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International Accounting 3rd Edition By Doupnik – Test Bank

Chapter 01

Introduction to International Accounting

 

Multiple Choice Questions

 

  1. Which of the following groups is a supranational organization?
  2. A) United Nations
  3. B) Organization for Economic Cooperation and Development
  4. C) International Federation of Accountants
  5. D) All of the above

 

 

 

  1. Determination of net present value involves:
  2. A) forecasting future profits and cash flows.
  3. B) discounting future cash flows back to their present value.
  4. C) analysis on an after-tax basis.
  5. D) All of the above

 

 

 

  1. International accounting can be defined in terms of which the following levels?
  2. A) Supranational organizations
  3. B) Company
  4. C) Country
  5. D) All of the above

 

 

 

  1. The factor used to convert from one country’s currency to another country’s currency is called the:
  2. A) Interest rate.
  3. B) Cost of capital.
  4. C) Exchange rate.
  5. D) Strike price.

 

LO: 2

 

  1. What is the term used to describe the possibility that a foreign currency will decrease in US $ value over the life of an asset such as Accounts Receivable?
  2. A) foreign exchange translation
  3. B) foreign exchange risk
  4. C) hedging
  5. D) foreign currency options

 

LO: 2

  1. Foreign exchange risk arises when:
  2. A) business transactions are denominated in foreign currencies.
  3. B) sales are made to customers in a foreign country.
  4. C) goods or services are purchased from suppliers in a foreign country.
  5. D) accounting reports are prepared in a foreign currency.

 

LO: 2

 

  1. As used in international accounting, a “hedge” is:
  2. A) a business transaction made to reduce the exposure of foreign exchange risk.
  3. B) the legal barrier between the various divisions of a multinational company.
  4. C) the loss in US $ resulting from a decline in the value of the US $ relative to foreign currencies.
  5. D) one form of foreign direct investment.

 

LO: 2

 

  1. Purchasing an option to buy foreign currency at a predetermined exchange rate in order to reduce exchange risk is called:
  2. A) transfer pricing.
  3. B)
  4. C)
  5. D) cross-listing.

 

LO: 2

 

  1. What term is used to describe the process of reducing foreign exchange risk?
  2. A) international accounting
  3. B) exposure
  4. C) hedging
  5. D) globalization

 

LO: 2

 

  1. The ownership and control of foreign assets such as a manufacturing plant is called:
  2. A) a hedge.
  3. B) foreign direct investment.
  4. C)
  5. D)

 

LO: 3

 

 

  1. What is a “greenfield” investment?
  2. A) Farm land held for speculation
  3. B) Foreign direct investment whereby a new facility is constructed abroad
  4. C) Purchasing an existing facility as a foreign direct investment
  5. D) A foreign investment that has been approved by the Environmental Protection Agency

 

LO: 3

 

  1. Which of the following is an example of a greenfield investment?
  2. A) Nike contracts with a footwear company in China to make athletic shoes.
  3. B) A Chinese oil company buys a S. oil company.
  4. C) Toyota, a Japanese automaker, builds an assembly plant in Ohio.
  5. D) Daimler, a German automaker, merges with Chrysler, a S. automaker.

 

LO: 3

 

  1. Which of the following is a reason for foreign direct investment?
  2. A) Reduce costs of doing business
  3. B) Protect domestic markets
  4. C) Protect foreign markets
  5. D) All of the above

 

LO: 3

 

  1. A translation adjustment may be necessary when:
  2. A) notes to financial statements are converted from one language to another.
  3. B) foreign currency financial statements are converted to another currency.
  4. C) consolidated financial statements are prepared.
  5. D) hedging foreign currency.

 

LO: 2, 3

 

  1. What is “transfer pricing?”
  2. A) The cost to convert from one country’s GAAP to another country’s GAAP
  3. B) The value of sales made in a foreign country
  4. C) The method of recording transactions between divisions within the same company
  5. D) The taxes paid on sales in a foreign country

 

LO: 3

 

 

  1. ABCO Corporation has a parts division in country A.  Its assembly division is in country B, which has a higher tax rate than country A.  To minimize the corporation’s overall income tax, how should ABCO set its transfer prices between its parts and assembly divisions?
  2. A) The parts division should sell parts to the assembly division at low prices.
  3. B) The parts division should sell parts to the assembly division at high prices.
  4. C) It doesn’t matter what transfer price is used because the divisions are part of the same company.
  5. D) Transfer pricing has nothing to do with the total tax paid by the corporation.

 

LO: 3

 

  1. The process by which a domestic company sells its stock, already sold on its domestic exchange, on a foreign stock exchange is known as:
  2. A) SEC registration
  3. B) Initial public offering
  4. C) Consolidation
  5. D) Cross-listing

 

LO: 4

 

  1. In 2008 the country with the largest amount of exports was:
  2. A) the United States of America.
  3. B) China.
  4. C)
  5. D) Germany.

 

LO: 6

 

  1. The multinationality index (MNI) includes the following ratio:
  2. A) foreign working capital to total working capital.
  3. B) foreign cash to total cash.
  4. C) foreign employment to total employment.
  5. D) foreign loans to total loans.

 

LO: 6

 

 

  1. The number of companies involved in international trade has grown significantly in recent years.  What percent of U.S. exporters are relatively small (i.e. less than 500 employees)?
  2. A) Less than 5%
  3. B) 10%
  4. C) 25%
  5. D) more than 90%

 

LO: 6

 

  1. What is the advantage of foreign direct investment?
  2. A) Retain advantage over competition
  3. B) Reducing transportation costs
  4. C) Creating a company tailored to a foreign market’s unique characteristics
  5. D) All of the above

 

LO: 2

 

  1. OECD is an important supranational entity.  What do the letters OECD stand for?
  2. A) Organization of Electrical Companies Directorate
  3. B) Oil Exporting Countries and Developers
  4. C) Organization for Economic Cooperation and Development
  5. D) Oil Exporting Corporations and Divisions

 

LO: 6

 

  1. What countries are collectively known as “the triad”?
  2. A) France, Spain and Italy
  3. B) Germany, Russia and China
  4. C) United States, Japan and members of the European Union
  5. D) United States, Canada and Mexico

 

LO: 6

 

  1. What is one reason for the tremendous increase in the flow of foreign direct investment from 1982 to 2007?
  2. A) Transfer pricing
  3. B) The liberalization of investment laws in many countries
  4. C) The similarities in tax rates and tax laws across the globe
  5. D) The availability of hedging instruments

 

LO: 3

 

 

  1. Foreign companies whose stocks are listed on the New York Stock Exchange (NYSE) must report their income in terms of:
  2. A) International Accounting Standards.
  3. B) the GAAP of their home country.
  4. C) the generally accepted accounting principles of the United States.
  5. D) All of the above.

 

LO: 4

 

  1. Which of the following is a reason a company might cross-list itself on a foreign stock exchange?
  2. A) It wants to hedge against currency fluctuations.
  3. B) It is less expensive than listing itself solely on a domestic exchange.
  4. C) It wants to obtain acquisition currency for acquiring a foreign company.
  5. D) It is a means of accomplishing foreign direct investment.

 

LO: 4

 

  1. What is KPMG?
  2. A) It is a Dutch manufacturing company with plants in over 50 countries worldwide.
  3. B) It is an international public accounting firm.
  4. C) It is the largest of the multinational corporations listed on the NYSE.
  5. D) It is a governmental agency whose aim is promoting international business.

 

LO: 3, 4

 

  1. Which of the following is true about foreign direct investment?
  2. A) It is a means of reducing transportation costs.
  3. B) Since the 1980’s foreign direct investment has been relatively stable worldwide.
  4. C) Only very large corporations are undertaking foreign direct investment.
  5. D) Foreign direct investment refers only to the amount of money S. corporations put into non-U.S. businesses.

 

LO: 6

 

  1. When a foreign subsidiary pays dividends to its U.S. parent, this process is known as:
  2. A)
  3. B) the reverse authoritative principle.
  4. C) income-splitting.
  5. D) earnings management.

 

LO: 3

 

 

  1. Why would a company want its stock cross-listed on the stock exchanges of several countries?
  2. A) To make financial reporting less burdensome for its accounting firm
  3. B) In order to use International Financial Reporting Standards
  4. C) To gain access to more financial resources than are available in its home country
  5. D) All of the above

 

LO: 4

 

  1. Which functional areas are included in the study of international accounting?
  2. A) Financial reporting
  3. B) Accounting information systems
  4. C) Taxation
  5. D) All of the above

 

 

 

  1. How should we recognize the difference between the value of a receivable in a foreign currency at the time it was recorded and the time the cash was received?
  2. A) As an adjustment to stockholders’ equity
  3. B) As an adjustment to sales revenue
  4. C) As an extraordinary gain or loss
  5. D) As a prior period adjustment

 

LO: 2

 

  1. What currency is used in the United Kingdom?
  2. A) Crown
  3. B) Euro
  4. C) Pound
  5. D) UK dollar

 

LO: 2

 

  1. Which of these European countries does NOT use the Euro as its domestic currency?
  2. A) France
  3. B) United Kingdom
  4. C) Ireland
  5. D) The Netherlands

 

LO: 2

 

 

  1. What term is used to describe combining the financial statements of all subsidiaries, both foreign and domestic, into the financial statements of the parent?
  2. A) Convergence
  3. B) Hedging
  4. C) Consolidation
  5. D) Incorporation

 

LO: 2

 

  1. Which of the following statements is true about U.S. taxation of foreign subsidiaries?
  2. A) The S. does not tax income generated on subsidiaries incorporated in foreign countries.
  3. B) S. multinationals pay tax on their worldwide income as soon as it is earned.
  4. C) Transfer pricing will eliminate taxes by the S. government on multinational corporations.
  5. D) S. tax on foreign operations does not have to be paid until the income is brought back to the United States.

 

LO: 2

 

  1. Why is auditing a multinational corporation potentially more difficult than auditing an entity that has only domestic operations?
  2. A) Language differences
  3. B) Cultural differences
  4. C) Multiple sets of accounting standards
  5. D) All of the above

 

LO: 2, 5, 6

 

  1. What is the entry point for most companies into the world of international business?
  2. A) Shanghai
  3. B) exporting
  4. C) foreign direct investment
  5. D) cross-listing on international stock exchanges

 

LO: 2

 

 

  1. In terms of multinational corporation international trade and investment, the United States, Japan, and the European Union are referred to together as:
  2. A) the G8.
  3. B) the Commonwealth
  4. C) the triad.
  5. D) the OECD.

 

LO: 6

 

  1. Many countries have recently liberalized their investment laws.  What is the primary reason for these actions?
  2. A) To make it more difficult for multinational companies to compete with domestic corporations
  3. B) To encourage foreign direct investment
  4. C) To enable funds to flow out of their country more easily
  5. D) To make taxing foreign companies easier

 

LO: 3, 6

 

  1. The 100 largest multinational companies generate what share of the world’s Gross Domestic Product (GDP)?
  2. A) 4%
  3. B) 20%
  4. C) 50%
  5. D) 75%

 

LO: 6

 

  1. What group is primarily responsible for the creation of International Financial Reporting Standards (IFRS)?
  2. A) Financial Accounting Standards Board (FASB)
  3. B) International Forum on Accountancy Development (IFAD)
  4. C) International Federation of Accountants (IFA)
  5. D) International Accounting Standards Board (IASB)

 

LO: 5

 

 

  1. Which of the following is an advantage of having a single set of accounting standards used worldwide?
  2. A) Reduce the accounting costs for multinational corporations
  3. B) Increase the power of the FASB
  4. C) Reduce the number of multinational corporations on the NYSE
  5. D) Increase the diversity of accounting methods used by multinational corporations

 

LO: 5

 

  1. What does “multinationality” mean?
  2. A) How internationally widespread a company’s investment and business operations are
  3. B) The diversity of languages spoken at a company’s headquarters
  4. C) The number of stock exchanges where a company’s shares are listed
  5. D) None of the above

 

LO: 6

 

  1. Assume that ABCO is a U.S. multinational corporation.   Its foreign subsidiaries must report income in their respective countries according to GAAP in those countries.  How must ABCO report its consolidated financial statements?
  2. A) ABCO must choose any one country’s accounting standards and combine the subsidiary reports into the parent company’s statements using that one country’s GAAP.
  3. B) Since the company is operating in several different countries, the International Accounting Standards must be used for the consolidated financial statements.
  4. C) Since ABCO is a S. corporation, U.S. generally accepted accounting principles must be used for the consolidated financial statements.
  5. D) On the consolidated financial statements, each subsidiary’s financial results must be shown in the currency of the country where the subsidiary is located.

 

LO: 5

 

  1. For a U.S. multinational corporation, consolidating the financial statements of foreign subsidiaries requires two steps.  First, the foreign subsidiary’s statements must be restated according to U.S. GAAP.  The next step is to:
  2. A) convert the account balances into U.S. dollars.
  3. B) determine the exchange rate gain or loss.
  4. C) calculate the translation adjustment.
  5. D) restate the income using international accounting standards.

