rates.

Spot rate on October 1 $0.5939


Forward rate for Nov
15 delivery $0.5945
Spot rate on October 31 $0.5948
Spot rate on Nov 15 $0.5941

Questions 39-43 assumes the treatment of FASB Statement 52 and that no forward contract is
entered into.

39. What is the dollar value of purchases on October 31?


__a. $297,050
**b. $296,950
__c. $297,250
__d. $297,400

40. How much cash will RadCo International have to pay?


**a. $297,050
__b. $296,950
__c. $297,250
__d. $297,400

41. What is the amount of the foreign exchange gain or loss that it will recognize on October 31?
__a. $300 loss
**b. $450 loss
__c. $450 gain
__d. $150 loss
__e. gain or loss is deferred

42. What is the amount of the foreign exchange gain or loss that it will recognize on November 15?
**a. $350 gain
__b. $200 loss
__c. $100 loss
__d. $350 loss
__e. gain or loss is deferred

43. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on October 31?
__a. $300 loss
__b. $450 loss
__c. $450 gain
__d. $150 loss
**e. gain or loss is deferred

44. Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain
or loss on November 15?
__a. $100 gain
__b. $300 gain
__c. $350 gain
**d. $100 loss
__e. gain or loss is deferred

45. Assume that RadCo enters into a forward contract. What is the dollar value of the purchases on
November 15?
__a. $297,050
**b. $296,950
__c. $297,250
__d. $297,400

46. Assume that RadCo enters into a forward contract. What is the amount of cash that it will pay
for the merchandise?
__a. $297,050
__b. $296,950
**c. $297,250
__d. $297,400

47. The difference between the spot rate on October 1 and the forward rate is
__a. a premium discount.
__b. a premium gain.
**c. a premium loss.
__d. a discount gain.
__e. a discount loss.

48. The premium or discount is


**a. adjusted for foreign exchange gains and losses over the life of the contract.
__b. an adjustment to the purchases account.
__c. is taken to the income statement when the contract is entered into.
__d. is deferred until RadCo pays the German supplier.

49. In the case of a forward contract used to hedge a foreign currency commitment,
**a. the gain or loss on the contract should be deferred and included in the measurement of the
related foreign currency transaction.
__b. the gain or loss on the contract should be recognized in the period in which the exchange rate
changes.
__c. the premium or discount must be written off over the life on the contract.
__d. the related foreign currency transaction will be recorded on the books at the rate in effect when
title passes.
50. In the case of a forward contract to hedge a foreign currency transaction,
__a. the gain or loss on the contract should be deferred and included in the measurement of the
related foreign currency transaction.
**b. the gain or loss on the contract should be recognized in the period in which the exchange rate
changes.
__c. a gain will occur if the foreign currency strengthens against the dollar, and a loss will occur if
the foreign currency weakens against the dollar.
__d. the related foreign currency transaction will be recorded on the books at each new exchange
rate until the monetary part of the transactions (the receivable or payable) is settled.

51. Foreign exchange gains and losses on foreign currency transactions


**a. must be recognized in income in the period in which the rate changes.
__b. are deferred until the monetary part of the transaction is settled.
__c. can be used to adjust the cost of the foreign currency transaction under the temporal but not
the current rate method.
__d. can be written off over the life of the debt according to Statement 52, according to the current
rate method.
52. Which of the following is true concerning the book accounting for foreign currency transactions
in different countries?
__a. In the United States, gains and losses are deferred until the monetary side of the transaction is
settled.
**b. In Canada, gains and losses on long-term items are deferred and amortized over the useful life
of the underlying transaction.
__c. In Japan, gains on long-term items are deferred, but losses are recognized immediately.
__d. Germans tend to recognize both gains and losses in the current period.

53. Which of the following is true concerning the book accounting for foreign currency transactions
in different countries?
__a. In the United States, gains and losses are deferred until the monetary side of the transaction is
settled.
__b. In Canada, gains on long-term items are deferred and amortized over the useful life of the
underlying transaction but losses are recognized in the current period.
**c. In Japan, long-term items are carried at the original spot rate, and gains and losses are deferred
until the settlement date.
__d. Germans tend to recognize both gains and losses in the current period.

54. According to IAS 21, the preferred treatment for recognizing gains and losses on foreign
currency transactions
__a. is similar to the way U.S. tax accounting treats gains and losses.
**b. is to recognize differences as income or expense in the period in which they arise.
__c. follows the German approach of conservatism.
__d. is to recognize losses but not gains in the period in which they arise.

55. In the United States, derivatives held for trading or speculative purposes are
__a. carried at the original spot rate.
__b. are deferred and amortized over the useful life of the derivative.
**c. are marked-to-market.
__d. and not permitted in the case of foreign currencies.

56. The balancing of a foreign exchange gain or loss on a transaction with a derivative loss or gain
is known as
**a. hedge accounting.
__b. a swap.
__c. a forward option.
__d. luck.

57. In terms of derivatives, FASB Statement 52 deals with


__a. forward contracts and futures contracts.
**b. forward contracts and currency swaps.
__c. all types of derivatives.
__d. options but not forwards.

58. Which of the following is not a criterion that must exist for hedge accounting to function:
__a. Item to be hedge exposes the enterprise to price, currency, or interest rate risk.
__b. The hedge position reduces the exposure.
__c. The hedge position is designated as a hedge.
**d. The enterprise would suffer a loss in the absence of the hedge.

59. Which of the following is true concerning the accounting for a foreign currency option?
__a. Hedge accounting is allowed when the characteristics and terms of the transaction cannot be
identified.
__b. Hedge accounting is not allowed when the anticipated transaction will most likely occur.
**c. The option is carried as fair value on the balance sheet.
__d. Options gains are deferred, whereas options losses are recognized in the period in which they
occur.
CHAPTER 10
Learning Objective #1: Differentiate between the process of foreign currency
conversion and the process of translation

1. The process by which one currency is changed into another is known as


__a. translation.
**b. conversion.
__c. restatement.
__d. mark-to-market.

2. The process by which one currency is expressed or restated in terms of another is known as
**a. translation.
__b. conversion.
__c. mark-to-market.
__d. inversion.

3. From the standpoint of the parent company, a foreign currency is


__a. the currency in which the parent company prepares its financial statements.
**b. any currency other than the parent currency.
__c. the currency of the primary economic environment in which the firm operates.
__d. the currency in the country where the foreign firm is operating.

Learning Objective #2: Compare the different foreign currency translation


methodologies: the current/noncurrent method, the monetary/non-monetary method,
the temporal method, and the current rate or closing rate methods

4. The currency of the primary economic environment in which the firm operates is the
**a. functional currency.
__b. reporting currency.
__c. historical currency.
__d. base currency.

5. The currency in which the parent company prepares its financial statements is the
__a. functional currency.
**b. reporting currency.
__c. historical currency.
__d. base currency.

6. The currency of the country where the foreign company is operating is the
__a. base currency.
__b. parent currency.
**c. local currency.
__d. third country currency.
7. If a U.S.-based company has a subsidiary in Germany, and the German subsidiary imports components
from Britain, the British pound would most likely be considered (from the standpoint of the German
subsidiary)
__a. the local currency.
**b. a foreign currency.
__c. the functional currency.
__d. the reporting currency.

