According to FASB Statement #52, a self-sustaining, autonomous foreign subsidiary

(a)     Has few transactions with the parent

(b)    Only provides sustainable cash flows to the parent

(c)     Has the U.S. dollar as its functional currency

(d)    Should not be consolidated

(e)     Should be disclosed as a separate geographic region

(a)     Has few transactions with the parent

      A piece of land was purchased by a foreign subsidiary on November 20, 2005 for LC (local currency) 2,200. The exchange rate on November 20, 2005 was 1LC=$1.3. On December 31, 2005 (the U.S. parent company’s year-end) the exchange rate was 1LC=$1.4. If the foreign subsidiary is considered to be autonomous under the requirements of FASB Statement # 52, at what U.S. dollar amount will the land be included in the consolidated financial statements at December 31, 2005?

(a)     $2,860

(b)    $1,692

(c)     $3,080

(d)    $1,571

(e)     $2,970

(c)     $3,080

     Assume the same facts as in Question 2, except that the foreign subsidiary is considered to be integral under the requirements of FASB #52. At what U.S. dollar amount will the land be included in the consolidated financial statements at December 31, 1993?

(a)     $1,571

(b)    $1,692

(c)     $2,860

(d)    $2,970

(e)     $3,080

(c)     $2,860

     The reasons of exchange rates change include

(a)     Relative interest rates only

(b)    Relative interest rates and inflation rates, balance of payments, and political factors

(c)     Relative inflation rates only

(d)    Relative inflation rates and interest rates

(e)     Political factors only

(b)    Relative interest rates and inflation rates, balance of payments, and political factors

      Using historical rates to translate the financial statements of a foreign subsidiary poses the following problem

(a)     The translated balance sheet no longer balances

(b)    It is incompatible with general price level financial statements presented as supplemental information

(c)     It is compatible with historical cost

(d)    It is incompatible with historical cost financial statements

(e)     No problem is posed

(a)     The translated balance sheet no longer balances

      Current U.S. accounting practice allows managements to designate foreign subsidiaries as “self-sustaining”. In turn such subsidiaries’ home currencies are the “functional currencies” for pusposes of preparing their financial statements for consolidation. When this is done

(a)     Translation effects are reflected in stockholders’ equity

(b)    Translation effects are eliminated from consolidated earnings

(c)     Only translation gains are reported separately

(d)    Foreign currency amounts are not translated at all

(e)     The temporal method of translation applies

(a)     Translation effects are reflected in stockholders’ equity

      Even though a company is decentralized, it is apt to centralize which following function?

(a)     Marketing

(b)    Research and development

(c)     Production

(d)    Accounting

(e)     Processing

(b)    Research and development

      When a MNC allow its foreign managers autonomy and evaluates them on the basis of individualized, local standards, that MNC is said to reflect which attitude?

(a)     Ethnocentric

(b)    Polycentric

(c)     Unicentric

(d)    Geocentric

(e)     Eccentric

(b)    Polycentric

      A polycentric attitude is most consistent with which organizational structure?

(a)     Centralized

(b)    Unified

(c)     Multinational

(d)    Decentralized

(e)     Modular

(d)    Decentralized

     Which of the following statements about multinational corporations is true?

(a)     They tend to centralize control over those functions critical for success and decentralize those that are less critical

(b)    An ethnocentric MNC is likely to be centralized

(c)     Decentralized decision making is consistent with a geocentric attitude toward multinational business

(d)    All of the above

(e)     None of the above

(d)    All of the above

     Headquarters’ attitude toward multinational business policies affects both the organizational structure and the control function of the MNC. Which statement is correct?

(a)     The geocentric attitude focuses on worldwide objectives

(b)    The ethnocentric attitude focuses on the host country

(c)     The polycentric attitude focuses on the home country

(d)    The geocentric attitude focuses on the host country

(e)     None of the above

(a)     The geocentric attitude focuses on worldwide objectives

      The transnational company of tomorrow must

(a)     be extremely centralize to survive

(b)    be able to respond to both national and local differences, retaining local flexibility while achieving global integration

(c)     exhibit a polycentric attitude toward business in order to survive

(d)    exhibit an ethnocentric attitude toward business in order to survive

(e)     operate as a decentralized unit in order to survive

(b)    be able to respond to both national and local differences, retaining local flexibility while achieving global integration

      Which of the following factors affects the operating and financial risk of a foreign environment?