 

LO: 2, 5

 

 

  1. When setting transfer prices among international subsidiaries, the corporation must:
  2. A) make sure that the total tax is minimized.
  3. B) ensure that the transfer prices are acceptable to the taxing authorities in the countries involved.
  4. C) do whatever it takes to make taxes paid in the United States as low as possible.
  5. D) follow the transfer pricing policy used for domestic transfers.

 

LO: 2

 

  1. What is the primary provision of the Foreign Corrupt Practices Act?
  2. A) To specify which corrupt practices are acceptable under S. law
  3. B) It prescribes how to account for bribes paid by S. corporations to obtain business from foreign governments.
  4. C) It informs internal auditors how to detect fraud in multinational corporations.
  5. D) To prohibit S. companies from paying bribes to foreign government officials to obtain business

 

LO: 2

 

  1. What is a key objective of a company’s performance evaluation system?
  2. A) To determine how much to pay executives in bonuses and other compensation
  3. B) To ensure that the domestic and foreign operations are achieving their objectives.
  4. C) To control foreign subsidiaries
  5. D) To assess the effect of foreign exchange rates on published financial statements

 

LO: 2

 

  1. What is the primary role of internal auditing in a multinational corporation?
  2. A) To assist the external auditors in completing the financial statement audit in a timely fashion
  3. B) To make sure that employees comply with local customs and traditions
  4. C) To ensure that corporate policies and procedures are being followed and to assess operating efficiency
  5. D) To prepare the consolidated financial statement of the corporation in compliance with international accounting standards

 

LO: 2

 

 

  1. Which of the following statements is true about international transfer pricing?
  2. A) It is a violation of the Foreign Corrupt Practices Act.
  3. B) It is accomplished using guidelines set up by the FASB.
  4. C) It is used to minimize the amount of worldwide taxes.
  5. D) Most countries do not regulate it.

 

LO: 3

 

  1. What percentage of world trade is represented by manufactured products?
  2. A) 5%
  3. B) 5%
  4. C) 5%
  5. D) 5%

 

LO: 6

 

  1. In 2005 the most popular location for inbound FDI among OECD countries was:
  2. A) France
  3. B) China
  4. C) the United Kingdom
  5. D) Luxembourg

 

 

  1. XYZ Corporation, with a division located in Germany, must translate its financial statements from euros to U.S. dollars. What is the major issue involved in translation?
  2. A) Most accountants are not conversant in foreign currency exchange.
  3. B) S. GAAP may differ from German GAAP.
  4. C) The U.S. dollar has been steadily falling relative to the euro.
  5. D) The resulting balance sheet may not balance.

 

 

  1. The five most multinational U.S. companies in 2008 were AES Corporation, Liberty Group, Inc., Coca-Cola, ExxonMobil and:
  2. A) General Electric.
  3. B) Proctor & Gamble.
  4. C) International House of Pancakes.
  5. D) Starbuck’s.

 

Chapter 02

Worldwide Accounting Diversity

 

Multiple Choice Questions

 

  1. What is the equivalent of U.S. balance sheet common stock on the balance sheet of a British company?
  2. A) Capital redemption reserve
  3. B) Share premium account
  4. C) Own shares held
  5. D) Called-up share capital

 

LO: 1

 

  1. Which of the following is not a problem caused by accounting diversity?
  2. A) Lack of qualified international auditors
  3. B) Preparation of consolidated financial statements
  4. C) Access to foreign capital markets
  5. D) Comparability of financial statements

 

LO: 2

 

  1. Differences in legal systems used in various countries have been cited as one reason for diversity in accounting practice.  What are the major types of legal systems?
  2. A) commercial law and accounting law
  3. B) rules and regulations
  4. C) written law and unwritten law
  5. D) common law and code law

 

LO: 3

 

  1. The accounting standards in code law countries tend to be:
  2. A) very detailed.
  3. B) formulated by organizations such as the FASB.
  4. C) stated broadly without much guidance on accounting procedures.
  5. D) very conservative.

 

LO: 3

 

 

  1. What is likely to be the source of accounting standards in common law countries?
  2. A) Tax law
  3. B) Non-government entities such as the FASB
  4. C) Federal and local legislatures
  5. D) The International Accounting Standards Board

 

LO: 3

 

  1. When accounting rules are left up to professional associations rather than being legislated by governmental bodies, what is the likely result?
  2. A) Very general accounting rules are created, as in code law countries.
  3. B) Very detailed rules for practice are created, as in common law countries.
  4. C) Very general accounting rules are created, as in common law countries.
  5. D) Very detailed rules for practice are created, as in code law countries.

 

LO: 3

 

  1. Relative to accounting standards in countries such as Germany, whose accounting laws are only 47 pages long, accounting practice in the U.S. is often described as being subject to:
  2. A) standards overload.
  3. B) standards minimization.
  4. C) the optimal amount of accounting regulation.
  5. D) ideal accounting standards.

 

LO: 3

 

  1. In code law countries such as Germany, France, and Japan, tax law and accounting standards tend to be:
  2. A)
  3. B) very different.
  4. C)
  5. D) more confusing than those in the S.

 

LO: 3

 

 

  1. If most of a country’s business financing comes from families, banks, and the government what should we expect in terms of information disclosure to the public?
  2. A) Relatively little because the public isn’t a major factor
  3. B) A great deal of disclosure because it will be the only way for interested parties to learn about the company
  4. C) Complete openness of accounting records
  5. D) No disclosure at all

 

LO: 3

 

  1. In countries such as the U. S., there is great demand for public disclosure of accounting information.  What is the reason for this?
  2. A) Corporate management isn’t trustworthy.
  3. B) Businesses rely heavily on financing through issuance of stock to the public.
  4. C) The American populace is better able to read financial statements than people in other countries.
  5. D) S. government officials are generally members of corporate boards of directors and can get all the information they require.

 

LO: 3

 

  1. Historical cost is the primary basis for asset valuation under U.S. GAAP.  Why is historical cost NOT as important in the accounting systems of Latin America as in the U.S.?
  2. A) Historical costs are too difficult to calculate in the currencies used in Central and South America.
  3. B) The countries of Latin America have experienced very high rates of inflation, which would make historical costs meaningless to readers of financial statements.
  4. C) There is very little foreign direct investment in the countries of Latin America, so few assets need to be accounted for.
  5. D) In Latin America, asset prices are very stable, making historical costs equal to replacement costs, so it doesn’t matter which valuation basis is used.

 

LO: 3

 

  1. What does “harmonization” mean in the context of international accounting?
  2. A) The process of combining the financial statements of foreign subsidiaries into the parent company’s financial statements
  3. B) Reducing the diversity of accounting standards
  4. C) Disclosing the accounting methods used in preparing the financial statements
  5. D) Assessing the exposure resulting from inadequate internal controls

 

LO: 2

 

 

  1. The extent to which hierarchy and unequal authority distribution in institutions and organizations are accepted within a culture is referred to as:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

LO: 5

 

  1. A cultural preference for loosely knit social fabric rather than tightly knit social fabric is referred to by the term:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

LO: 5

 

  1. A cultural emphasis on values of performance and achievement rather than values of relationships, caring, and nurturing is referred to as:
  2. A) Uncertainty avoidance.
  3. B)
  4. C)
  5. D) Power distance.

 

LO: 5

 

  1. What term is used to refer to a cultural aversion to ambiguous situations?
  2. A) Uncertainty avoidance.
  3. B)
  4. C) Power distance.
  5. D)

 

LO: 5

 

  1. A cultural preference for accounting systems that rely on compliance with legal requirements is called:
  2. A)
  3. B)
  4. C) Statutory control.
  5. D)

 

LO: 5

 

 

  1. Countries such as the U.S. tend to value self-regulation of accounting.  What term is used to define this subculture?
  2. A) Uniformity
  3. B) Flexibility
  4. C) Conservatism
  5. D) Professionalism

 

LO: 5

 

  1. What does “transparency” mean in accounting?
  2. A) An emphasis on confidentiality
  3. B) Restricted disclosure of accounting information
  4. C) Flexibility in the application of accounting standards
  5. D) Openness of accounting information

 

LO: 5

 

  1. What term is used to describe accounting standards that encourage risk-taking in financial reporting?
  2. A) Optimism
  3. B) Conservatism
  4. C) Professionalism
  5. D) Transparency

 

LO: 5

 

  1. Which of the following countries tends to have a relatively high degree of transparency in their companies’ financial statements?
  2. A) Germany
  3. B) Switzerland
  4. C) United Kingdom
  5. D) Saudi Arabia

 

LO: 5

 

  1. Which of the following countries tends to show a relatively high preference for conservative accounting standards?
  2. A) Norway
  3. B) United Kingdom
  4. C) United States of America
  5. D) Japan

 

LO: 5

 

 

  1. Optimism is a value of accounting standards that would most likely be found in which country?
  2. A) Japan
  3. B) Australia
  4. C) Mexico
  5. D) Brazil

 

LO: 5

 

  1. In Gray’s framework for accounting system development, the cultural dimensions of individualism, power distance, uncertainty avoidance and masculinity directly affect:
  2. A) accounting systems.
  3. B) accounting values.
  4. C) external influences.
  5. D) institutional consequences.

 

LO: 5

 

  1. Individualism, power distance, uncertainty avoidance, and masculinity are examples of:
  2. A) accounting values.
  3. B) ecological factors.
  4. C) cultural dimensions.
  5. D) external forces.

 

LO: 5

 

  1. How are the concepts of professionalism, uniformity, conservatism, and secrecy classified in Gray’s framework for accounting system development?
  2. A) Accounting values
  3. B) Accounting systems
  4. C) Institutional consequences
  5. D) Cultural dimensions

 

LO: 5

 

 

  1. According to Gray’s framework for accounting system development, which of the following are directly affected by ecological influences, such as geography, demography, and technology?
  2. A) Accounting values
  3. B) Accounting systems
  4. C) Institutional consequences
  5. D) Cultural dimensions

 

LO: 5

 

  1. According to Gray’s framework for accounting system development, the counterpart to (i.e. opposite of) the value of “secrecy” is:
  2. A)
  3. B)
  4. C)
  5. D)

 

LO: 5

 

  1. In their 1993 paper, Doupnik and Salter found that countries tended to cluster in terms of the similarities or differences of their accounting systems.  These researchers attribute the large cluster around Great Britain to:
  2. A) the superiority of the Anglo accounting model.
  3. B) the predominant influence of Great Britain in the world economy.
  4. C) the colonial influence of Great Britain on accounting development.
  5. D) the fact that more of the world’s people speak English than any other language.

 

LO: 5

 

  1. The 1993 study by Doupnik and Salter found that a cluster of Latin American countries indicated that the similarity of their accounting systems was related to:
  2. A) a common currency.
  3. B) the effect of persistent inflation.
  4. C) the colonial influence of Spain.
  5. D) the colonial influence of the United States of America.

 

LO: 5

 

 

  1. It is generally believed that the 1997 financial crisis in East Asia was partly due to accounting factors in that part of the world.  Which of the following accounting values was lacking in that part of the world, and thereby contributed to the crisis?
  2. A) Professionalism
  3. B) Statutory control
  4. C) Uniformity
  5. D) Transparency

 

LO: 2, 5

 

  1. In the Nobes classification of accounting systems, micro-based accounting systems are derived from:
  2. A) government models.
  3. B) business models.
  4. C) tax laws.
  5. D) code law.

 

LO: 4

 

  1. According to the research of Christopher Nobes, the most relevant factor in determining the purpose of financial reporting is:
  2. A) the way a country finances businesses.
  3. B) religious differences across countries.
  4. C) the population of the country.
  5. D) the strength of the country’s accounting profession.

 

LO: 4

 

  1. According to the research of Christopher Nobes, what is the primary determinant of the accounting systems in developing countries?
  2. A) The nature of their financing system
  3. B) The accounting system of countries that dominate their culture
  4. C) The size of their capital market
  5. D) The strength of their tax code

 

LO: 4

 

 

  1. The term “Class A Accounting” as it is used by the researcher Christopher Nobes refers to:
  2. A) preferred accounting systems.
  3. B) the most efficient accounting systems.
  4. C) accounting systems that primarily serve external shareholders.
  5. D) accounting systems that were developed primarily for creditors and taxing authorities.

 

LO: 6

 

  1. The term “Class B Accounting” as it is used by the researcher Christopher Nobes refers to:
  2. A) less preferred accounting systems
  3. B) less efficient accounting systems.
  4. C) accounting systems that primarily serve external shareholders.
  5. D) accounting systems that were developed primarily for creditors and taxing authorities.

 

LO: 6

 

  1. Which financial statement is provided by virtually all corporations worldwide?
  2. A) Statement of Cash Flows
  3. B) Statement of Changes in Financial Position
  4. C) Balance Sheet
  5. D) Statement of Changes in Non-current Assets

 

LO: 7

 

  1. Which of the following statements is NOT universally included in annual reports worldwide?
  2. A) Balance Sheet
  3. B) Cash Flow Statement
  4. C) Income Statement
  5. D) All of the above statements are included in annual reports worldwide.