8. The reporting currency is


**a. the currency in which the parent company prepares its financial statements.
__b. any currency other than the parent currency.
__c. the currency of the primary economic environment in which the firm operates.
__d. the currency in the country where the foreign firm is operating.

9. The local currency is


__a. the currency in which the parent company prepares its financial statements.
__b. any currency other than the parent currency.
__c. the currency of the primary economic environment in which the firm operates.
**d. the currency of the country where the foreign firm is operating.

10. The translation method in which current assets and liabilities are translated at current exchange rates
and other assets, liabilities and owner's equity are translated at historical exchange rates is known as the
**a. current-noncurrent method.
__b. monetary-nonmonetary method.
__c. temporal method.
__d. current rate method.

11. The translation method which uses as the basis for its logic that financial assets and liabilities have
similar attributes and should be translated at the same exchange rate is the
__a. current-noncurrent method.
**b. monetary-nonmonetary method.
__c. temporal method.
__d. current rate method.

12. The translation methodology which assumes that the only assets that should be translated at the
historical rate are those carried at past exchange prices is the
__a. current-noncurrent method.
__b. monetary-nonmonetary method.
**c. temporal method.
__d. current rate method.

13. According to the temporal method of translating foreign currency financial statements,
__a. current assets and liabilities are translated at current exchange rates, and other assets, liabilities and
owner's equity are translated at historical exchange rates.
**b. only those assets carried at past exchange prices should be translated at the historical rate.
__c. only owner's equity is translated at historical exchange rates.
__d. the entire income statement should be at the current rate

Learning Objective #3: Present the translation methodologies recommended by the


International Accounting Standards Committee (IASC)

14. According to IAS 21,


__a. a forward contract may be used to set the value of a nonmonetary asset whose purchase was hedged
by the forward contract.
__b. a forward contract can hedge the value of a commitment but not a transaction.
__c. the current rate method may be used but not the temporal method.
**d. long-term monetary items may be translated at the historical rate.
__e. Two of the above.

15. The functional currency is


__a. the U.S. dollar.
__b. any currency other than the parent currency.
**c. the currency of the primary economic environment in which the firm operates.
__d. the currency in the country where the foreign firm is operating as long as it is also the reporting
currency.

16. The translation methodology that translates only owner's equity at historical exchange rates is the
__a. current-noncurrent method.
__b. monetary-nonmonetary method.
__c. temporal method.
**d. current rate method.

17. According to the current-rate method of translating foreign currency financial statements,
__a. current assets and liabilities are translated at current exchange rates, and other assets, liabilities and
owner's equity are translated at historical exchange rates.
__b. only those assets carried at past exchange prices should be translated at the historical rate.
**c. only owner's equity is translated at historical exchange rates.
__d. translation losses are taken to income, but translation gains are deferred.

18. According to the current-rate method of translating financial statements,


__a. all balance sheet accounts except capital stock are translated at the historical exchange rate.
**b. every income-statement account is multiplied by the average exchange rate.
__c. translation gains or losses are taken to the income statement.
__d. all balance sheet accounts are translated at the current exchange rate.

19. If a parent company has a subsidiary in a country where the cumulative rate of inflation for the past
three years is around 100 percent, which translation methodology would they use according to the IASC?
__a. the temporal method.
__b. the temporal method after adjusting for inflation.
__c. the current rate method.
**d. the current rate method after adjusting for inflation.

Learning Objective #4: Describe the basic dimensions of FASB Statement 52 and how
that standard compares with previous GAAPs in the United States

20. Which foreign currency translation standard uses the following objective: "for the purpose of
preparing an enterprise's financial statements, the objective of translation is to measure and express (a) in
dollars and (b) in conformity with U.S. generally accepted accounting principles (GAAP) the assets,
liabilities, revenues, or expenses that are measured or denominated in foreign currency."
__a. Accounting Research Study #12
**b. FASB Statement 8
__c. FASB Statement 52
__d. International Accounting Standard 14.

21. According to FASB Statement No. 8,


__a. translation losses had to be recognized, whereas gains were deferred.
__b. both the temporal and current rate methods were permitted.
**c. long-term debt had to be carried at current rates, but the non-monetary assets purchased with the debt
were carried at historical rates.
__d. cost of goods sold was translated at the average exchange rate for the period.

22. Which foreign currency translation standard uses the following objective: "1. Provide information that
is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows
and equity. 2. Reflect in consolidated statements the financial results and relationships of the individual
consolidated entities as measured in their functional currencies in conformity with generally accepted
accounting principles."
__a. Accounting Research Study #12
__b. FASB Statement 8
**c. FASB Statement 52
__d. International Accounting Standard 14.

23. According to FASB Statement No. 52,


__a. translation losses had to be recognized, whereas gains were deferred.
**b. both the temporal and current rate methods were permitted.
__c. the choice of translation methodology is independent of the choice of functional currency.
__d. the temporal method is the only translation method allowed.

24. If a parent company has a subsidiary in a country where the cumulative rate of inflation for the past
three years is around 100 percent, which translation methodology would they use under FASB Statement
No. 52?
**a. the temporal method.
__b. the temporal method after adjusting for inflation.
__c. the current rate method.
__d. the current rate method after adjusting for inflation.
Learning Objective #5: Illustrate the temporal and current-rate methods of
translation foreign currency financial statements

25. The temporal method of translating financial statements is used when


__a. the local currency is the functional currency.
__b. the local currency is the reporting currency.
**c. the parent's reporting currency is the functional currency.
__d. the subsidiary's reporting currency is the functional currency.

26. The current-rate method of translating financial statements is used when


**a. the local currency is the functional currency.
__b. the local currency is the foreign currency.
__c. the parent's reporting currency is the functional currency.
__d. you are translating current financial statements.

27. According to which method is the translation gain or loss taken to the income statement?
__a. the current rate method
__b. the consolidation method
**c. the temporal method
__d. the transcription method

28. According to the temporal method of translation,


__a. Transaction gains and losses are taken to income, but translation gains and losses are taken to the
owners' equity section of the balance sheet.
**b. Transaction and translation gains and losses are taken to the income statement.
__c. Transaction and translation gains and losses are taken to the owners' equity section of the balance
sheet.
__d. Transaction gains and losses are taken to the owners' equity section of the balance sheet, but
translation gains and losses are taken to the income statement.

29. If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is
located, the translation method that should be selected is the
__a. temporal method
**b. current rate method
__c. monetary/nonmonetary method
__d. the current rate method if the rate of inflation is the foreign country is 25% per month.

30. According to which method is the foreign currency translation gain or loss taken to stockholders'
equity?
**a. the current rate method
__b. the consolidation method
__c. the temporal method
__d. the conversion method

31. According to the current rate method of translation,


**a. Transaction gains and losses are taken to income, but translation gains and losses are taken to the
owners' equity section of the balance sheet.
__b. Transaction and translation gains and losses are taken to the income statement.
__c. Transaction and translation gains and losses are taken to the owners' equity section of the balance
sheet.
__d. Transaction gains and losses are taken to the owners' equity section of the balance sheet, but
translation gains and losses are taken to the income statement.