(a)     The stability of a country’s government

(b)    The stability of a country’s currency

(c)     The stability of a country’s labor force

(d)    All of the above

(e)     None of the above

(d)    All of the above

      Which of the following is true about communication within a MNC?

(a)     Communication from corporate headquarters to foreign subsidiary is more important than communication from foreign subsidiary to corporate headquarters

(b)    It is important that all foreign subsidiaries use comparable accounting practices in communicating their results to corporate headquarters

(c)     It is important that the number of reports communicated from a foreign subsidiary to corporate headquarters be equal to the number of reports communicated from corporate headquarters to the foreign subsidiary

(d)    Corporate headquarters can increase its control over foreign subsidiaries by communicating less information to the subsidiaries

(e)     Corporate headquarters can increase its control over foreign subsidiaries by communicating more information to the subsidiaries

(b)    It is important that all foreign subsidiaries use comparable accounting practices in communicating their results to corporate headquarters

      Which of the following is done in the environmental assessment phase of the MNC management control system?

(a)     Assess the strengths and weaknesses of each foreign subsidiary

(b)    Formalize the budgets for each foreign subsidiary

(c)     Select where products will be produced

(d)    Compare actual with budgeted performances

(e)     Evaluate risks of expropriations and political instability

(e)     Evaluate risks of expropriations and political instability

      An effective management control system should

(a)     Enhance corporation goal congruence across domestic subsidiaries but not across foreign

(b)    Fully communicate projections

(c)     Distort the communication of actual results

(d)    Provide useful information to subsidiaries but not headquarters

(e)     Keep all information secret from the subsidiaries

(b)    Fully communicate projections

      The ideal of corporate goal congruence means:

(a)     New environmental developments are incorporated into the corporation’s goals and objectives

(b)    The management control system is strictly separated from the strategic planning process

(c)     Independent outside consultants advise what desirable goals and objectives should be

(d)    Everyone in the organization is operating on the same wavelength

(d)    Everyone in the organization is operating on the same wavelength

    Operating budgets for foreign subsidiaries should be:

(a)     Developed in terms of local currencies

(b)    Developed in terms of the headquarters country currency

(c)     Set more tightly than for domestic subsidiaries

(d)    Proposed by headquarters staff

(e)     Approved by local government authorities

(a)     Developed in terms of local currencies

      If a projected exchange rate is used to develop a budget and this same rate is used to track the results, then

(a)     You have held the subsidiary manager accountable for unexpected exchange rate fluctuations

(b)    Only the impact of changes in the local environment fall on the subsidiary manager

(c)     This will result in the subsidiary manager exhibiting dysfunctional behavior

(d)    The subsidiary manager will pad the budget to protect his/her results

(e)     The subsidiary manager will feel unfairly treated

(b)    Only the impact of changes in the local environment fall on the subsidiary manager

      Headquarters requires the manager of Foreign Subsidiary A to buy component parts from Foreign Subsidiary B at a price predetermined by headquarters. In this situation it is more reasonable to hold the manager of Foreign Subsidiary A responsible for

(a)     Revenues

(b)    Cost of good sold

(c)     Gross profit

(d)    Net income

(e)     Total assets

(a)     Revenues

      The manager of a foreign subsidiary operates with complete autonomy. In this situation, it is reasonable to evaluate the manager on which of the following?

(a)     Revenues

(b)    Costs

(c)     Net income

(d)    Return on investment

(e)     All of the above

(e)     All of the above

      Which of the following features should be included in designing a performance evaluation system for a multinational corporation?

(a)     Subsidiary mangers should participate in establishing subsidiary goals

(b)    To avoid confusion, a single measure of performance should be used

(c)     Evaluating the performance of the subsidiary should be identical to evaluating the performance of the manager

(d)    Evaluations of foreign subsidiary managers should ignore the environments in which they operate

(e)     Return on investment is an appropriate measure of performance when foreign subsidiary managers lack autonomy

(a)     Subsidiary mangers should participate in establishing subsidiary goals

      Which of the following statements about translation is true?