 

LO: 7

 

 

  1. International accounting diversity can be found in terms of:
  2. A) terminology used in the financial statements.
  3. B) the amount of information disclosed in the financial statements.
  4. C) the order of items in the financial statements.
  5. D) All of the above are evidence of accounting diversity.

 

LO: 7

 

  1. What term is used to refer to the decision about whether to report an item in the financial statements?
  2. A) Capitalization
  3. B) Recognition
  4. C) Realization
  5. D) Conservatism

 

LO: 7

 

  1. What method of fixed asset valuation would most likely be used in countries that regularly experience high rates of inflation?
  2. A) Historical cost
  3. B) Net realizable value
  4. C) Fair value
  5. D) Net present value

 

LO: 7

 

  1. Under U.S. GAAP, fixed assets are generally reported on the balance sheet at their:
  2. A) historical cost.
  3. B) net realizable value.
  4. C) fair value.
  5. D) market value.

 

LO: 7

 

  1. Until 2008 Mexico used which of the following bases for fixed asset valuation?
  2. A) Historical cost
  3. B) Historical cost later restated in terms of GPP
  4. C) Current replacement cost
  5. D) Net realizable value

 

LO: 7

 

 

  1. Which country includes a social report in the notes to financial statements?
  2. A) Japan
  3. B) Israel
  4. C) Brazil
  5. D) Germany

 

LO: 7

 

  1. IFRS allows for which two methods for valuing property, plant and equipment?
  2. A) Historic cost and general purchasing power
  3. B) Historic cost and fair value
  4. C) Fair value and general purchasing power
  5. D) Fair value and inflation-adjusted

 

LO: 7

 

  1. In terms of level of detail provided in the individual financial statements, the U.S. tends to:
  2. A) emphasize more line items on the face of the financial statements.
  3. B) rely less on footnote disclosure.
  4. C) condense the amount of line items and supplement with more footnote detail.
  5. D) use footnotes only when absolutely required by GAAP.

 

LO: 7

 

  1. Which of the following is found in a Mexican income statement in the “Comprehensive Financing Result” section?
  2. A) the depreciation expense on capital leases
  3. B) purchasing power gain or loss during inflationary periods
  4. C) income taxes
  5. D) operating lease rent expense

 

LO: 7

 

 

  1. In the United States, conformity between financial statement presentation and tax treatment is required only for:
  2. A)
  3. B)
  4. C) gains or losses on securities.
  5. D) the use of the LIFO inventory cost flow assumption.

 

LO: 3

 

  1. In some countries, financial accounting and tax accounting are so closely related that there is very little need to account for deferred income taxes.  Of the countries listed below, which has a financial accounting system that is most different from its tax laws?
  2. A) United States of America
  3. B) Japan
  4. C) Germany
  5. D) France

 

LO: 3

 

  1. In some countries, financial institutions operate under Shariah, which also gives guidance about accounting practice in these institutions.  What is “Shariah?”
  2. A) Shariah is the financial accounting standards board in Saudi Arabia.
  3. B) Shariah is the law governing human conduct that is derived from the Koran.
  4. C) Shariah is the codification of banking regulations in the European Union.
  5. D) Shariah is a political system used in South American countries.

 

LO: 5

 

  1. Assets are commonly shown in order of their liquidity, or in reverse order of their liquidity.   What does “liquidity” mean?
  2. A) Liquidity refers to how easily the assets are converted to cash.
  3. B) Liquidity means that assets are inflation-adjusted.
  4. C) Liquidity refers to whether the asset is depreciable or not.
  5. D) Liquidity means that the assets are closely matched to specific liabilities.

 

LO: 7

 

 

  1. The “Fair Presentation/Full Disclosure Model” is a classification scheme used by:
  2. A) Germany
  3. B) Japan
  4. C) the United States and the United Kingdom
  5. D) Brazil

 

LO: 4

 

Chapter 03

International Convergence of Financial Reporting

 

Multiple Choice Questions

 

  1. According to Sir Bryan Carsberg, former IASC Secretary-General, what is the most significant cost of accounting diversity?
  2. A) The time expended by accountants to create multiple sets of financial statements conforming to different national standards
  3. B) The cost of the IASB to regulate compliance with many national accounting standards
  4. C) The reduction in effectiveness of the international markets for capital
  5. D) The resources used by countries in legislating different sets of accounting standards

 

LO: 1

 

  1. From a practical standpoint, what is the goal of accounting standards harmonization?
  2. A) Creating one set of standards used throughout the world
  3. B) Reducing the conflict among national accounting standards
  4. C) Producing accounting standards that are unique for each country
  5. D) Forcing compliance with IASB regulations

 

LO: 1

 

  1. De jure harmonization refers to:
  2. A) the process of making accounting practice consistent across countries.
  3. B) the process of making accounting regulations consistent internationally.
  4. C) forcing accounting differences to be resolved through jury trials.
  5. D) eliminating the need to have different accounting methods.

 

LO: 1

 

  1. De facto harmonization refers to:
  2. A) the process of making accounting practice consistent across countries.
  3. B) the process of making accounting regulations consistent internationally.
  4. C) forcing accounting differences to be resolved through litigation.
  5. D) creating one set of accounting standards.

 

LO: 1

 

 

  1. Which of the following statements is true about accounting convergence?
  2. A) Convergence is a synonym for harmonization.
  3. B) Convergence is the opposite of standardization.
  4. C) Convergence, unlike harmonization, takes place over a period of time.
  5. D) Convergence means developing high-quality standards in partnership with national standard-setters.

 

LO: 1

 

  1. Which of the following statements is believed to be true about accounting convergence by proponents of convergence?
  2. A) Convergence would decrease feelings of nationalism.
  3. B) Convergence is desirable because there is little difference among capital markets in different countries.
  4. C) Convergence would help to raise the quality of accounting practice internationally.
  5. D) None of the above statements is true.

 

LO: 2

 

  1. Which of the following items is considered to be the most significant impediment to accounting convergence?
  2. A) Nationalism
  3. B) Lack of accounting knowledge
  4. C) Language differences
  5. D) High cost of convergence

 

LO: 2

 

  1. In addition to the International Accounting Standards Board (IASB), which of the following organizations was considered to be one of the two most important forces in efforts to harmonize accounting standards?
  2. A) S. Financial Accounting Standards Board (FASB)
  3. B) United Nations (UN)
  4. C) North Atlantic Treaty Organization (NATO)
  5. D) European Union (EU)

 

LO: 3

 

 

  1. It has been said that the addition of 10 new members to the European Union in 2004 is likely to significantly change the dynamics within the EU.  What was the explanation given for this statement?
  2. A) The EU is getting too large to manage effectively.
  3. B) The members added in 2004 have very different economic traditions than the 15 members that joined before 2004.
  4. C) The members added in 2004 have more economic power than the members that joined the EU between 1957 and 1995.
  5. D) The purchasing power of the EU was weakened by the addition of additional members.

 

LO: 3

 

  1. Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia joined the European Union in 2004.  Besides membership in the EU, what do these countries have in common?
  2. A) They share a common language.
  3. B) They were previously under the political and economic influence of the Soviet Union.
  4. C) All were under the political control of Germany until the early 1960’s.
  5. D) They were former British colonies until after World War II.

 

LO: 3

 

  1. The “Fourth Directive” issued by the European Commission, which administers the European Union (EU), deals with which of the following?
  2. A) Adoption of the Euro as the currency used throughout the EU
  3. B) Consolidated financial statements
  4. C) Rules for valuation, financial statement disclosures, and format
  5. D) Authority of the European Commission to pass laws

 

LO: 3

 

  1. The “Seventh Directive” issued by the European Commission is a statement to the European Union (EU) members concerning:
  2. A) adoption of the Euro as the currency used throughout the EU.
  3. B) consolidated financial statements.
  4. C) rules for valuation, financial statement disclosures, and financial statement format.
  5. D) authority of the European Commission to pass laws.

 

LO: 3

 

 

  1. In preparation for admission to the European Union, Hungary, Poland, and the Czech Republic passed new accounting laws based on EU Directives.  How were these new laws different from their previous accounting laws?
  2. A) The new laws are easier to enforce than the previous laws.
  3. B) The new accounting regulations are written in English, whereas the earlier accounting standards were written in Russian.
  4. C) The new laws are less flexible than their earlier accounting laws.
  5. D) The new laws are market-oriented and their earlier accounting laws were Soviet-style.

 

LO: 3

 

  1. In 1990, the European Commission stopped issuing directives related to accounting.  Why?
  2. A) The EU was leaving the formulation of accounting standards up to the IASC.
  3. B) The European Commission had finished the task of formulating accounting standards for the European Union.
  4. C) Accounting harmonization had been completed.
  5. D) The Commission found that its directives were unenforceable.

 

LO: 3

 

  1. The early (1973-1988) harmonization efforts of the International Accounting Standards Committee (IASC) created standards that have been described as a “lowest common denominator” approach.  What was the effect of these first international accounting standards?
  2. A) The IASC standards accommodated existing accounting practice in various countries.
  3. B) Comparability of financial statements across countries was achieved.
  4. C) It resulted in few companies being in compliance with IASC standards.
  5. D) All of the above

 

LO: 3

 

  1. The second phase (1989-1993) of the IASC’s efforts to harmonize accounting standards was aimed at what goal?
  2. A) Making international accounting standards more flexible
  3. B) Creating greater financial statement comparability across countries
  4. C) Adding new alternatives for accounting practice desired by the international community
  5. D) Strengthening the enforcement power of the IASC

 

LO: 3

 

 

  1. Which of the following is NOT an objective of the International Accounting Standards Board?
  2. A) To establish worldwide uniformity of accounting practice
  3. B) To develop a single set of enforceable global accounting standards
  4. C) To promote the use and application of global accounting standards
  5. D) To encourage convergence of national accounting standards and international accounting standards

 

LO: 3

 

  1. Of the 16 members of the International Accounting Standards Board (IASB), how many must have experience as auditors?
  2. A) 0
  3. B) 3
  4. C) 5
  5. D) 12

 

LO: 3

 

  1. Of the 16 members of the International Accounting Standards Board (IASB), how many work for the board on a full-time basis?
  2. A) 8
  3. B) 13
  4. C) 10
  5. D) 0

 

LO: 3

 

  1. To create an appropriate mix of members of the IASB, by 2012 there will be:
  2. A) 8 auditors.
  3. B) 8 academic representatives.
  4. C) 4 members of the FASB.
  5. D) a diverse geographical balance of members.

 

LO: 3

 

 

  1. Who was the first chairman of the International Accounting Standards Board?
  2. A) Sir Walter Raleigh
  3. B) Sir David Tweedie
  4. C) Sir Paul McCartney
  5. D) Sir Bryan Carsberg

 

LO: 3

 

  1. The International Accounting Standards Board was preceded by:
  2. A) the IOSCO.
  3. B) the ASEAN.
  4. C) the IASC.
  5. D) the NRC .

 

LO: 3

 

  1. The IFRS Foundation will normally have as its trustees how many senior partners of international accounting firms?
  2. A) 0
  3. B) 2
  4. C) 5
  5. D) 10

 

LO: 3

 

  1. The IASB is organized under an independent entity called:
  2. A) the SEC.
  3. B) the AFL.
  4. C) the IFRSF.
  5. D)

 

LO: 3

 

  1. Which of the following is NOT part of the due process followed by the IASB in formulating International Financial Reporting Standards?
  2. A) A period of public comment is provided after discussion papers are prepared.
  3. B) Standards are approved by a unanimous vote of the 16-member board.
  4. C) Exposure drafts are published prior to taking a vote of the board.
  5. D) National accounting standards and practices are studied before preparing exposure drafts.

 

LO: 3

 

 

  1. What basis does the International Accounting Standards Board use in formulating its IFRS?
  2. A) Detailed rules to govern accounting practice
  3. B) A framework of accounting principles
  4. C) Typical tax laws of western nations
  5. D) Exceptions or unusual circumstances that require special attention

 

LO: 3

 

  1. Why does the IASB believe that a principles-based approach to standard setting is superior to a rules-based perspective?
  2. A) Detailed prescriptions or rules encourage accountants to look for ways to circumvent the rules rather than trying to provide useful information.
  3. B) Principles-based standard setting is less costly to undertake than rules-based standard formulation.
  4. C) It is desirable to have all corporations in all countries using the same accounting practice.
  5. D) A conceptual framework for standard setting has been demonstrated to encourage the greatest economic development.

 

LO: 4

 

  1. According to the IASB, what is needed for international accounting standards to work effectively?
  2. A) Commitment from auditors to resist client pressures
  3. B) Professional judgment in the public interest on the part of management
  4. C) Financial statement preparers must produce reports that faithfully represent all transactions
  5. D) All of the above are conditions for effective standards.