32. In general, if a foreign firm translates its financial statements according to the temporal method during
a period when the value of the foreign currency is rising against the reporting currency, the firm will
recognize a
__a. translation gain in the income statement.
**b. translation loss in the income statement.
__c. translation gain in the accumulated translation adjustment account in owners' equity.
__d. translation loss in the accumulated translation adjustment account in owners' equity.

Learning Objective #6: Examine the different translation methodologies in use in


different countries

33. In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements
according to the current rate method during a period when the value of the Japanese yen is falling against
the reporting currency (the U.S. dollar) , the subsidiary will recognize a
__a. translation gain in the income statement.
__b. translation loss in the income statement.
__c. translation gain in the accumulated translation adjustment account in owners' equity.
**d. translation loss in the accumulated translation adjustment account in owners' equity.

34. In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements
according to the current rate method during a period when the value of the Japanese yen is rising against
the reporting currency (the U.S. dollar) , the subsidiary will recognize a
__a. translation gain in the income statement.
__b. translation loss in the income statement.
**c. translation gain in the accumulated translation adjustment account in owners' equity.
__d. translation loss in the accumulated translation adjustment account in owners' equity.

35. Which of the following reflects how foreign exchange translation gains and losses are treated in
different countries?
__a. U.S. companies are required to take translation gains and losses to income if the current rate method is
used.
__b. The Fourth Directive of the EU requires that all firms in Europe use the same procedure for
determining translation gains and losses.
**c. Most European countries use the current rate method, the notable exception being Germany.
__d. British firms are not allowed to set up an accumulated translation adjustment account, because they
are not permitted to use reserves.
36. A major difference between the Canadian translation standard and Statement 52 is that
**a. translation gains and losses for long-term debt may be deferred and amortized over the life of the
underlying asset.
__b. translation gains and losses for long-term assets may be deferred and amortized.
__c. the closing rate may be used for the income statement but not the balance sheet.
__d. forward contracts may not be used to hedge a net investment position.

37. According to SSAP 20 in the United Kingdom,


__a. the current rate method must be used for translation, but the temporal method is not allowed.
__b. the closing rate must be used to translate the income statement into pounds.
__c. more information must be disclosed concerning the translation of financial statements than is required
in the United States.
**d. financial statements in highly inflationary countries must be adjusted for local inflation and then
translated into pounds using the current rate method.

38. According to FASB Statement No. 52, which of the following does not have to be disclosed?
__a. The aggregate transaction gain or loss included in income.
__b. The beginning and ending amount of cumulative translation adjustments.
**c. The average exchange rate movement of countries whose operations are material to the parent
company's results.
__d. The aggregate adjustment for the period resulting from translation adjustments.

39. Assume that U.S. parent company ABC has a subsidiary XYZ in Germany. XYZ's total assets are as
follows in German marks:

Cash and receivables 500,000


Inventory 500,000
Fixed assets (net) 900,000

The relevant exchange rates are:


DM 1.6800 closing rate on the balance sheet date
DM 1.5500 exchange rate when the fixed assets were acquired
DM 1.6300 average exchange rate for the period
DM 1.6600 average exchange rate when ending inventory was acquired.

What is the total value of assets if the functional currency is the German mark?
**a. $1,130,952
__b. $1,179,469
__c. $1,175,883
__d. $1,185,012

40. Assume that U.S. parent company ABC has a subsidiary XYZ in Germany. XYZ's total assets are as
follows in German marks:

Cash and receivables 500,000


Inventory 500,000
Fixed assets (net) 900,000

The relevant exchange rates are:


DM 1.6800 closing rate on the balance sheet date
DM 1.5500 exchange rate when the fixed assets were acquired
DM 1.6300 average exchange rate for the period
DM 1.6600 average exchange rate when ending inventory was acquired.

What is the total value of assets if the functional currency is the U.S. dollar?
__a. $1,130,952
**b. $1,179,469
__c. $1,175,883
__d. $1,185,012
CHAPTER 11

Learning Objective #1: Identify the major ways that companies and their financial
statements are impacted by inflation

1. According to the Philips approach to accounting for inflation,


**a. a gearing adjustment was used to reflect the extent to which the company benefits from financing the
purchase of capital assets by long term debt rather than by equity.
__b. net realizable value was used to value assets, but replacement values were not used.
__c. target costs were used for inventory rather than standard costs.
__d. physical assets were adjusted to current values, but there was no gain or loss from holding net
financial assets.

2. Which of the following countries have not experienced hyperinflation


__a. Russia
__b. Brazil
__c. Mexico
**d. United Kingdom

3. The effect of inflation on nonmonetary assets is reflected in the


I. income statement
II. balance sheet
__a. only I
__b. only II
**c. both I and II
__d. neither I or II

4. In high inflation economies financial liabilities are


__a. poor choices for MNEs to have on the balance sheet
**b. good choices for MNEs to have on the balance sheet
__c. questioned by labor unions
__d. restrictive for MNEs

Learning Objective #2: Compare general purchasing power and current value
approaches to inflation accounting

5. General purchasing power accounting


__a. is required for U.S. companies if the inflation rate exceeds 10 percent three years in a row.
**b. is designed to report accounts in units of the same purchasing power.
__c. assumes that the general level of inflation is irrelevant.
__d. is not permitted in British accounting.

6. Current value accounting


__a. is required for Dutch companies.
**b. takes into consideration that the prices of specific assets have changed.
__c. assumes that the purchasing power of money has gone up.
__d. is required by the FASB to be used in highly inflationary countries.

7. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What would be
the unrealized holding gain in constant purchasing power terms?
__a. $100,000
__b. $220,000
__c. $120,000
**d. $ 80,000
__e. $ 20,000
__f. $280,000

8. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What is the
unrealized holding gain in current cost terms?
**a. $100,000
__b. $220,000
__c. $120,000
__d. $ 80,000
__e. $ 20,000
__f. $280,000

9. Assume that Costa Plc buys a machine in 1993 for $200,000 when the general price index is 150. At the
end of 1996, the index has risen to 210 and the current cost of the machine is $300,000. What is the
current cost gain or loss net of inflation?
__a. $100,000
__b. $220,000
__c. $120,000
__d. $ 80,000
**e. $ 20,000

Learning Objective #3: Review the International Accounting Standards on accounting


for price changes and inflation

10. The International Accounting Standards Committee


__a. takes a particular stand on the type of inflation accounting that it wants firms to use.
__b. relies more on accounting for inflation than it does disclosure.
**c. requires that firms restate their financial statements for general purchasing power when they are
operating in hyperinflationary economies.
__d. does not want firms to account for inflation, except in hyperinflationary countries.

11. Which of the following is true concerning inflation disclosures?


__a. The gearing adjustment was developed primarily for the auto industry.
__b. The Dutch prefer to use historical cost accounting due to its objectivity.
__c. Current cost adjustments are based on the fact that the value of money has fallen.
**d. The IASC does not recommend one specific approach to account for inflation.