(a)     Translation does not change the monetary unit in the financial statements of foreign subsidiaries from that of foreign money to U.S. dollars

(b)    This is a measurement conversion process, and changes the accounting principles used in preparing the financial statements

(c)     Translation is necessary to evaluate the return produced by the dollar investment of the U.S. company

(d)    Translation results in using several units of measure in the consolidated financial statements

(e)     None of the above

(c)     Translation is necessary to evaluate the return produced by the dollar investment of the U.S. company

      Which is the most frequently used indicator of internal performance evaluation by MNC international division executives?

(a)     Employee turnover

(b)    Financial ratios

(c)     Return on investment

(d)    Cash flow potential

(e)     Profit

(e)     Profit

      All of the following are examples of uncontrollable costs that might be allocated to foreign subsidiaries except

(a)     Royalties

(b)    Interest

(c)     Taxes

(d)    Exchange gains and losses

(e)     Cost of good sold

(e)     Cost of good sold

      Compared with U.S. auditing, which statement is incorrect?

(a)     There are fewer audit working papers prepared in Japan

(b)    There are fewer lawsuits in Japan involving auditors

(c)     Japanese auditors spend more hours planning an engagement than American auditors

(d)    It is customary to give expensive gifts and social relationships with business clients in Japan

(e)     All of the above are incorrect

(c)     Japanese auditors spend more hours planning an engagement than American auditors

      A MNC has two subsidiaries – Subsidiary A, located in Country A, and Subsidiary B, located in Country B. Subsidiary A sells its entire output to Subsidiary B at an agreed upon transfer price. Raising the transfer price

(a)     Is a way to shift income out of Subsidiary A to Subsidiary B

(b)    Would reduce the import duties paid to country B

(c)     Should be considered if Country B is less stable than Country A

(d)    All of the above

(e)     None of the above

(c)     Should be considered if Country B is less stable than Country A

      MNC headquarter management may have trouble evaluating a foreign subsidiary manager’s performance because

(a)     Top management is not likely to understand all of the peculiarities of each foreign operating environment

(b)    The operating environment is similar to the home countries, but the climate is different

(c)     Of extreme geographic proximity

(d)    Of a lack of funds to educate headquarters’ management 

(e)     Of a lack of interest in the foreign subsidiary

(a)     Top management is not likely to understand all of the peculiarities of each foreign operating environment

      MNCs regularly engage in transfer pricing. A transfer price is the

(a)     Price a moving company chargers for transferring an executive family from Country A to Country B

(b)    Markup of sale prices when prices rise

(c)     Amount of money charge when goods or services are exchanged between various organizational units of the MNC

(d)    Arm’s-length market price when you buy (transfer) something from a supplier

(e)     Price taxing authorities substitute for real market prices

(c)     Amount of money charge when goods or services are exchanged between various organizational units of the MNC

      Which of the following does not mitigate the effect of double taxation?

(a)     Tax haven

(b)    Controlled foreign corporation

(c)     Tax treaty

(d)    Tax avoidance

(e)     Transfer pricing

(b)    Controlled foreign corporation

      A country fitting the definition of a tax haven is

(a)     The United States

(b)    Germany

(c)     Hong Kong

(d)    Cayman Islands

(e)     Japan

(d)    Cayman Islands

     Which of the following best describes the current approach to the global harmonization of accounting and financial reporting?

(a)     International accounting standards serve as a benchmark that can be adapted to the specific needs of a company or country

(b)    International accounting standards are achieving universal acceptance through political pressures

(c)     International accounting standards are required to be followed by internationally active corporations

(d)    International accounting standards are required to be followed by corporations whose shares are listed on international stock exchanges

(e)     Active efforts to establish international accounting standards are not very effective at present

(a)     International accounting standards serve as a benchmark that can be adapted to the specific needs of a company or country

      Accounting technology is constantly changing. The rate of change is heavily influenced by:

(a)     The value of the U.S. dollar in foreign exchange markets

(b)    Strategic planning by MNCs

(c)     Its cost

(d)    Transfer pricing regulations adopted by national taxation authorities

(e)     Business cycle timing difference between major economics

(c)     Its cost

      Which item would not be considered a social responsibility disclosure?