 

LO: 4

 

  1. Which of the following statements is true about the IASB’s approach to accounting standard setting?
  2. A) The IASB approach is very similar to the rules-oriented basis favored by the FASB in the United States.
  3. B) The IASB uses a principles-based approach to standards formulation.
  4. C) The IASB pronouncements have been called a “cookbook” of accounting standards.
  5. D) The Sarbanes-Oxley Act requires the FASB to move toward the approach for standard setting used by the IASB.

 

LO: 4

 

 

  1. The IASB’s Framework for Preparation and Presentation of Financial Statements (1989) establishes:
  2. A) the required practices that should be followed by accountants in preparing financial statements.
  3. B) the structure, content, and format of financial statements.
  4. C) sanctions for failure to comply with the IASB standards.
  5. D) the concepts to be used in formulating international accounting standards.

 

LO: 5

 

  1. The IASB’s  Framework for Preparation and Presentation of Financial Statements (1989) implies that the most important group of users is:
  2. A)
  3. B) general public.
  4. C)
  5. D)

 

LO: 5

 

  1. According to the Framework for Preparation and Presentation of Financial Statements of the IASB, which of the following is NOT required for asset recognition?
  2. A) Control of the resource
  3. B) Ownership of the resource
  4. C) Future economic benefits
  5. D) Reliable measurement of the cost or value of the resource

 

LO: 5

 

  1. According to the Framework for Preparation and Presentation of Financial Statements of the IASB, what is the definition of income?
  2. A) Assets minus liabilities
  3. B) Revenue minus expenses
  4. C) Increase in equity (other than from contributions by owners)
  5. D) Inflow of resources with future economic benefit

 

LO: 5

 

 

  1. In November 2007 which organization removed the requirement that foreign private issuers reconcile their financial statements to U.S. GAAP?
  2. A) IASB
  3. B) EU
  4. C) SEC
  5. D) FASB

 

LO: 9

 

  1. Which of the following is NOT a way in which a country might adopt IFRS?
  2. A) All companies in that country adopt IFRS.
  3. B) Foreign companies listed on domestic exchanges adopt IFRS.
  4. C) IASB forces them to adopt IFRS.
  5. D) Domestic companies that list on foreign exchanges adopt IFRS.

 

LO: 8

 

  1. What was the 2002 finding by the six largest public accounting firms regarding International Financial Reporting Standards?
  2. A) Of the countries surveyed, almost all planned to make their GAAP converge with IFRS.
  3. B) Very few of the countries studied planned to move their national accounting standards toward convergence with IFRS.
  4. C) There were almost as many convergence strategies as there were countries in the study.
  5. D) The countries that planned to make their GAAP converge with IFRS were predominantly western European nations.

 

LO: 7

 

  1. In the 2002 study by the world’s six largest public accounting firms concerning convergence with IFRS, what was the most frequently cited concern about convergence?
  2. A) Language translation difficulties
  3. B) Lack of perceived benefit of using IFRS
  4. C) Complexity of specific IFRS
  5. D) Preference for national standards

 

LO: 8

 

 

  1. What is the official language of the IASB?
  2. A) English
  3. B) French
  4. C) Spanish
  5. D) German

 

LO: 7

 

  1. What language is used to develop the International Financial Reporting Standards (IFRS)?
  2. A) French
  3. B) German
  4. C) English
  5. D) Spanish

 

LO: 7

 

  1. What group is responsible for translating International Financial Reporting Standards into languages other than the official language of the IASB?
  2. A) The International Accounting Standards Board
  3. B) The International Accounting Standards Committee Foundation
  4. C) The United Nations
  5. D) The national accountancy bodies of individual countries

 

LO: 7

 

  1. The International Financial Reporting Standards (IFRS) have been translated into how many languages?
  2. A)   They are only written in the official language of the IASB.
  3. B) More than 30
  4. C) More than 100
  5. D) Six (6):  Chinese, English, German, Japanese, Russian, and Spanish

 

LO: 7

 

 

  1. What was the “Norwalk Agreement?”
  2. A) A pledge between the Financial Accounting Standards Board in the S. and the IASB to make their reporting standards compatible
  3. B) A concession by the Financial Accounting Standards Board in the S. to adopt IFRS as soon as possible
  4. C) It is a treaty between the United States and the European Union to make their accounting standards converge.
  5. D) It was an agreement signed in Norwalk, Connecticut in 2002 to make English the official language of the IASB.

 

LO: 9

 

  1. According to the Norwalk Agreement, the FASB will monitor:
  2. A) all IASB projects.
  3. B) only those projects where they have a level of interest in the topic.
  4. C) no IASB projects, since the IASB is capable of self-monitoring.
  5. D) only those projects dealing with internationally complex issues.

 

LO: 9

 

  1. What is the role of the liaison members of the International Accounting Standards Board?
  2. A) To facilitate information exchange and cooperation between the FASB and the IASB
  3. B) To eliminate the political influences on the IASB and national accounting bodies
  4. C) To enforce adherence to the fundamental principles of the IASB
  5. D) All of the above

 

LO: 9

 

  1. Which of the following is not a major concern related to convergence of international accounting standards?
  2. A) The complicated nature of particular standards
  3. B) The tax-driven nature of the national accounting regime
  4. C) An overload of guidance on the first-time application of IFRS
  5. D) IFRS language translation difficulties

 

LO: 8

 

 

  1. What is the intent of IFRS 1?
  2. A) To establish the guidelines for financial statement presentation
  3. B) Provide the working definitions of accounting elements
  4. C) It gives guidance to first-time adopters of IFRS issued by the IASB.
  5. D) To provide the framework for setting international accounting standards

 

LO: 6

 

  1. What is the primary focus of IAS 1?
  2. A) To establish the guidelines for financial statement presentation
  3. B) Provide guidance to first-time adopters of IFRS issued by the IASB
  4. C) Establish the framework that is to guide the IASB in setting accounting standards
  5. D) None of the above.

 

LO: 6

 

  1. What is Anglo-American Accounting?
  2. A) It is an association of British and American accounting regulatory agencies.
  3. B) The accounting systems used in the S., U.K., and other English-speaking countries
  4. C) This refers to the basis used by the IASB to judge the appropriateness of international accounting standards.
  5. D) All of the above are true.

 

LO: 10

 

  1. Which of the following statements is NOT true about Anglo-American Accounting?
  2. A) There is a strong reliance on professional judgment.
  3. B) Financial reporting focuses on the firm with an investor orientation.
  4. C) There is a strong emphasis on measurement of taxable income.
  5. D) Audits report on the adherence to the principle of fair presentation.

 

LO: 10

 

 

  1. Which of the following statements is NOT true about Anglo-American Accounting?
  2. A) There is a strong reliance on professional judgment.
  3. B) There is agreement on the interpretation of the principle of fair presentation.
  4. C) There is a stronger emphasis on substance of reports rather than the form of reports
  5. D) Audits report on the adherence to the principle of fair presentation.

 

LO: 10

 

  1. Which of the following is a difference among the U.S. and other Anglo-American countries in terms of accounting standards?
  2. A) The S. does not adhere to the “true and fair view” approach.
  3. B) The S. is more private-sector oriented.
  4. C) The S. always follows a conceptual framework when developing accounting standards.
  5. D) S. standards are becoming more rigid than U.K. standards.

 

LO: 10

 

  1. Which of the following terms describe the qualitative characteristic of information usefulness?
  2. A) Relevance
  3. B) Understandability
  4. C) Representational faithfulness
  5. D) All of the above are characteristics of information usefulness.

 

LO: 5

 

  1. In which of the following countries is the use of IFRS not allowed for domestic companies listed on its stock exchanges?
  2. A) United Kingdom
  3. B) Yugoslavia
  4. C) Australia
  5. D) United States

 

LO: 6

 

 

 

 

 

Chapter 04

International Financial Reporting Standards: Part I

 

Multiple Choice Questions

 

  1. In an Ernst and Young 2005 survey of 130 companies’ Forms 20-F filed with the SEC, what issue required the greatest adjustment?
  2. A) goodwill
  3. B) leases
  4. C) pensions
  5. D) business combinations

 

LO: 1

 

  1. What types of issues cause differences between International Financial Reporting Standards and U.S. GAAP?
  2. A) measurement
  3. B) alternatives available
  4. C) disclosure
  5. D) All of the above may be different between IFRS and U.S. GAAP.

 

LO: 1

 

  1. Which of the following is generally true about the differences between U.S. GAAP and IASB standards?
  2. A) S. GAAP is generally more flexible than IASB standards.
  3. B) S. GAAP tends to be more rule-based and the IASB standards tend to be principles-based.
  4. C) More professional judgment is required to apply U.S. GAAP than is required for implementing IASB standards.
  5. D) In all cases, U.S. GAAP is more detailed than the IASB standards.

 

LO: 1

 

  1. Which of the following inventory valuation methods commonly used in the U.S. is NOT allowed under IAS 2 (Inventories)?
  2. A) LIFO
  3. B) FIFO
  4. C) weighted average
  5. D) retail inventory method

 

LO: 2, 3

 

 

Use the following to answer questions 5-6:

 

The following inventory information above was taken from the records of GlobeKom Ltd.:

 

 

  1. Under IAS 2, what should the Balance Sheet report for Inventory?
  2. A) $9,000
  3. B) $8,500
  4. C) $9,500
  5. D) $10,000

 

LO: 2

 

  1. Under U.S. GAAP, what should the Balance Sheet report for Inventory?
  2. A) $9,000
  3. B) $8,500
  4. C) $9,500
  5. D) $10,000

 

LO: 2, 3

 

Use the following to answer questions 7-9:

 

The following inventory information was taken from the records of Kleinfeld Inc.:

 

 

 
  1. Under IAS 2, what should the Balance Sheet report for Inventory?
  2. A) $7,000
  3. B) $8,500
  4. C) $7,600
  5. D) $9,000

 

LO: 2

 

  1. Assume that subsequent to your adjustment the expected selling price increases to $13,000.  (All the rest of the facts are the same.)  What adjustment to inventory should be made under IAS 2 after this event?
  2. A) Inventory should be increased (debited) by $3,500.
  3. B) Inventory should be increased (debited) by $4,000.
  4. C) No adjustment should be made to inventory once it is written down.
  5. D) Inventory should be increased (debited) by $1,000.

 

LO: 2

 

  1. Under U.S. GAAP, what should the Balance Sheet report for Inventory?
  2. A) $9,000
  3. B) $8,500
  4. C) $7,600
  5. D) $10,000

 

LO: 2, 3

 

  1. The following inventory information was taken form the records of a foreign corporation whose stock is listed on an exchange in the U.S.

 

 

 

How will income under the U.S. GAAP compare to income the company reported under IFRS after reconciliation?

  1. A) Income will not be affected by the reconciliation.
  2. B) Income under U.S. GAAP will be lower by $1,700.
  3. C) Income under U.S. GAAP will be lower by $2,500.
  4. D) Income under U.S. GAAP will be equal to income under IFRS.
 

 

LO: 2, 3

 

  1. Under IAS 2, what adjustment needs to be made after an inventory write-down if the selling price subsequently increases?
  2. A) No adjustment is necessary.  Once inventory is written down, it cannot be increased under IASB standards.
  3. B) It should be sold at the replacement cost.
  4. C) The inventory write-down should be reversed to bring it in line with the new net realizable value.
  5. D) Recovery of inventory loss should be debited to reflect the increase in inventory value.

 

LO: 2

 

  1. What is the basis for choosing depreciation methods for fixed assets under IAS 16 (Property, Plant, & Equipment)?
  2. A) Tax minimization
  3. B) Profit maximization
  4. C) Useful life of the fixed asset
  5. D) Pattern of economic benefits to be derived from the asset

 

LO: 2

 

  1. According to IAS 16 (Property, Plant & Equipment), what is the term used to indicate the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction?
  2. A) replacement cost
  3. B) net realizable value
  4. C) fair market value
  5. D) historical cost

 

LO: 2

 

  1. Which of the following items should be included in the cost of property, plant, and equipment under IAS 16?
  2. A) all costs directly attributable to getting the asset to the proper location
  3. B) import duties and taxes
  4. C) estimated costs of removing the asset
  5. D) All of the above should be considered part of the cost of the asset.

 

LO: 2

 

 

  1. In what way does IAS 16 (Property, Plant, & Equipment) differ from U.S. GAAP concerning fixed asset measurement subsequent to initial recognition?
  2. A) IAS 16 allows for upward revaluation of the asset based on fair value.
  3. B) IAS 16 does not allow accumulated depreciation to be shown on the balance sheet.
  4. C) IAS 16 requires that fixed assets be carried at fair value less accumulated impairment losses.
  5. D) IAS 16 allows both upward and downward revaluation of fixed assets, whereas U.S. GAAP only allows upward revaluation.