12. Which of the following reflects the treatment of inflation accounting in the European Union?
__a. The 4th Directive does not allow an alternative to historical cost due to the influence of the Germans.
**b. Firms are allowed to provide supplemental current cost information.
__c. Firms are not allowed to put their financial statements in terms of current costs, even if they provide
supplemental historical cost information.
__d. none of the above.
1.3. IAS 15 on inflation requires the
I..general purchasing power approach
II..current cost approach
__a. only I
__b. only II
**c. either I and II
__d. neither I or II

Learning Objective #4: Examine inflation regulations and practices in different


countries, with special emphasis on approaches to inflation accounting in South
America and the Netherlands

14. A major difference between the British and U.S. approach to inflation accounting (before the standards
were withdrawn) was that
**a. the British were allowed to use current cost accounting in primary or supplementary financial
statements.
__b. the British did not permit a gearing adjustment.
__c. the U.S. allowed general purchasing power adjustments but not current cost adjustments.
__d. U.S. firms took their inflation adjustments to a reserve account.

15. What is the trend in inflation accounting in South American countries of Argentina and Brazil
__a. change to current cost accounting
__b. change to general purchasing power adjustments
__c. continued use of an index in general purchasing power statements
**d. dropping of inflation accounting

16. Professor Limperg believed


__a. in general purchasing power accounting
**b. that income is a function of revenues and replacement values
__c. in a weak relation between economics and accounting
__d. in the gold standard

17. Current cost accounting is required in the


I..UK
II..US
__a. only I
__b. only II
__c. either I and II
**d. neither I or II
CHAPTER 12

Learning Objective #1: Discuss important factors influencing the quality of the
accounting and auditing profession

1. Which of the following is not a key dimension to auditing?


__a. a competent, independent person.
__b. quantifiable and verifiable information.
__c. established criteria (auditing standards).
**d. the existence of a global auditing standards board that will harmonize auditing practices.

2. Which of the following is not an element of the quality of the auditing profession.
__a. reputation of the profession.
__b. the quality of the educational system.
__c. the certification process.
**d. the organization of the auditing firms.

3. The identity of a candidate for the auditing profession is important. For example,
__a. Mexico has a strict requirement that one must be a Mexican citizen or be fluent in Spanish in order to
practice in Mexico.
**b. the U.K. requires that candidates be a member of one of the Chartered Institutes or the Chartered
Association of Certified Accountants.
__c. France does not allow candidates from other EU member countries to practice in France.
__d. the Dutch are short on good accountants, so their requirements are not too strict.

4. In terms of the size of the profession,


__a. the Anglo-Saxon tradition generates the most accountants, but not the most per capita.
__b. the United States is the largest in the world in number of accountants and accountants per capita.
**c. the British do not have the most accountants in the world, but they have the most per capita.
__d. Japan is more similar to the Anglo-Saxon countries than Germany in terms of the number of
accountants per capita.

Learning Objective #2: Discuss the nature of global audit services and examine the
challenges of auditing across borders

5. Reciprocity in the accounting profession means that


**a. practitioners certified in one country should be allowed to practice in another country.
__b. the U.S. will grant reciprocity to accountants from Anglo-Saxon traditions, but not from other
countries.
__c. accountants are allowed to practice but not certify outside of their countries.
__d. audit reports should be accepted in different countries.
6. According to the reciprocity agreement between the United States and Canada,
__a. Canadian chartered accountants must pass the Uniform CPA exam in order to practice in the United
States.
__b. Canadians and Americans who are certified in their own country can practice in the other country by
registering with the proper accounting board and paying a one-time fee.
__c. any accountant, even one who is not certified in either the United States or Canada, can practice in the
other country by passing a special exam.
**d. a special exam has been developed which focuses on the differences between Canada and the United
States.

7. In terms of educational experience to become a certified accountant,


__a. the French rely on the apprenticeship approach.
**b. the Germans use university training as a prerequisite for certification.
__c. the Dutch do not rely very much on university training of accountants.
__d. the British have a dual approach that uses different styles of universities to train accountants.

8. The U.S. model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
**b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.

9. The British model of accounting education is like which of the following models?
**a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.

10. The German model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
**b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
__c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.

11. The Dutch model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
**c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.

12. The French model of accounting education is like which of the following models?
__a. Integrated system: the test of professional competence is preceded by an integrated education and
practical experience approach.
__b. Linear system: the test of professional competence is preceded by practical experience, which is
preceded by university training.
**c. Parallel system: the test of professional competence is preceded by either practical experienced which
follows university education or an integrated education and practical experience.
__d. All of the above.
Learning Objective #3: Describe the strategies of the global public accounting firms in
servicing clients worldwide

13. A major development in the global accounting firms in recent years has been the
__a. decision on the part of the largest firms to concentrate in specific geographic areas rather than attempt
to service all markets.
**b. merger of some of the largest accounting firms.
__c. slowdown in merger activity.
__d. all of the above.

14. Which of the following is not a major reason for the global expansion of public accounting firms?
__a. to service clients better.
__b. to provide a line of defense against global competitors.
__c. to increase the client base outside of the home market.
**d. to focus on the industrial instead of developing countries where the accounting tradition is already
well-established.

15. Which of the following is not a problem that public accounting firms face when the do business
overseas.
__a. restrictions on the use of the firm's name.
__b. restrictions on the scope of practice.
__c. tax discrimination.
**d. understanding the different audit statement formats.

16. Companies that switch from small or medium audit firms to more international auditors often give the
reason of
**a. the need to have one firm auditing all companies within one group
__b. better brand recognition
__c. superior low balling
__d. side payments

Learning Objective #4: Provide a comparative international analysis of audit


standards

17. With respect to accounting services, the General Agreement on Trade in Services (GATS)
__a. was enacted in the Uruguay Round of GATT negotiations, and it resulted in the free trade in
accounting services.
__b. efforts are being concentrated on tariff barriers to the cross-border trade in services.
__c. governments are all required to use the same reciprocity rules.
**d. wants to ensure that quality of service is not compromised.

18. Which of the following is true concerning the EU's 4th Directive?
__a. it is a source of audit requirements, standards and practices.
__b. it is a source of audit standards and practices but not audit requirements.
**c. it is a source of audit requirements but not standards and practices.
__d. it describes the format and content of the audit report.

19. With respect to auditors in the European Union,


__a. the 4th Directive states that accountants need to demonstrate education, examination and experience
qualifications in order to be able to practice.
**b. auditors in one country may be allowed to practice in another country under certain conditions.
__c. reciprocity is not extended.
__d. auditors are not allowed to engage in consulting due to concerns over independence.

20. Auditors are generally appointed by


**a. shareholders at the annual meeting
__b. local country government
__c. management
__d. UN

Learning Objective #5: Explain the role of the International Federation of


Accountants (IFAC) in harmonizing auditing standards worldwide

21. The IFAC is


**a. an organization of national professional accountancy organizations
__b. part of the OECD
__c. under control of FASB
__d. part of the UN

22. The IFAC has


__a. set for international development policy
**b. issued over 30 international standards on auditing
__c. issued numerous security regulations
__d. none of the above

23. The IFAC is active in all of the following areas except


__a. education
__b. ethics
**c. metric standards
__d. information technology

24. International auditing standards


__a. make it more difficult for developing countries to produce domestic auditing standards
__b. are principally generated by FASB
__c. are created and reviewed by G11 summits
**d. provide incentives to improve and extend the set of international accounting standards

Learning Objective #6: Review recent developments including the establishment of


the International Forum on Accountancy Development (IFAD)
25. Evidence of IFAC global effectiveness problems in enforcing audit standards is
**a. a restructuring plan
__b. the take-over of the duties by the OECD
__c. the take-over of the duties by court at the Hague
__d. SEC rejection of IAS standards