(a)     Earnings forecasts

(b)    Employee safety

(c)     Environmental protection

(d)    Equal opportunities in the workplace

(e)     Facilities for the disabled

(a)     Earnings forecasts

      Think globally and act locally was discussed in the text in relation to

(a)     The central issue faced by MNCs in developing appropriate accounting information system

(b)    The strategy of the IASC

(c)     The EU’s approach to standard setting

(d)    The MNC’s approach to decentralizing decision making

(e)     The FASB’s approach to accounting for pensions

(a)     The central issue faced by MNCs in developing appropriate accounting information system

      MNC transfer pricing is an internationally sensitive issue. The issue involves

(a)     Stock prices when securities are transferred from one country’s stock exchange to another country’s stock exchange

(b)    Tax collection in different countries

(c)     Pricing of export goods for consumers overseas

(d)    Government regulation of commodities’ prices

(e)     Sales tax assessment on transfers of machinery and equipment to be used by foreign subsidiaries

(b)    Tax collection in different countries

      When the functional currency of a foreign operation is the U.S. dollar, exchange gains resulting from remeasuring foreign currency financial statements into U.S. dollars should be included as

(a)     A deferred item in the balance sheet

(b)    An extraordinary item in the income statement

(c)     An ordinary item in the income statement for losses but a deferred item in the balance sheet for gains

(d)    A shareholders’ equity item

(e)     An ordinary item in the income statement

(e)     An ordinary item in the income statement

      The financial statements of a foreign subsidiary are to be measured by use of the subsidiary’s functional currency. The functional currency of an entity is defined as the currency of the

(a)     Parent company

(b)    United States

(c)     Geographic location in which the entity’s headquarters are located

(d)    Geographic location in which the subsidiary is located

(e)     Primary economic environment in which the entity operates

(e)     Primary economic environment in which the entity operates

      Which of the following statement is true?

(a)     Japanese auditors spend more hours planning an engagement than American auditors

(b)    Clients change auditing firms more often in Japan than in the United States

(c)     More audit working papers prepared in Japan than in the United States

(d)    There are more lawsuits involving auditors in Japan than in the United States

(e)     There is less structured supervision and training of staff in Japan compared to their counterparts in the United States

(e)     There is less structured supervision and training of staff in Japan compared to their counterparts in the United States

      The temporal method of foreign currency translation

(a)     Uses historical exchange rates to translate fixed assets and depreciation expenses

(b)    Uses the year-end exchange rate to translate cash

(c)     Preserves the historical cost basis of accounting

(d)    Is used by U.S. MNCs to translate the financial statements of “integral” foreign subsidiaries

(e)     All of the above

(e)     All of the above

During a period of inflation in which an asset account remains constant, a purchasing power loss occurs if the item is a monetary asset. ( T / F )

True

All else equal, subsidiaries in tax haven countries should sell their products to other subsidiaries of the MNC at as high a transfer price as possible. ( T / F )

True

In a MNC. A foreign subsidiary may be evaluated as “poor” and at the same time, the subsidiary’s manager may be evaluated as “good”. ( T / F )

True

Organizing by function is popular among the extractive companies due to the homogeneity of the product. ( T / F )

True

When a MNC is organized by geographic area, managers may be responsible for several products. ( T / F )

True

In Japan, audit fees are fixed under the Securities and Exchange Law and based on terms negotiated by the Japanese Institute of CPA and the Keidanren. ( T / F )

True

Under current cost accounting, current cost income (or net income) is equal to realized income plus unrealized holding gain/loss. ( T / F )

True

If a subsidiary is located in a highly inflationary country, the MNC should consider as low a transfer price as possible for products that the subsidiary sells to other subsidiaries of the MNC. ( T / F )

True

A transnational corporation is centralized. ( T / F )

False

When you think of Bayer aspirin, you think of it as a local product, not a German invention. This is because Bayer has an ethnocentric attitude. ( T / F )

False