 

LO: 2, 3

 

  1. If a company chooses the revaluation model permitted in IAS 16 for fixed asset measurement:
  2. A) annual revaluations must be performed on each class of assets.
  3. B) it must update the valuation so that the balance sheet represents fair value on the balance sheet date.
  4. C) appraisals must be performed by an official of the IASB.
  5. D) the depreciated replacement cost must be used as the fair value of the fixed asset.

 

LO: 2

 

  1. Chien Bleu Ltd. purchased a building in 2004 for €10,000,000 and as of December 31, 2010 had recorded accumulated depreciation on the building of €3,000,000.  December 31, 2010 the company conducted its first revaluation when the fair value was €12,000,000.  According to IAS 16, what account should be credited for €5,000,000?
  2. A) retained earnings
  3. B) gain from revaluation of building
  4. C) revaluation surplus
  5. D) revaluation revenue

 

LO: 2

 

  1. According to IAS 16, a decrease in the carrying amount of a fixed asset that is identified on an asset’s first revaluation should be recorded as:
  2. A) an expense on the Income Statement.
  3. B) a prior period adjustment to Retained Earnings.
  4. C) a credit to Revaluation Surplus.
  5. D) a debit to Revaluation Surplus.

 

LO: 2

 

 

  1. Blanco Chemical Company spent €15,000,000 in development efforts to create a fertilizer for which it was able to obtain a patent; however, the expected distribution costs make it infeasible to market the chemical in the foreseeable future.  According to IAS 38 (Intangible Assets), how should Blanco Chemical Company record the €15,000,000?
  2. A) as a  “Deferred Development Cost” on the Balance Sheet
  3. B) as “Fertilizer Revenue” on the Income Statement
  4. C) as “Development Expense” on the Income Statement
  5. D) It should only be reported in the notes to the financial statements.

 

LO: 2

 

  1. As defined by IAS 38, how are intangible assets unlike other assets?
  2. A) They must have arisen from past events.
  3. B) Their value cannot be reasonably measured.
  4. C) They must be controlled by the enterprise.
  5. D) They are non-monetary and lack physical substance.

 

LO: 2

 

  1. IAS 38 states that an intangible asset is deemed to have an indefinite life when there is no foreseeable end to the expected cash flows the asset is likely to generate.  What is the impact of an indefinite life on amortization of the intangible asset’s cost under IAS 38?
  2. A) Management may choose any number of years over which to amortize the cost.
  3. B) No amortization is taken as long as the life is considered indefinite.
  4. C) The cost of the asset should be amortized over 20 years.
  5. D) The cost of the asset should be expensed in the period the intangible asset is acquired.

 

LO: 2

 

 

  1. When a patent or trademark is acquired in a business combination, what does IAS 38 say about recording these intangibles?
  2. A) If they had not been previously recorded as separate assets by the acquired company, they should always be recorded as “Goodwill” on the balance sheet of the company acquiring them.
  3. B) The cost of the intangibles should be expensed by the acquiring company on the merger date.
  4. C) They should be recorded as separate intangible assets only if their useful life is indefinite.
  5. D) They should be recorded as separate intangible assets if their fair value can be reliably measured.

 

LO: 2

 

  1. Through 50 years of high quality service, Domo Diagnostics Laboratory has created goodwill with its clients that management estimates is worth at least $20,000,000.  Under IAS 38, how should this be recognized?
  2. A) An intangible asset “Goodwill” should be debited for $20,000,000.
  3. B) The $20,000,000 should be expensed over a period of 20 years.
  4. C) The $20,000,000 should be expensed over a period of 50 years.
  5. D) It should not be recognized in Domo’s accounting records at all.

 

LO: 2

 

  1. Under IAS 38, which of the following items is specifically EXCLUDED from being recognized as an internally generated intangible asset?
  2. A) computer software costs
  3. B) copyrights
  4. C) customer lists
  5. D) motion pictures

 

LO: 2

 

 

  1. How does IAS 38 (Intangible Assets) differ from U.S. GAAP with respect to development costs?
  2. A) S. GAAP does not allow capitalization of development costs, whereas IAS 38 allows capitalization of these costs.
  3. B) S. GAAP requires capitalization of development costs, whereas IAS 38 makes capitalization of these costs optional.
  4. C) S. GAAP treats development costs as part of “Goodwill” whereas IAS 38 treats these costs as an intangible asset.
  5. D) S. GAAP requires expensing of all development costs and IAS 38 requires capitalizing all development costs.

 

LO: 2, 3

 

  1. Agro-World Technologies Inc. incurred $1,000,000 to construct a pilot plant to study the feasibility of building agricultural machinery more inexpensively for emerging economies.  How would this cost be classified under IAS 38 (Intangible Assets)?
  2. A) research
  3. B) development
  4. C) neither research nor development
  5. D) It could be either research or development, depending on management’s wishes.

 

LO: 2

 

  1. Rive Rouge Confections Company incurred €5,000,000 to determine if chocolate could be made to resist melting by adding certain inert minerals to the mixture.  According to IAS 38, how should Rive Rouge record this cost?
  2. A) It should be capitalized as a Deferred Development Cost.
  3. B) It should be treated as a cost of products it currently markets.
  4. C) It should be expensed currently.
  5. D) It should be amortized over 20 years.

 

LO: 2

 

  1. How does the definition of asset impairment differ between IAS 36 and U.S. GAAP?
  2. A) S. GAAP does not consider selling price in determining impairment, but IAS 36 does.
  3. B) S. GAAP considers cash flows in assessing value of continued use, but does not discount them, whereas IAS 36 requires discounting in assessing asset impairment.
  4. C) Asset impairment is more likely to occur under IAS 36 than under U.S. GAAP.
  5. D) All of the above are differences between IAS 36 and U.S. GAAP.

 

LO: 2, 3

 

 

Use the following to answer questions 29-31:

 

The following information was taken from the fixed asset records of Bosco Ltd as of December 31, 2010:

  1.   Using IAS 36, what is the amount of Impairment Loss?
  2. A) €18,000
  3. B) €37,000
  4. C) €15,000
  5. D) €25,000

 

LO: 2

 

  1. What is the amount of Impairment Loss under U.S. GAAP?
  2. A) €37,000
  3. B) €18,000
  4. C) €15,000
  5. D) €25,000

 

LO: 2, 3

 

  1. Using IAS 36, what is the recoverable amount?
  2. A) €85,000
  3. B) €82,000
  4. C) €63,000
  5. D) €75,000

 

LO: 2

 

  1. Under U.S. GAAP, if the carrying value was $50,000, the undiscounted expected future cash flows was $55,000, the discounted expected future cash flows was $51,000   and the selling price was $53,000, what is the amount of Impairment Loss?
  2. A) $5,000
  3. B) $3,000
  4. C) $1,000
  5. D) $0

 

LO: 2, 3

 

 

 

  1. A “bottom up” test and “top down” test must be applied under IASB standards to determine what?
  2. A) impairment of tangible fixed assets
  3. B) impairment of intangible fixed assets
  4. C) impairment of goodwill
  5. D) allocation of overhead costs

 

LO: 2

 

  1. How should the cost of borrowing funds to acquire or construct property, plant, and equipment be accounted for under IASB rules, as revised in 2007?
  2. A) It should be expensed in the period incurred.
  3. B) It should be added to the other costs of acquiring fixed assets to determine the amount for the balance sheet.
  4. C) Both methods are acceptable.
  5. D) Neither method is acceptable under IASB rules.

 

LO: 2

 

  1. Under U.S. GAAP, interest on loans secured to acquire fixed assets must be:
  2. A) expensed in the period they are incurred.
  3. B) capitalized as part of the fixed asset cost.
  4. C) either expensed currently or capitalized as part of the fixed asset cost.
  5. D) charged against revenue in the year the asset is put into service.

 

LO: 2, 3

 

  1. Camerata Construction borrowed €19,000,000 for 10 years at 6% specifically to modernize its operations with new equipment.  The average rate of interest on Camerata’s debt after considering the most recent loan was 5.5%.  What rate of interest should be used for capitalizing the borrowing costs on the new equipment under IAS 23?
  2. A) 5%
  3. B) 6%
  4. C) 75%
  5. D) some other amount

 

LO: 2

 

 

  1. In what way does the IASB standard on Leases (IAS 17) differ from U.S. GAAP?
  2. A) It is less specific than U.S. GAAP in terms of defining what constitutes a finance lease.
  3. B) S. GAAP requires more professional judgment in accounting for leases than does IAS 17.
  4. C) IAS 17 is more specific than U.S. GAAP in defining an operating lease.
  5. D) Operating leases are capitalized under IAS 17 but are not capitalized under U.S. GAAP

 

LO: 2, 3

 

  1. In what way should operating leases be accounted for under IAS 17?
  2. A) The lease payments should be capitalized and shown on the balance sheet as an asset.
  3. B) The lease payments must be expensed as they are incurred.
  4. C) IAS 17 is flexible, allowing both capitalization and expensing of operating lease costs.
  5. D) The lessee capitalizes the operating lease and the lessor expenses the lease.

 

LO: 2

 

  1. Which of the following is true about the IASB standards on Cash Flow Statements?
  2. A) Cash flow statements are not required under the IASB standards.
  3. B) Operating cash flows must be determined using the “direct method.”
  4. C) Operating cash flows may be combined with financing cash flows.
  5. D) IAS 7 requires essentially the same information in the cash flow statement as U.S. GAAP.

 

LO: 4, 5

 

  1. IASB standards address related party transactions.  According to these standards, which of the following is considered a “related party?”
  2. A) parent companies
  3. B) subsidiary companies
  4. C) key members of management
  5. D) All of the above could be related parties.

 

LO: 4

 

 

  1. What do IASB standards say about related party transactions?
  2. A) They are illegal in most countries and must be avoided.
  3. B) Related party transactions should be eliminated from the financial statements.
  4. C) They must be disclosed in the notes to the financial statements.
  5. D) none of the above

 

LO: 4

 

  1. Under IAS 17, in a sale-leaseback transaction, how must the initial owner treat any gain?
  2. A) defer it and amortize it into income over the life of the lease
  3. B) recognize it in income immediately
  4. C) defer it until the end of the lease term, including extensions
  5. D) He/she can choose to either defer it or recognize it in income immediately.

 

LO: 2

 

  1. Under a joint exposure draft issued by the IASB and FASB in August 2010, what is the most significant proposal?
  2. A) IFRS and U.S. GAAP would have identical quantifiable criteria for lease classification.
  3. B) Leases would no longer be classified as finance or operating.
  4. C) Lessors would recognize income immediately at the inception of the lease.
  5. D) There would be no lease disclosure required in the notes to the financial statements.

 

LO: 3

 

  1. What is one major difference between IFRS and U.S. GAAP relative to discontinued operations?
  2. A) S. GAAP requires that the after-tax gain or loss from operations and the after-tax gain or loss on asset disposal be shown as a combined item.
  3. B) S. GAAP requires the above components to be shown separately.
  4. C) IFRS requires that the after-tax gain or loss from operations and the after-tax gain or loss on asset disposal be shown separately.
  5. D) IFRS requires no separate disclosure for discontinued operations.

 

LO: 4, 5

 

 

  1. What is one major difference between IFRS and U.S. GAAP relative to correction of errors?
  2. A) S. GAAP is silent as to how to treat errors that have been discovered.
  3. B) IFRS is silent as to how to treat errors that have been discovered.
  4. C) Under U.S. GAAP a prospective approach is taken.
  5. D) Under IFRS, if it’s impractical to restate financial statements, then no restatement is necessary.

 

LO: 4, 5

 

  1. According to IFRS 8 (Segment Reporting), which is not one of the three criteria for defining an operating segment?
  2. A) An operating segment can’t merely be a lessor.
  3. B) An operating segment is a component of a business that generates revenues.
  4. C) An operating segment is a component of a business whose operating results are regularly reviewed by the chief operating officer.
  5. D) An operating segment has separate financial information available.

 

LO: 4

 

  1. Under IAS 40 (Investment Property), gains or losses from revaluation are:
  2. A) recognized in revaluation surplus.
  3. B) recognized in current income.
  4. C) not permitted.
  5. D) recognized either in current income or revaluation surplus at the option of management..

 

LO: 2

 

  1. Under IAS 16 (Property, Plant, and Equipment), subsequent revaluation decreases are:
  2. A) never recognized.
  3. B) credited to a revaluation surplus account.
  4. C) recognized as an expense on the Income Statement.
  5. D) first recognized as a reduction in any related revaluation surplus.

 

LO: 2

 

 

 

 

  1. Under IAS 10 (Events After the Reporting Period), adjusting events that occur after the balance sheet date are:
  2. A) similar to U.S. GAAP.
  3. B) disclosed in a footnote only.
  4. C) treated as a prior period adjustment.
  5. D) not disclosed, since they occurred after the fact.