26. IFAC’s 2000 initiative is


__a. supposed to raise audit fees
**b. designed to raise global audit standards
__c. ease the tax collection problems on MNEs
__d. likely to increase Internet E-commerce

27. The IFAD was formed


__a. in order to improve Internet E-commerce
__b. so as to reduce the dependence on the SEC
**c. after the late 90’s Asian financial crisis
__d. to control dumping

28. The IFAD objectives include all of the following except


__a. Promote cooperation between governments, the accountancy, regulators, standard setters and capital
providers
__b. Contribute to a common strategy and framework of reference for accountancy development
__c. Assist in defining expectations as to how the accountancy profession should carry out its
responsibilities
**d. Develop near earth orbit commerce
CHAPTER 13

Learning Objective #1: Show how different organizational structures and


philosophies toward decision making and control in MNEs can influence the
information system that the firm establishes

1. A multidomestic strategy
**a. allows each subsidiary abroad to operate relatively independently of other subsidiaries.
__b. occurs when an MNE pits itself against competitors on a global basis.
__c. results in highly centralized decision-making.
__d. does not allow products to vary from one market to another.

2. A global strategy
__a. involves the development of global markets, market by market.
**b. involves the integration of activities worldwide.
__c. is not able to capitalize on firm-specific advantages as easily as does the multidomestic strategy.
__d. generally results in each subsidiary establishing its own accounting system but sending the
information back to the home office for global consolidation.

3. Structural and formal mechanisms include


__a. task forces and meetings that cut across organizational lines.
__b. networking and personal contacts.
__c. the socialization of individuals in the organization.
**d. organizational structure.

4. Organizational structure is part of


__a. informal control mechanisms.
**b. structural mechanisms.
__c. organizational culture.
__d. lateral relations.

5. Organizational culture is part of the


__a. structural mechanisms of control.
**b. informal control mechanisms.
__c. centralization vs. decentralization dilemma.
__d. organizational structure dimension.

6. As firms become more global, they tend to rely more on


__a. organizational structure to control operations.
__b. the decentralization of decision making in order to control foreign operations.
__c. informal accounting procedures.
**d. lateral relations and informal communication.

7. The process of socialization that crosses national lines is an example of


__a. structural mechanisms.
**b. informal mechanisms.
__c. organizational structure.
__d. formalization of policies.

8. A geographic organizational structure works best when


**a. there are narrow, relatively simple product lines.
__b. when product lines are rapidly changing.
__c. product expertise is more important than country expertise.
__d. the company needs economies of scale.

9. Which of the following is not consistent with establishing a product line focus in the MNEs
organizational structure?
__a. The product line is wide.
__b. Products are subject to rapid technological change.
__c. Production and logistics need to be coordinated.
**d. Country and regional expertise is of prime importance.

10. The need to achieve economies of scale is an example of the forces for
__a. worldwide innovation
__b. local differentiation.
**c. global integration.
__d. lateral relations.

11. Responsiveness to local conditions results in


__a. global integration.
**b. differentiation.
__c. worldwide innovation.
__d. a common corporate culture.

12. A decentralized, independent strategy is symbolic of a


**a. multidomestic strategy.
__b. global strategy.
__c. transnational strategy.
__d. geocentric strategy.

13. A centralized, globally scaled strategy is symbolic of a


__a. multidomestic strategy.
**b. global strategy.
__c. transnational strategy.
__d. geocentric strategy.

14. A strategy where corporate assets are dispersed, interdependent and specialized is symbolic of a
__a. multidomestic strategy.
__b. global strategy.
**c. transnational strategy.
__d. geocentric strategy.

Learning Objective #2: Identify key aspects of a global information system

15. Economies of scale result in


__a. worldwide innovation.
__b. local differentiation.
**c. global integration.
__d. lateral relations.

16. The movement of business data electronically between or within firms in a structured, computer-
processable data format is known as
__a. decentralization.
__b. globalization.
**c. Electronic Data Interchange.
__d. routine transfers.

17. The knowledge-flows framework for an integrated player results in


**a. reciprocal flows.
__b. sequential flows from the subsidiary to the parent but not vice-versa.
__c. routine but not non-routine flows.
__d. lateral relations.

18. If a subsidiary in a global company is considered to be an integrated player,


__a. it tends to receive but not share knowledge.
**b. its information flows would be reciprocal.
__c. it is probably organized around geographic lines of business.
__d. it would be multidomestic rather than transnational.

19. For global innovators,


__a. information flows are reciprocal rather than sequential.
__b. information flows are sequential from the parent company to the global innovator.
**c. information flows are sequential from the global innovator to the parent company.
__d. information flows are relatively infrequent and unimportant.

20. Which of the following reflects information flows of a global innovator?


__a. High outflow of knowledge from the local subsidiary to the rest of the corporation and high inflow of
knowledge from the rest of the corporation to the local subsidiary.
**b. High outflows and low inflows.
__c. Low outflows and high inflows.
__d. High outflows and high inflows.
Learning Objective #3: Discuss how the international business environment influences
the internal audit function and show how internal auditing is an important element in
the control process

21. When a firm shifts from a multidomestic to a global organization, it


**a. centralizes many aspects of the accounting function.
__b. eliminates any local accounting differences.
__c. decentralizes the accounting function in order to respond to local differences.
__d. decentralizes the accounting function in order help prepare timely and reliable financial data.

22. The value of centralizing the accounting function in an MNE is that it


__a. allows the firms to concentrate on its multidomestic nature.
__b. forces information flows to move from parent to subsidiary rather than vise-versa.
**c. causes management to establish reporting channels that are more comparable,
__d. none of the above.

23. Having product managers and geographic area coordinators get together to discuss strategy is an
example of
**a. lateral relations.
__b. developing corporate culture.
__c. formalizing rules.
__d. decentralizing decision making.

24. A major problem with the internal audit function as a control mechanism is that
__a. auditors cannot function if they do not know the local language.
**b. internal auditors need to understand Statement 52 in order to determine whether or not management is
determining the functional currency correctly.
__c. internal auditors must live in the local country where the audit is being performed in order to conduct
the audit properly.
__d. internal auditors must travel in order to maintain their independence.

25. Which of the following is not a problem of the internal audit function.
__a. Adapting to local business practices and customs.
__b. Dealing in foreign currencies.
__c. Language - working through interpreters.
**d. Dealing in checks drawn on banks in the foreign location.

Learning Objective #4: Examine the Foreign Corrupt Practices Act and its impact on
the internal control system of U.S.-based MNEs

26. The Foreign Corrupt Practices Act in the United States is designed to
__a. deal with bribery only.
**b. force companies to develop good internal control systems.
__c. eliminate payments to foreign governments.
__d. ensure that bribes are properly recorded on the company's books and records.
27. Bribes are made for all of the following reasons except
**a. get an independent auditor
__b. get an edge on competitors
__c. grease normal channels
__d. support the political process

28. In order to comply with the FCPA, a firm needs strong support form all of the following except
__a. management
__b. internal auditors
**c. stockholders
__d. external auditors

29. The FCPA requires reasonable assurances that


__a. debits equal credits
__b. no accounts are misclassified
__c. transfer prices are a economic arm’s length transactions
**d. transactions are executed in accordance with management’s authorization
CHAPTER 14

Learning Objective #1: Identify the major stages in the strategic control process

1. Benchmarking performance based on global competitors is sound practice, because since it is easy to get
good data on them.
__a. True.
**b. False

2. A strategic control process in a MNE


__a. involves a one-directional flow of products, capital and knowledge.
**b. should be formal but not necessarily rigid.
__c. will not work if the firm cannot get good data on global competitors.
__d. all of the above.