 

LO: 4, 5

 

 

  1. How does IAS 34 (Interim Financial Reporting) differ from U.S. GAAP?
  2. A) S. GAAP has no guidance for interim financial reporting.
  3. B) S. GAAP takes the position that interim periods are an integral part of the full year.
  4. C) S. GAAP is the same as IAS 34.
  5. D) S. GAAP requires that an interim period be projected pro rata for the entire year.

 

LO: 4, 5

 

 

 

 

Chapter 05

International Financial Reporting Standards: Part II

 

Multiple Choice Questions

 

 

  1. The primary difference between IAS 37, and U.S. GAAP concerning the treatment of contingent liabilities pertains to:
  2. A) definition of terms.
  3. B)
  4. C) classification on the balance sheet.
  5. D) disclosure of relevant information.

 

LO: 1, 2

 

  1. The term “provision” as it is used in IAS 37, is most closely related to what term in U.S. GAAP?
  2. A) Contingent liability, where the outflow of resources is “remote.”
  3. B) Contingent liability, where the outflow of resources is “probable.”
  4. C) Current liability, where the outflow is difficult to measure.
  5. D) Reserve for bad debt, where the amount recoverable is “uncertain.”

 

LO: 1, 2

 

  1. Under IAS 37, how are contingent liabilities treated in the financial statements?
  2. A) IAS 37 does not address contingent liabilities.
  3. B) They are recorded as current liabilities if the amount is reasonably measured.
  4. C) They are disclosed in the notes to the financial statements when there is more than a remote possibility of an outflow of resources.
  5. D) They are not disclosed.

 

LO: 1

 

 

  1. What is a “contingent asset?”
  2. A) There is no such thing, in either IASB standards or U.S. GAAP, as a “contingent asset.”
  3. B) This is an asset that has been put up as collateral against a loan.
  4. C) This is a possible inflow of resources arising from a future activity.
  5. D) It is a probable asset, arising from past events ,whose existence is yet to be confirmed definitively by a future event.

 

LO: 1, 2

 

  1. According to IAS 37, how should contingent assets be recognized?
  2. A) They should be disclosed in the notes to the financial statements if the inflow of resources is probable.
  3. B) They should be recognized like any other asset, with a debit to “contingent assets.”
  4. C) They should not be disclosed anywhere in the financial statements due to their uncertainty.
  5. D) They should only be disclosed in the notes to the financial statements if the inflows of resources are virtually certain.

 

LO: 1

 

  1. Under IAS 37, inflows of resources that are “virtually certain” to be received should be:
  2. A) disclosed as contingent assets in the notes to the financial statements.
  3. B) recognized as assets.
  4. C) undisclosed until management is absolutely certain that resources will be received.
  5. D) reported only in the cash flow statement.

 

LO: 1

 

  1. Why is it difficult to compare IAS 18, Revenue, to U.S. GAAP?
  2. A) The IASB definition of revenue is very complicated, whereas the definition of revenue under U.S. GAAP is straightforward.
  3. B) Revenue is not defined under U.S. GAAP.
  4. C) There is no single standard in U.S. GAAP that deals solely with revenue.
  5. D) Under U.S. GAAP, revenue is defined in terms of cash, whereas IAS 18 defines revenue in terms of a variety of resources.

 

LO: 1, 2

 

 

  1. How does U.S. GAAP require prior service costs related to retirees to be recognized?
  2. A) amortize over the average remaining working lives of active employees
  3. B) recognize immediately
  4. C) don’t recognize at all
  5. D) amortize over remaining expected life of the retirees

 

LO: 1, 2

 

  1. The IASB standard on stock options (IFRS 2) is substantially the same as U.S. GAAP.  How should stock options be accounted for?
  2. A) Since their value is not determinable until a future date, they are not recorded, but only disclosed in the notes to the financial statements.
  3. B) A compensation expense is recorded based on the value of the options expected to vest as of the date the options are granted.
  4. C) An expense is recorded only if a market value for the options exists on the date the options are granted.
  5. D) The options are recorded as a liability for the value of the stock at the exercise date.

 

LO: 1, 2

 

  1. Under IAS 1, Presentation of Financial Statements, which of the following is NOT a definition of a current liability:
  2. A) It is a liability that is expected to be settled in an entity’s normal operating cycle.
  3. B) It is a liability primarily held for the purpose of trading.
  4. C) It is a liability that does not have the right to defer until 18 months after the balance sheet date.
  5. D) It is a liability that is expected to be settled within 12 months of the balance sheet date.

 

LO: 1

 

  1. Which of the following represents a difference in the classification of current liabilities between IFRS and U.S. GAAP?
  2. A) refinanced short-term debt
  3. B) amounts payable on demand due to violation of debt covenants
  4. C) bank overdrafts
  5. D) all of the above

 

LO: 1, 2

 

 

  1. According to IAS 37, with respect to onerous contracts, a provision should be recognized for “unavoidable costs of the contract”, which is defined as:
  2. A) the intrinsic value of the contract.
  3. B) the lower of cost or market value of the contract.
  4. C) the lower of cost of fulfillment or the penalty from non-fulfillment of the contract.
  5. D) none of the above.

 

LO: 1

 

  1. Under IAS 19, Employee Benefits, which of the following benefits are covered?
  2. A) compensated absences and bonuses
  3. B) post-employment benefits
  4. C) deferred compensation and disability benefits
  5. D) all of the above

 

LO: 1

 

 

  1. Under IAS 19, with respect to the calculation of net pension expense (or revenue), which of the following components is NOT counted?
  2. A) actual annual return on plan assets
  3. B) current service cost
  4. C) current period actuarial gains and losses
  5. D) past service cost recognized in the current period

 

LO: 1

 

The following facts apply to questions 15-16:

 

XYZ Company, a calendar-year entity, amends its defined benefit pension plan on January 1, 2010 and must recognize the increase in past service costs of its vested and non-vested employees as of that date in the calculation of its net 2010 pension expense (or revenue).  The pertinent facts as of January 1, 2010 are:

 

Increase in PSC—vested employees:                         $5,000

Increase in PSC—non-vested employees:                  $2,000

Remaining vesting period—non-vested employees:   5 years

Remaining working life—vested employees:             10 years

Remaining working life—non-vested employees:      20 years

 

 

  1. Calculate the past service costs included in 2010 net pension expense (or revenue) under IAS 19.
  2. A) $5,100
  3. B) $5,400
  4. C) $600
  5. D) $7,000

 

LO: 1

 

  1. Calculate the past service costs included in 2010 net pension expense (or revenue) under U.S GAAP.
  2. A) $5,100
  3. B) $5,400
  4. C) $600
  5. D) $7,000

 

LO: 1, 2

 

 

 

  1. Which of the following is a difference between IAS 37 and U.S. GAAP with respect to restructuring provisions?
  2. A) S. GAAP does not allow recognition of a restructuring provision until a liability has been incurred.
  3. B) There is no difference between IAS 37 and U.S. GAAP with respect to restructuring provisions.
  4. C) IAS 37 does not allow recognition of a restructuring provision until a liability has been incurred.
  5. D) A restructuring provision and related loss is more likely to occur later under IAS 37 than under U.S. GAAP.

 

LO: 1, 2

 

 

  1. Under the “corridor approach” of IAS 19, which is used to smooth out the impact of actuarial gains and losses, how are these losses recognized in the current period?
  2. A) to the extent they exceed 5% of the greater of the present value of the defined pension benefit obligation at the end of the previous year or the fair value of the plan assets at the end of the previous year
  3. B) They are amortized evenly over the current year and the next year.
  4. C) to the extent they exceed 10% of the greater of the present value of the defined pension benefit obligation at the end of the previous year or the fair value of the plan assets at the end of the previous year
  5. D) They are amortized evenly over the average expected remaining lives of active employees.

 

LO: 1

 

  1. With respect to post-employment medical benefits, U.S. GAAP:
  2. A) does not recognize the concept of post-employment medical benefits.
  3. B) has considerably less guidance than IAS 19.
  4. C) follows the guidance of IAS 19.
  5. D) has considerably more guidance than IAS 19.

 

LO: 1, 2

 

  1. Which of the following is NOT  a share-based payment transaction under IFRS 2?
  2. A) equity-settled share-based payment
  3. B) cash-settled share-based payment
  4. C) choice-of-settlement share-based payment
  5. D) All of the above are share-based payment transactions under IFRS 2.

 

LO: 1

 

 

  1. Under IFRS 2, Share-based Payment, what approach is used to account for the transaction?
  2. A) comparable transaction approach
  3. B) fair value approach
  4. C) market approach
  5. D) notional value approach

 

LO: 1

 

  1. Under both IFRS and U.S. GAAP, in an equity-settled share-based payment transaction, how are such payments to non-employees measured?
  2. A) at the cost of the goods or services received
  3. B) Both standards are silent as to the treatment of non-employees.
  4. C) always the fair value of the equity instrument
  5. D) at the fair value of goods or services received, if a reliable determination is available—otherwise, the fair value of the equity instrument

 

LO: 1, 2

 

  1. Under U.S. GAAP, with respect to equity-settled share-based payments, if the fair value of the equity instrument is used, the value is determined:
  2. A) at the earlier of the date a commitment for performance is reached or the date the services are actually completed.
  3. B) at the date the services are actually completed.
  4. C) at the date a commitment for performance is reached.
  5. D) none of the above

 

LO: 1, 2

 

 

  1. How does U.S. GAAP differ from IFRS with respect to cash-settled share-based payments?
  2. A) S. GAAP always treats such payments as a liability.
  3. B) S. GAAP offers the option to treat such payments as either a liability or equity.
  4. C) IFRS and U.S. GAAP follow the same approach with respect to such payments.
  5. D) S. GAAP, under certain circumstances, may treat such payments as equity.

 

LO: 1, 2

 

  1. Under IFRS 2, with respect to cash-settled share-based payments, when an employee has received stock appreciation rights, how is the fair value of those rights measured?
  2. A) using the Black Motor Pool method
  3. B) using an option pricing model
  4. C) using the Van der Graaf approach
  5. D) all of the above

 

LO: 1

 

  1. Under IFRS 2, with respect to choice-of-settlement share-based payments, if it is the entity that has the right to choose between equity settlement and cash settlement, when must the entity choose the cash settlement?
  2. A) if the supplier provides services
  3. B) if the supplier provides goods
  4. C) if the entity has a present obligation to settle in cash
  5. D) The entity always has the option to choose either method.

 

LO: 1

 

  1. Under IFRS 2, with respect to choice-of-settlement share-based payments, if the supplier chooses the cash settlement, the entity is deemed to have issued a compound financial instrument consisting of debt and equity.  When cash is received, how does the supplier report it?
  2. A) only against the equity portion
  3. B) apportioned between debt and equity based on relative fair market value of each component
  4. C) in current year income
  5. D) only against the debt portion

 

LO: 1

 

 

  1. Under IAS 36, Income Taxes, which of the following issues are covered?
  2. A) temporary differences
  3. B) operating loss carry-forwards
  4. C) tax credit carry-forwards
  5. D) all of the above

 

LO: 1

 

  1. Under IAS 12, current and deferred taxes are measured on the basis of:
  2. A) rates that have been enacted or substantively enacted by the balance sheet date.
  3. B) current rates and rates anticipated when temporary differences reverse.
  4. C) rates anticipated when temporary differences reverse.
  5. D) whether the entity provides goods or services.

 

LO: 1

 

  1. Under the IASB’s exposure draft, Income Tax, how would the term “substantively enacted”, as it applies to tax laws, be determined?
  2. A) when the affected jurisdiction has issued final regulations with respect to a tax law
  3. B) when any future steps in the enactment process can’t change the outcome
  4. C) when one part of a bicameral legislature has passed a tax bill
  5. D) all of the above

 

LO: 1

 

  1. Under U.S. GAAP, a deferred tax asset must be realized when:
  2. A) realization is probable.
  3. B) realization is possible.
  4. C) realization is more likely than not.
  5. D) realization is greater than 75% likely.

 

LO: 1, 2

 

  1. What is the journal entry required to recognize a deferred tax asset of $50,000?
  2. A) Deferred Tax Asset $50,000, Cr. Income Tax Benefit $50,000
  3. B) Deferred Tax Asset $50,000, Cr. Equity $50,000
  4. C) Income Tax Expense $50,000, Cr. Deferred Tax Asset $50,000
  5. D) Deferred Tax Asset $50,000, Cr. Deferred Tax Liability $50,000

 

LO: 1, 2

 

 

  1. Under IAS 12, Income Taxes, how is the relationship between a hypothetical tax expense based on statutory rates and reported tax expense based on the effective tax rate explained?
  2. A) A numerical reconciliation between tax expense based on the statutory rate in the home country and tax expense based on the effective tax rate must be presented.
  3. B) A numerical reconciliation between tax expense based on the weighted-average statutory rate across jurisdictions in which the company pays income taxes and tax expense based on the effective tax rate must be presented.
  4. C) Either (A) or (B) are acceptable explanations.
  5. D) Neither (A) nor (B) are acceptable explanations.

 

LO: 1

 

  1. What kinds of temporary differences related to income taxes can arise under IFRS that don’t occur under U.S. GAAP?
  2. A) book and tax differences related to the revaluation of property, plant, and equipment for book purposes and cost method for tax purposes.
  3. B) book and tax differences related to the calculation of impairments for book purposes with no like adjustment for tax purposes.
  4. C) both (A) and (B)
  5. D) use of the LIFO inventory method for book purposes and the FIFO inventory method for tax purposes.

 

LO: 1, 2

 

  1. Under IAS 1, Presentation of Financial Statements, how must deferred taxes be classified on the balance sheet?
  2. A) as either a current asset or a current liability
  3. B) as always a noncurrent asset or a noncurrent liability
  4. C) as either a current or noncurrent asset or liability based on the expected timing of realization
  5. D) as a separately stated positive or negative component of equity

 

LO: 1

 

 

  1. IAS 18, Revenue, covers which types of revenues?
  2. A) sale of goods
  3. B) rendering of services
  4. C) interest, royalties, and dividends
  5. D) all of the above

 

LO: 1

 

  1. Under IAS 18, which of the following is NOT a condition that must be met in order for revenue from the sale of goods to be recognized?
  2. A) The significant risks and rewards of ownership of the goods have been transferred to the buyer.
  3. B) There must be a binding, written contract between the seller and the buyer.
  4. C) The amount of revenue can be measured reliably.
  5. D) Neither continued managerial involvement normally associated with ownership nor effective control of the goods is retained.

 

LO: 1

 

  1. Under IAS 18, which of the following is an example of retention of significant risks and rewards by the seller?
  2. A) The buyer has no right to rescind the purchase.
  3. B) The seller is under no obligation for satisfactory performance not covered by normal warranties.
  4. C) Goods are sold subject to installation, but installation is not a significant part of the contract and has not yet been completed.
  5. D) Receipt of revenue by the seller is contingent on the buyer generating revenue through its sale of the goods.

 

Level: Medium  LO: 1

 

  1. Under IAS 18, if four out of the five conditions for recognizing revenue from the sale of goods are met, and the entity is 75% certain that revenue will be recognized as a result, how would a $100,000 sale be recognized at the time of the sale?
  2. A) The recognition of the entire sale must be deferred until the fifth condition has been met.
  3. B) $75,000 of the sales price can be currently recognized and $25,000 will be treated as a liability.
  4. C) The entire $100,000 sales price can be currently recognized since most of the conditions have been met.
  5. D) None of the above represents a proper treatment of this sale.

 

LO: 1

 

 

  1. What is true about both IFRS and U.S. GAAP with respect to service contracts?
  2. A) IFRS and U.S. GAAP both allow the use of the percentage-of-completion method.
  3. B) Neither IFRS, nor U.S. GAAP allows the use of the percentage-of-completion method.
  4. C) IFRS allows the use of the percentage-of-completion method while U.S. GAAP does not.
  5. D) S. GAAP allows the use of the percentage-of-completion method while IFRS does not.

 

LO: 1, 2

 

  1. Under IAS 18, when it is probable that the economic benefits of interest, royalties, and dividends will flow to the enterprise and can be measured reliably, how should revenue be recognized?
  2. A) Interest income shall be recognized based on an effective yield basis.
  3. B) Royalties are recognized on an accrual basis with reference to the terms of the agreement.
  4. C) Dividends are recognized when the shareholders’ right to receive payment is established.
  5. D) All of the above govern revenue recognition under these circumstances.

 

LO: 1

 

  1. Under a joint exposure draft issued by the IASB and FASB in June 2010, Revenue from Contracts with Customers, which of the following is NOT one of the steps to be applied in the recognition of revenue across a wide range of transactions and industries?
  2. A) Identify the contract with a customer.
  3. B) Do not separate the transaction price for separate performance obligations if the contract is a bundled contract where goods and services are not sold separately.
  4. C) Identify the separate performance obligations in the contract.
  5. D) Determine the transaction price.

 

LO: 1, 2

 

  1. IAS 32 defines a financial instrument as:
  2. A) the currency of a foreign country in which the enterprise does business.
  3. B) a certified check.
  4. C) any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
  5. D) a recognized stock exchange.

 

LO: 1

 

 

  1. Under IAS 32, which of the following is a financial asset?
  2. A) investment in equity instruments accounted for under the equity method
  3. B) investment in special-purpose entities
  4. C) a 30% investment in a subsidiary
  5. D) loans to other entities

 

LO: 1

 

  1. Under IAS 32, which of the following is a financial liability?
  2. A) a payable
  3. B) a bank loan
  4. C) an intercompany loan payable
  5. D) all of the above

 

LO: 1

 

  1. Under IAS 32, how should an equity instrument be classified?
  2. A) It must always be classified as equity by its very nature.
  3. B) The entity has the option of classifying it as a liability or equity.
  4. C) If it contains a contractual obligation that meets the definition of a financial liability, it should be classified as a liability.
  5. D) The entity should apportion the classification between liability and equity if there is a contractual obligation that meets the definition of a financial liability.

 

LO: 1

 

  1. Under U.S. GAAP, if an entity issues 4% preferred stock that gives shareholders the right to redeem the shares if the prevailing interest rates on 5-year certificates of deposit exceed 4%, how should this stock be accounted for on the books of the entity?
  2. A) initially as equity and then reclassified as a liability when the triggering event occurs
  3. B) as a liability since the chances are more likely than not that the triggering event will occur
  4. C) as equity or a liability at the option of the entity
  5. D) as a permanent part of equity, to be debited as shares are redeemed

 

LO: 1, 2

 

 

 

  1. Under IAS 39, Financial Instruments: Recognition and Measurement, which of the following is NOT a category into which a financial asset must be classified?
  2. A) property, plant, and equipment
  3. B) held-to-maturity investments
  4. C) loans and receivables
  5. D) available-for-sale financial assets

 

LO: 1

 

  1. Under IAS 39, Financial Instruments: Recognition and Measurement, which of the following terms describes the removal of a financial asset or liability from the balance sheet when certain appropriate criteria have been met?
  2. A) decoupling
  3. B) extinguishment
  4. C) derecognition
  5. D) reversal

 

LO: 1

 

  1. Under IAS 39, under what circumstances will derecognition of a financial liability occur?
  2. A) when the obligation has been paid
  3. B) when the obligation has been canceled
  4. C) when the obligation has expired
  5. D) all of the above

 

LO: 1

 

 

 

Chapter 06

Comparative Accounting

 

Multiple Choice Questions

 

  1. What term should be used to describe the current economic system in the People’s Republic of China?
  2. A) Communist
  3. B) Socialist market
  4. C) Totalitarian
  5. D) Free enterprise

 

LO: 1

 

  1. What is the basis for the People’s Republic of China’s current economic system?
  2. A) Government ownership of all businesses and economic resources
  3. B) Private ownership of all business enterprises
  4. C) Competition between state-owned enterprises and private business
  5. D) Congressional planning of industrial output and consumption

 

LO: 1

 

  1. Among the world’s nations, where does the People’s Republic of China rank in terms of receiving foreign direct investment?
  2. A) First
  3. B) Fourth
  4. C) Tenth
  5. D) Fifth

 

LO: 1

 

  1. What is China’s policy regarding revaluation of intangible assets?
  2. A) It is encouraged.
  3. B) It is prohibited.
  4. C) It is permitted only if the asset trades in an active market.
  5. D) It has offered no guidance on the issue.

 

LO: 4

 

 

  1. Which term refers to an affiliate relationship between an accounting/auditing firm and its sponsoring organization?
  2. A) parent/subsidiary
  3. B) hooked up
  4. C) guanxi
  5. D) brother/sister

 

LO: 2

 

  1. What body regulates trading of corporate securities in the People’s Republic of China?
  2. A) National People’s Congress
  3. B) State Council
  4. C) Securities and Exchange Commission
  5. D) Chinese Security Regulatory Commission

 

LO: 3

 

  1. Why is the validity and reliability of financial disclosures of limited importance in the People’s Republic of China (PRC)?
  2. A) China has no corporations with publicly traded stock.
  3. B) The government owns all of the corporate stock traded in the PRC.
  4. C) Most of the stock purchased in the PRC is held for only a short period of time.
  5. D) Most of the stock is rated by the government of the PRC in terms of its quality.

 

LO: 2

 

  1. Which of the following statements is true about accounting in China?
  2. A) Accounting has a long history, dating back thousands of years.
  3. B) The first professional accounting body in the People’s Republic of China was established in 1988.
  4. C) The philosopher Confucius taught about accounting.
  5. D) All of the statements above are true.

 

LO: 2

 

 

  1. What was the difference between the CICPA and CACPA in the People’s Republic of China (PRC)?
  2. A) These are two translations of a single Chinese professional association from Mandarin to English.
  3. B) The CICPA was the professional association for accountants and the CACPA is the professional association for auditors.
  4. C) The CICPA was the professional association for CPAs in private practice and the CACPA is the professional association for accountants in public practice in the PRC.
  5. D) None of the statements above is true.

 

LO: 2

 

  1. What reason is given for the stagnation of accounting development during the “Cultural Revolution” in China (1966-1976)?
  2. A) Over-simplification of accounting was pursued to make it accessible to a broad populace.
  3. B) There was very little business being transacted in China during the Cultural Revolution.
  4. C) Businesses in China were converting to international accounting standards during this period of time so they stopped developing new standards.
  5. D) Auditors took over the development of accounting practice.

 

LO: 2

 

  1. The People’s Republic of China made economic reforms in the 1980s to encourage international trade.  What impact have these reforms made on accounting?
  2. A) Increased the demand for accounting information from investors.
  3. B) Increased the supply of publicly available accounting information from Chinese companies.
  4. C) Changed the nature of auditing in the PRC.
  5. D) All of the above are true.

 

LO: 1, 2

 

  1. Which of the following statements is true about joint ventures between Chinese companies and international companies?
  2. A) Tax returns of joint ventures must be audited by Chinese CPAs.
  3. B) Annual financial reports of joint ventures must be audited by Chinese CPAs.
  4. C) Capital contributions by investors must be verified by Chinese CPAs.
  5. D) All of the above statements are true about Chinese joint ventures.

 

LO: 1

 

 

  1. What agency is responsible for setting accounting standards and regulations in the People’s Republic of China?
  2. A) Chinese Institute of CPAs
  3. B) Ministry of Finance
  4. C) Chinese Security Regulatory Commission
  5. D) State Council

 

LO: 3

 

  1. In addition to the 16 Chinese Accounting Standards, what else forms the structure of financial reporting in modern China?
  2. A) IFRS
  3. B) S. GAAP
  4. C) ASBE
  5. D) CICPA

 

LO: 4

 

  1. Who is the main user of accounting information in China?
  2. A) listed companies
  3. B) banks
  4. C) investors
  5. D) the government

 

LO: 4

 

  1. What recent event has given the People’s Republic of China an incentive to harmonize its accounting standards?
  2. A) Collapse of Arthur Andersen
  3. B) Membership in the NATO
  4. C) Admission to the WTO
  5. D) Establishment of the CSRC

 

LO: 1

 

 

  1. Why is accounting conservatism NOT a basic principle underlying accounting standards in the People’s Republic of China?
  2. A) It is perceived to manipulate accounting numbers for the benefit of owners by exploiting workers.
  3. B) It too closely reflects the views of the masses, which are not considered in establishing accounting standards.
  4. C) Conservatism has been shown to cause economic hardship for companies operating in China.
  5. D) Conservatism overstates assets, which is perceived to distort financial results.

 

LO: 5

 

  1. Which of the following is the purpose of China’s “Accounting System for Business Enterprises” issued in 2001 to supersede its “Basic Standard of Accounting for Business Enterprises?”
  2. A) Increase harmonization of accounting standards.
  3. B) Improve comparability of accounting statements.
  4. C) Make financial reporting distinct from taxation.
  5. D) All of the above

 

LO: 5

 

  1. What is the primary source of capital in Germany?
  2. A) Issuance of stock
  3. B) Corporate bonds
  4. C) Bank loans
  5. D) Government grants

 

LO: 1

 

  1. Which of the following countries has NOT had its accounting systems significantly influenced by Germany?
  2. A) Switzerland
  3. B) Denmark
  4. C) Japan
  5. D) France

 

LO: 1

 

 

  1. What functional area dominates the accounting profession in Germany?
  2. A) Taxation
  3. B) Auditing
  4. C) Financial reporting
  5. D) Managerial Accounting

 

LO: 2

 

  1. In Germany, prudence is an accounting principle established in commercial law.  What does “prudence” mean in an accounting context?
  2. A) Reliability
  3. B) Comparability
  4. C) Conservatism
  5. D) Relevance

 

LO: 4

 

  1. What was the primary influence on Germany’s accounting regulations from the mid-1980’s until very recently?
  2. A) The Stock Corporation Law
  3. B) The directives of the European Union
  4. C) The Companies Act
  5. D) The S. Financial Accounting Standards Board

 

LO: 1

 

  1. What body currently develops accounting standards in Germany?
  2. A) German Accounting Standards Committee
  3. B) German Ministry of Justice
  4. C) Bundestag
  5. D) Chamber of Auditors

 

LO: 3

 

  1. What body currently enforces financial accounting requirements in Germany?
  2. A) German Accounting Standards Committee
  3. B) Bundestag
  4. C) Financial Reporting Enforcement Panel
  5. D) Financial Accounting Standards Board

 

LO: 3

 

 

  1. What is Germany’s position with respect to accounting standards harmonization?
  2. A) IFRS should be used as long as they conform to directives set by the European Union.
  3. B) German GAAP is not influenced by IFRS.
  4. C) Accounting standard harmonization is of little interest to German accounting regulators.
  5. D) Germany has no mechanism for ensuring that accounting standards are consistent with IFRS.