3. Global innovators and integrated players tend to rely more on outcome controls than on behavioral
controls.
__a. True
**b. False

4. Implementors need much more autonomy than do global innovators.


__a. True
**b. False

Learning Objective #2: Describe different ways to evaluate the performance of


managers and companies in the international context

5. Which of the following is not true concerning the performance evaluation of global innovators.
__a. They need relatively flexible performance evaluation systems.
__b.They rely more on behavioral controls.
**c. The rely on outcome controls.
__d. They need more autonomy than do implementors.

6.Which of the following is true concerning the performance evaluation of implementors.


__a. They need relatively flexible performance evaluation systems.
__b. They rely more on behavioral controls.
**c. The rely on outcome controls.
__d. They need more autonomy than do global innovators.

7. In order to maximize global profits, foreign subsidiaries should always be established as profit centers.
__a. True
**b. False
8. The international environment and global strategy of the MNE are very influential in the budgeting
process in that
__a. the value of budgets is equally accepted worldwide due to the increased flow of information about
evaluation techniques.
**b. transfer prices can affect profitability and, therefore, performance evaluation.
__c. managers in countries with wide variations in inflation rates usually can predict those rate variations
for budgeting purposes.
__d. all of the above.

9. Which of the following does not accurately describe economic value added.
__a. It is after-tax operating profit minus the total annual cost of capital.
__b. It includes the cost of debt and the cost of equity.
__c. It is a measure of the value added or depleted from shareholder value in one period.
**d. It requires that different costs of capital be used in different country settings.

Learning Objective #3: Present the results of different studies on performance


evaluation by U.S. and non-U.S. firms

10. Bailes and Assada report differences between performance measurement by Japanese and American
companies
**a. Japanese most frequently use sales and Americans most frequently use return on investment
__b. Japanese most frequently use return on investment and Americans most frequently use sales
__c. Japanese most frequently use asset turnover and Americans most frequently use profit minus
corporate costs
__d. Japanese most frequently use market share and Americans most frequently use profit minus corporate
costs

11. Based on most surveys of U.S.-based MNE performance evaluation systems,


__a. completely separate performance evaluation systems are used for foreign operations.
**b. return on investment is the most widely utilized performance evaluation measure.
__c. capital and operating budgets are not very useful due to currency differences.
__d. very few companies use local currency information for performance evaluation.

12. According to the Robbins and Stobaugh study of performance evaluation systems of MNEs,
__a. intangible assets considered in the investment decision are usually covered in performance evaluation
systems.
__b. foreign and domestic subsidiaries are judged on different bases.
**c. ROI is the most utilized evaluation measure.
__d. all of the companies used local currency rather than dollar budgets.

13. According to the Abdallah and Keller study on performance evaluation systems of MNEs,
**a. budgets were equally important as a measure of foreign subsidiary and foreign subsidiary
management performance.
__b. ROI is no longer an important technique of evaluating performance.
__c. Companies tend to evaluate foreign subsidiary performance but not performance of foreign
management.
__d. foreign currency is not a critical element in performance evaluation of MNEs due to widespread use
of the current rate method.

Learning Objective #4: Discuss how foreign currencies impact on the budgeting and
performance evaluation process

14. In the budgeting process,


__a. the local currency should be used to set the budget and monitor performance.
__b. the local currency budget should be translated into dollars at the projected exchange rate.
__c. actual results should be translated into dollars at the same rate at which the budget was set.
**d. translated budgets allow management to look at the same numbers that shareholders use.

15. There have been few good studies on the use of local currency versus parent currency in establishing
budgets. However, the Appleyard study of a small sample of British firms found that
**a. most firms set their budgets in local currency.
__b. most firms set their budgets in sterling.
__c. most firms set their budgets in both sterling and the local currency.
__d. most firms set their budgets in the local currency, although all of them saw the final results in sterling.

16. The local currency should be used for performance evaluation purposes if
**a. the MNE leaves considerable autonomy to the foreign operation.
__b. sales are made in the foreign currency.
__c. the foreign currency is relatively stable.
__d. the local manager is given authority and responsibility to hedge foreign exchange differences.

17. Which of the following Lessard/Lorange translation approaches results in a foreign exchange variance?
__a. setting the budget and monitoring performance at the rate in effect when the budget was set.
__b. setting the budget and monitoring performance at the projected rate.
**c. setting the budget at the projected rate and monitoring performance at the actual rate.
__d. updating the budget at the end of period rate, and tracking performance at the end of period rate.

18. Which of the following Lessard/Lorange translation approaches results in a foreign exchange variance?
__a. A-1
__b. P-2
**c. P-3
__d. E-3

19. Which of the following Lessard/Lorange translation approaches forces management to predict the
future?
__a. setting the budget and tracking performance at the actual rate at the time of the budget.
__b. setting the budget at the actual rate at the time of the budget and tracking performance at the actual rate
at the end of the period.
**c. setting the budget at the projected rate and tracking performance at the rate at the end of the period.
__d. updating the budget for the end of period rate and tracking performance at the end of period rate.

20. Which of the following Lessard/Lorange translation approaches forces management to predict the
future?
__a. A-1
__b. A-3
**c. P-3
__d. E-3

21. When comparing Japanese and U.S. firms for budget purposes,
__a. Japanese firms take much longer to prepare budgets.
__b. U.S. managers are less likely to be evaluated by the budgets.
__c. Japanese managers are more likely to have their salaries and bonuses affected by budgets.
**d. Japanese managers are more likely to use budget variances to recognize problems on a timely basis.

Learning Objective #5: Review the problems involved with setting intra-corporate
transfer price

22. A major advantage of offshore production is that


__a. labor is higher offshore.
**b. the overall cost structure in a low-wage country is lower.
__c. companies can get better quality offshore than they can in their domestic market.
__d. foreign exchange risk can be eliminated.

23. Which of the following is true concerning transfer pricing practices?


__a. The U.S. is a relatively rigorous country in terms of transfer pricing, but British are relatively lax.
__b. U.S. tax law does not allow U.S. firms to use arms-length prices.
__c. U.S. companies can apply for an Advanced Determination Ruling on their transfer pricing policies,
except for transfers to developing countries.
**d. The United States is not the only country to use Advanced Determination Rulings.

24. If a U.S. parent is shipping inventory to its Chinese subsidiary at an arbitrarily high transfer price,
__a. the U.S. parent will show a lower pre-tax profit.
__b. the Chinese government will collect relatively higher income taxes.
__c. the U.S. government will collect relatively high import tariffs.
**d. the Chinese subsidiary will show relatively lower profits.

25. If a U.S. parent is shipping inventory to its Mexican subsidiary at an arbitrarily low transfer price,
__a. the U.S. parent will show a higher pre-tax profit.
**b. the Mexican government will collect relatively higher income taxes.
__c. the Mexican government will collect relatively high import tariffs.
__d. the Mexican subsidiary will show relatively lower profits.

26. If the Brazilian subsidiary of a U.S. company ships components to its U.S. parent at an arbitrarily high
transfer price,
__a. the U.S. parent will show a higher pre-tax profit.
__b. the Brazilian government will collect relatively lower income taxes.
**c. U.S. Customs will collect higher tariffs.
__d. the Brazilian subsidiary will show relatively lower profits.

27. Market-driven standards are more appropriate for products


__a. that are in the star and cash cow phases of the product cycle.
__b. in a mature, commodity business.
__c. manufactured in Japan but not Europe.
**d. in a firm following a product differentiation strategy in a fast-growing, fast-changing business.

Learning Objective #6: Analyze costing issues including target costing

28. According to standard costing,


**a. quality and cost standards are established as benchmarks for performance.
__b. engineering estimates are not used due to their inaccuracies.
__c. variances are not determined due to the looseness of the standards.
__d. market price is based on market conditions rather than by the standard cost plus desired markup.

29. In target costing,


__a. the target cost is the difference between the selling price and the profit margin.
__b. prices are set on cost plus a normal profit margin.
__c. the target cost is the standard cost.
**d. the target cost is generally somewhere between the standard cost and the projected selling price less
the target profit margin.

30. Which of the following does not accurately reflect target costing?
**a. market price is based on the standard cost plus a desired markup.
__b. the projected selling price is based on the projected market price of the product.
__c. the target profit margin is consistent with the firm's long-term strategy.
__d. it is similar to an ideal standard cost system.

31. Which of the following accurately reflects target costing?


__a. Target costing is based on engineering standards.
__b. Foreign suppliers like to work with Japanese companies, because the Japanese firms allow the
suppliers to increase prices due to inflation.
**c. Japanese firms assume that foreign suppliers can push their costs down over time.
__d. Standard costing is more appropriate for target costing in industries where there is rapid innovation.

32. According to the target costing system employed by Toyota Motor Company (TMC) in the United
Kingdom (TMUK),
__a. the target cost is determined by TMC without any input by TMUK, because TMUK tends to
underestimate its potential performance.
__b. the target cost in the U.K. is the same as in Japan in order to make comparisons easier.
**c. TMUK works with European suppliers to reduce their prices to help TMUK achieve its target cost.
__d. TMUK personnel are not allowed to visit supplier plants to help them become more efficient because
of work rules in the EU.

33. A difference between TQM and AQL is that


**a. TQM is a proactive strategy, whereas AQL is a reactive strategy.
__b. TQM always results in cheaper parts.
__c. AQL's major goal is zero defects.
__d. under TQM, the production process is designed to keep defects at a tolerable level.

34. Which of the following accurately reflects the concept of quality?


**a. TQM assumes zero defects.
__b. According to the U.S. concept of quality, a product should meet or exceed engineering standards.
__c. The Japanese feel that the product must be so good that the customer wouldn't think of buying
anything else.
__d. Zero defects is a production rather than a quality concept.

35. A major difference between Japanese and U.S. cost accounting strategies is that
__a. U.S. companies are not permitted to allocate to foreign operations overhead generated in the United
States.
**b. Japanese companies use cost accounting to support and reinforce their manufacturing strategies.
__c. Japanese companies prefer to use direct labor hours as cost drivers, whereas U.S. companies prefer to
use machine hours.
__d. for U.S. companies, prices are usually a function of costs but not market conditions.

36. Something that determines the creation (and thus the allocation) of overhead is known as
__a. strategic costing.
__b. target costing.
**c. cost driver.
__d. market-driven product costing.

Learning Objective #7: Examine the major issues and trends in performance
evaluation

37. Return on investment is a popular performance evaluation technique of MNEs, because


__a. it takes into consideration transfer pricing policies.
**b. it allows the parent company to compare operations more easily.
__c. it is an accurate indicator of currency differences.
d. it allows the MNEs to focus on market share.

38. Which of the following describe some of the national practices in performance evaluation techniques.
__a. British firms rely more on ROI and sales growth.
__b. U.S. firms rely more on budgets than do British firms.
**c. Japanese firms rely more on sales growth and market share than do U.S. firms.
__d. All of the above.
39. In transferring the domestic performance evaluation system into the international environment, MNEs
__a. are creating a more expensive performance evaluation system.
**b. miss significant foreign events that could affect performance.
__c. are taking into consideration that there are strategic differences in subsidiaries.
__d. are sacrificing comparability for understandability.

40. A performance evaluation tool that measures after-tax operating profit minus the total annual cost of
capital is
__a. return on investment.
__b. return on assets.
**c. economic value added.
__d. residual income.
CHAPTER 15
Learning Objective #1: Identify the major factors that influence the different tax
systems used worldwide

1. The concept of equity means that


**a. under similar circumstances, taxpayers should pay the same tax.
__b. the tax effect should not have an impact on business decisions.
__c. assets and liabilities should not be subject to taxation, only increases in equity.
__d. foreign and domestic source income should always be taxed at the same rate.

2. The concept of neutrality means that


__a. under similar circumstances, taxpayers should pay the same tax.
**b. the tax effect should not have an impact on business decisions.
__c. assets and liabilities should not be subject to taxation, only increases in equity.
__d. foreign and domestic source income should always be taxed at the same rate.

3. The concept where under similar circumstances, taxpayers should pay the same tax is
__a. double taxation.
__b. a tax incentive.
**c. equity.
__d. neutrality.

4. The concept where the tax effect should not have an impact on business decisions is
__a. double taxation.
__b. a tax incentive.
__c. equity.
**d. neutrality.

5. The concept which assets that Hong Kong should only tax income that is earned in Hong is know as the
__a. worldwide approach.
**b. territorial approach.
__c. multidomestic approach.
__d. transnational approach.

6. The value added tax is a (an)


__a. corporate income tax.
__b. withholding tax.
**c. indirect tax.
__d. tax credit.

7. A tax that is applied at each stage of the production process is known as a


__a. corporate income tax.
__b. withholding tax.
**c. value-added tax.
__d. sales tax.
8. Assume that a wholesaler purchased goods from a manufacturer was £34.50 (gross price), the VAT is
15%, and the VAT paid by the manufacturer was £4.50. The markup on the merchandise is £10. What is
the net amount of VAT paid to Customs and Excise under the British system of computing VAT?
**a. £1.5
__b. £5.0
__c. £46
__d. none of the above.

Learning Objective #2: Discuss the role that the tax credit and tax treaties play in
avoiding double taxation when firms earn income in different countries

9. The taxation of both domestic and foreign source income is known as


__a. double taxation.
**b. the worldwide approach.
__c. effective vs. statutory.
__d. a tax incentive.

10. Which of the following is true concerning tax harmonization in the European Union?
__a. The EU has harmonized rates and categories in the value-added tax.
__b. The EU requires the use of the split rate form of tax system.
**c. Tax rates have been coming down in the EU.
__d. Although tax rates have not been harmonized, taxes bases and tax systems have been.

11. In order the minimize the effects of double taxation, the U.S.
**a. permits the use of a tax credit.
__b. allows firms to use the split rate or imputation tax system.
__c. allows MNEs to use the lower of the U.S. or foreign tax rate.
__d. requires firms to deduct foreign income taxes paid.

12. According to the tax credit,


__a. companies are allowed to defer the recognition of income until a dividend has been declared by the
foreign corporation.
__b. income can be excluded from U.S. taxation.
**c. firms can reduce their tax liability by the amount of income taxes paid to foreign governments.
__d. credits can be given for active but not passive income.

Learning Objective #3: Explain how income from controlled foreign corporations may
be taxed differently than income from noncontrolled foreign corporations

13. The principle whereby foreign source income is not taxed until received by the U.S. shareholder is
known as
__a. the tax credit.
**b. deferral.
__c. a tax treaty.
__d. double taxation.

14. Which of the following is true concerning taxable earnings of foreign corporations according to the
U.S. IRS?
__a. The temporal method must be used to translate financial statements into dollars.
__b. Active income of a CFC is not recognized until distributed as a dividend.
__c. Passive income does not need to be recognized.
**d. Passive income of a CFC is taxed after being translated into dollars at the average exchange rate.

15. All of the following foreign corporations derive more than 50 percent of their income from subpart F
income. Which of them must recognize the subpart F income in the year in which it is earned? The
percentage ownership of each shareholder is provided in parenthesis.
**a. U.S. shareholder A (10), Foreign shareholder B (20), U.S. shareholder C (35), U.S. shareholder D (5),
Foreign shareholder E (15), U.S. shareholder F (15)
__b. U.S. shareholder A (5), Foreign shareholder B (40), U.S. shareholder C (15), U.S. shareholder D (15),
Foreign shareholder E (10), U.S. shareholder F (15)
__c. U.S. shareholder A (50), Foreign shareholder B (20), U.S. shareholder C (5), U.S. shareholder D (5),
Foreign shareholder E (15), U.S. shareholder F (5)
__d. all of the above since subpart F income exceeds 50 percent of total.

16. Subpart F income


__a. is active income if earned in low-tax countries.
__b. is not eligible for the deferral principle.
**c. is eligible for the tax credit.
__d. requires that income be earned from the sale or purchase of goods produced inside the country where
the tax haven corporation is located.

Learning Objective #4: Compare the tax treatment and book treatment of foreign
exchange gains and losses due to foreign currency transactions and the translation of
foreign currency financial statements

17. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary does not declare a dividend, how
much of its income is included in U.S. taxable income?
__a. $100,000
__b. $ 60,000
__c. $ 39,600
**d. nothing.

18. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, how
much of its income is included in U.S. taxable income?
**a. $100,000
__b. $ 60,000
__c. $ 39,600
__d. nothing.

19. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is
the amount of its direct and deemed direct tax credit?
__a. $40,000
__b. $ 3,000
**c. $43,000
__d. $34,000

20. Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated
from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent,
and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is
the maximum allowable tax credit according to U.S. tax law?
__a. $40,000
__b. $ 3,000
__c. $43,000
**d. $34,000

21. According to the U.S. IRS, which of the following is true concerning the taxation of gains and losses
on foreign currency transactions?
__a. Gains are recognized when the financial obligation has been settled, but losses are recognized
immediately.
__b. Losses are recognized when the financial obligation has been settled, but gains are recognized
immediately.
__c. Gains and losses are recognized immediately.
**d. Gains and losses are recognized when the financial obligation has been settled.
22. On January 1, Multicorp, a U.S. firm, sells £200,000 of merchandise on account to an importer in
Britain with payment due on February 15. The relevant exchange rates are as follows:
January 1 $1.6260
January 31 $1.5995
February 15 $1.5900
February 28 $1.5855

What would be the gain or loss for U.S. tax purposes on February 15?
__a. No gain or loss would be recognized.
__b. $5,300 loss
**c. $7,200 loss
__d. $1,900 loss

Learning Objective #5: Discuss the tax dimensions of intracorporate transfer pricing

23. The price set on goods and services transferred between a parent and subsidiary is known as a (an)
**a. transfer price.
__b. arms-length price.
__c. allocation price.
__d. none of the above.

24. If the French subsidiary of a U.S. company ships components to its U.S. parent at an arbitrarily low
transfer price,
__a. the French subsidiary will show relatively high profits.
**b. the French government will collect relatively low corporate income tax.
__c. U.S. Customs will collect relatively high tariffs.
__d. the U.S. parent will show lower pre-tax profits.

25. The most important influence on transfer pricing decisions is


__a. management of cash flows.
**b. market conditions in the foreign country.
__c. exchange controls.
__d. U.S. export incentives.

26. According to changes in the U.S. tax laws related to transfer pricing,
__a. the level of complexity and documentation has been lowered significantly.
__b. companies will have less flexibility in determining transfer pricing practices.
**c. companies have to gather a lot of information from the third-party marketplace to justify their transfer
pricing practices.
__d. the IRS is not concerned with analyzing which transfer pricing method is the best method.

27. In the allocation of overhead in an MNE,


**a. U.S. tax law permits the allocation of U.S.-overhead to foreign source income.
__b. U.S. tax law allows firms to allocate overhead based on manufacturing strategy.
__c. Japanese have separated overhead allocation and corporate goals in order to drive down costs.
__d. Japanese managers use allocation techniques primarily to measure costs.

26. Which of the following is the correct transfer pricing rule that can be followed by an FSC?
__a. All transfer prices must be arm's-length prices.
**b. Special rules allow the exporter to sell goods or services to the FSC at less than an arm's-length price.
__c. Special rules apply for FSC income that arises from export services performed inside the United
States for its parent companies.
__d. Special rules apply only for income that is exempt from U.S. taxation.

Learning Objective #6: Illustrate how international tax planning can influence cash
flows

27. Which of the following accurately describes how the U.S. taxes foreign branch earnings.
__a. Earnings that have been distributed to the home office are taxable, but earnings that are retained in the
foreign location are not.
__b. Neither earnings distributed to the home office nor earnings retained in the foreign location are taxed
in the U.S. due to the tax credit.
**c. Earnings distributed to the home office are translated at the exchange rate in effect on the date of the
transfer.
__d. Profits not distributed as earnings are translated at the year-end exchange rate.

28. According to the Foreign Sales Corporation Act,


__a. the Domestic International Sales Corporation (DSC) is no longer permitted.
__b. FSCs must be owned by foreign corporations to get the tax break.
__c. all FSC income is exempted from U.S. tax.
**d. the FSC must be incorporated in a foreign country or U.S. possession.

29. Which of the following is not true concerning the taxation of expatriate income?
**a. The taxpayer must have been a resident outside of the United States for an uninterrupted period that
includes less than an entire taxable year or less than at least 330 full days during any twelve
consecutive months.
__b. The taxpayer can exclude from U.S. taxation the lesser of the individual's foreign earned income or
$70,000.
__c. The $70,000 exclusion is an increase from the prior year.
__d. A housing allowance is permitted.

30. In choosing the correct entry strategy in the context of the tax environment,
__a. exports are typically not affected by tax rules since they are made from the home country anyway.
**b. it is best to organize a foreign branch in the early years if operations are not profitable.
__c. it is best to organize a foreign subsidiary in the early years if operations are not profitable.
__d. foreign tax incentives are not useful, because they are typically offset by home country regulations.