 

LO: 4

 

  1. German accounting standards have a “reverse authoritative principle.”  What does this mean?
  2. A) Reversing entries must be made before financial reports can be issued to the public.
  3. B) Only tax deductible expenses may be used for determining accounting income.
  4. C) Financial statements are the basis for taxation.
  5. D) None of the above.

 

LO: 4

 

  1. What is meant by Germany’s “authoritative principle?”
  2. A) The GASB is the final authority for accounting standards.
  3. B) The International Accounting Standards Board is the authority for making German GAAP.
  4. C) Financial accounting is the basis for determining tax.
  5. D) Accounting standards are derived from tax law.

 

LO: 4

 

  1. Why is corporate income tax in Germany based on financial accounting income?
  2. A) Germany had rules for financial accounting before it had a corporate income tax.
  3. B) The German Accounting Standards Board has more authority than the Bundestag.
  4. C) German financial accounting standards reflect true economic income.
  5. D) Germany was following the practice set by the United Kingdom.

 

LO: 4

 

 

  1. While German tax computations are based on financial accounting standards, this is not true in the United Kingdom.  Why doesn’t the U.K. base its tax code on financial accounting standards?
  2. A) The United Kingdom tries to avoid being like Germany whenever it can.
  3. B) The United Kingdom had a tax code long before it had financial accounting standards.
  4. C) Financial accounting standards in the United Kingdom are too conservative to be practical for tax purposes.
  5. D) Germany follows the directives of the European Union, whereas the United Kingdom has not adopted the directives of the EU.

 

LO: 4

 

  1. Why do German companies willingly take a conservative position in calculating income?
  2. A) To minimize tax
  3. B) To keep employees from asking for higher wages.
  4. C) To stabilize income from year to year for dividend purposes.
  5. D) All of the above

 

LO: 1

 

  1. Under what circumstance should a German company prepare its financial statements under German GAAP rather than international financial reporting standards?
  2. A) Reporting to banks
  3. B) Reporting consolidated financial statements
  4. C) Calculating tax
  5. D) German GAAP should always be used instead of IRFS.

 

LO: 5

 

  1. Why does German accounting practice differ from IFRS?
  2. A) German accounting rules are much more specific in most areas than IFRS.
  3. B) German accounting law is less specific in some respects than IFRS.
  4. C) Germany has not adopted a policy on accounting standard harmonization.
  5. D) Germany is not interested in foreign direct investment.

 

LO: 5

 

 

  1. The Japanese economy is dominated by “keiretsu.”  What are these?
  2. A) warlords that control Japanese wealth
  3. B) local governmental entities
  4. C) corporate conglomerates
  5. D) joint ventures with foreign investors

 

LO: 1

 

  1. What links the components of a Japanese keiretsu?
  2. A) a governmental agency
  3. B) a common industry affiliation
  4. C) a common market
  5. D) a bank

 

LO: 1

 

  1. Keiretsu control about one-fourth (1/4) of the assets in Japan.  What cultural value is reflected in this business structure?
  2. A) professionalism
  3. B) optimism
  4. C) collectivism
  5. D) conservatism

 

LO: 1

 

  1. What is the reason given for a relatively low emphasis on public disclosure of financial information in Japan?
  2. A) Significant reliance on bank credit for financing
  3. B) Long-term cross-corporate ownership of stock
  4. C) Income is not viewed as a measure of corporate performance.
  5. D) All of the above

 

LO: 1

 

  1. Why is public disclosure of financial information less important in Japan than in other industrialized countries?
  2. A) Very few corporations
  3. B) Undeveloped stock exchange
  4. C) Heavy reliance on bank financing.
  5. D) Strong government control of corporations

 

LO: 1

 

 

  1. Which body has the primary responsibility for establishing accounting standards in Japan?
  2. A) Japanese Institute of Certified Public Accountants (JICPA)
  3. B) Japanese Accounting Association (JAA)
  4. C) Japan’s Ministry of Finance (MoF)
  5. D) International Accounting Standards Board (IASB)

 

LO: 3

 

  1. How does the cultural value of collectivism explain the status of auditors in Japanese society?
  2. A) Collectivism places great importance on individual responsibility, giving auditors a high status in Japanese society.
  3. B) Since outsiders are not trusted in the Japanese culture, independent auditors in Japan do not enjoy the status of American auditors.
  4. C) Because individual achievement is a hallmark of collectivism, auditors are commonly found at the top of Japanese corporations.
  5. D) Collectivism values the ability of individuals to collect resources for themselves, so auditors who achieve distinction in their profession are highly regarded.

 

LO: 2

 

  1. The population of Japan is about 1/3 the population of the United States.  There are approximately 250,000 CPAs in the U.S.  What is the approximate number of CPAs in Japan?
  2. A) 250,000
  3. B) 100,000
  4. C) 85,000
  5. D) 15,000

 

LO: 2

 

  1. Accounting and financial reporting in Japan is regulated by its Commercial Code, which is patterned after the commercial code of what country?
  2. A) United States of America
  3. B) United Kingdom
  4. C) Germany
  5. D) France

 

LO: 3

 

 

  1. What must large Japanese corporations report for years ending after 2004 due to recent amendments to the Japanese commercial code?
  2. A) Statement of Changes in Financial Position
  3. B) Consolidated Financial Statements
  4. C) Retained Earnings Statement
  5. D) Cash Flow Statement

 

LO: 4

 

  1. The Securities and Exchange Law (SEL) is one of the regulators of accounting and financial reporting in Japan.  The SEL is modeled on the regulations of what U.S. entity?
  2. A) Securities and Exchange Commission
  3. B) Financial Accounting Standards Board
  4. C) American Institute of Certified Public Accountants
  5. D) American Accounting Association

 

LO: 3

 

  1. What was the “Big Bang” in Japan?
  2. A) The stock market crash of 1929.
  3. B) The unprecedented decline in exports and stock prices in the late 1980’s.
  4. C) The changes in accounting regulation that occurred in the late 1990’s
  5. D) The growth of the Japanese economy from the 1950’s to the 1980’s.

 

LO: 1

 

  1. In Japan, what is the most commonly used ending date for accounting periods?
  2. A) December 31
  3. B) March 31
  4. C) June 30
  5. D) September 30

 

LO: 4

 

  1. Unlike IFRS, under Japanese GAAP, inventories may be valued at:
  2. A) cost
  3. B) market
  4. C) lower of cost or net realizable value
  5. D) lower of cost or market

 

LO: 5

 

 

  1. How does Japanese GAAP differ from IFRS with respect to costs of testing a fixed asset prior to use?
  2. A) Japanese GAAP requires expensing of pre-operating costs, whereas IFRS allows capitalization.
  3. B) Japanese GAAP requires expensing of pre-operating costs, where IFRS requires capitalization.
  4. C) Japanese GAAP requires capitalizing pre-operating costs, whereas IFRS requires expensing.
  5. D) Japanese GAAP allows capitalizing pre-operating costs, whereas IFRS requires expensing.

 

LO: 5

 

  1. Privatization of Mexican businesses has been encouraged by:
  2. A) North American Free Trade Agreement (NAFTA).
  3. B) Governmental attempts to improve long-term economic growth.
  4. C) Loosening restrictions on foreign investment.
  5. D) All of the above.

 

LO: 1

 

  1. What type of economic system presently exists in Mexico?
  2. A) socialist market
  3. B) Communist
  4. C) free market
  5. D) planned economy

 

LO: 1

 

  1. Mexican corporations may issue three types of stock.  Series A stock can only be owned by Mexican nationals.  These shares must constitute at least what percentage of corporate voting rights?
  2. A) 51%
  3. B) 49%
  4. C) 25%
  5. D) 10%

 

LO: 1

 

 

  1. Mexico has had a professional association of public accountants since what year?
  2. A) 1821
  3. B) 1917
  4. C) 1929
  5. D) 1964

 

LO: 2

 

  1. By what title are professional accountants in Mexico known?
  2. A) Certified Public Accountant (CPA)
  3. B) Chartered Accountant (CA)
  4. C) Contador Publico Certificado (CPC)
  5. D) Mexican Certified Public Accountant (MCPA)

 

LO: 2

 

  1. Companies listed on the stock exchange in Mexico City must provide annual audited financial statements to:
  2. A) The public through the national media.
  3. B) Shareholders only.
  4. C) Government only.
  5. D) Shareholders and the Government.

 

LO: 4

 

  1. What is the most important federal agency regulating disclosure by publicly traded companies in Mexico?
  2. A) Mexican Institute of Public Accountants (MIPA)
  3. B) National Banking and Securities Commission (NBSC)
  4. C) Bolsa Mexicana de Valores (BMV)
  5. D) National Executive Committee (NEC)

 

LO: 3

 

  1. What entity is primarily responsible for setting accounting and financial reporting standards in Mexico?
  2. A) Mexican Institute of Public Accountants (MIPA)
  3. B) National Banking and Securities Commission (NBSC)
  4. C) Bolsa Mexicana de Valores (BMV)
  5. D) International Accounting Standards Board

 

LO: 3

 

 

  1. Which of the following is NOT considered GAAP in Mexico?
  2. A) MIPA Bulletins
  3. B) MIPA Interpretations
  4. C) International Financial Reporting Standards
  5. D) NBSC Statements on Accounting Practice

 

LO: 3

 

  1. Which of the following statements is NOT required in Mexico?
  2. A) Statement of Financial Position
  3. B) Statement of Cash Flows
  4. C) Statement of Changes in Financial Position
  5. D) Income Statement

 

LO: 5

 

  1. What is the greatest difference between Mexican accounting practice and American accounting practice?
  2. A) The method of calculating earnings per share
  3. B) The lack of conservatism in Mexican accounting standards
  4. C) The treatment of inflation effects on financial statements
  5. D) The accounting for exchange rate gains and losses

 

LO: 4

 

  1. What currency is used in Mexico?
  2. A) Peseta
  3. B) Peso
  4. C) Mexican dollar
  5. D) Bolivar

 

LO: 1

 

 

  1. Why do Mexican accounting standards require all nonmonetary assets and liabilities to be restated in terms of purchasing power of the Mexican currency?
  2. A) So that exchange rate gains and losses are properly reflected in the financial statement
  3. B) In order to reflect the historical cost of the assets and financing associated with these assets
  4. C) To reflect the high rates of inflation that Mexico has experienced
  5. D) Because historical costs overstate the value of the assets and corresponding claims on resources.

 

LO: 4

 

  1. What is the main source of corporate financing in the United Kingdom?
  2. A) banks
  3. B) capital markets
  4. C) government grants
  5. D) royal family

 

LO: 1

 

  1. The first professional accounting association in the United Kingdom was established in 1853 in what city?
  2. A) London
  3. B) Belfast
  4. C) Edinburgh
  5. D) Canterbury

 

LO: 2

 

  1. Of the following British professional accounting associations, whose members MAY NOT sign an audit report?
  2. A) ICAEW
  3. B) ACCA
  4. C) CIPFA
  5. D) ICAS

 

LO: 2

 

 

  1. In what way does the public accounting profession in the United Kingdom differ from the profession in the United States?
  2. A) Public accountants in the K. may not sign audit reports.
  3. B) Auditors in the K. do not need to be independent from their audit clients.
  4. C) Public accountants in the K. are paid by the government for their audit services.
  5. D) Public accountants in the K. are not required to have a university education.

 

LO: 2

 

  1. What reasons have been given by the Institute of Chartered Accountants in England and Wales (ICAEW) for following a principles-based approach to setting accounting standards?
  2. A) Lawmakers and standard-setters cannot anticipate every situation.
  3. B) Professions should be about exercising judgment and integrity.
  4. C) The profession needs to attract people of high intellect.
  5. D) All of the above.

 

LO: 2

 

  1. Until recently, regulation of accounting practice in the United Kingdom had traditionally been left to:
  2. A)
  3. B) the accounting profession.
  4. C) the securities exchange commission.
  5. D) None of the above.

 

LO: 3

 

  1. Since the 1980s accounting regulation in the United Kingdom has been legislated more than it had been previously.  What is the primary cause for this change from professional self-regulation to government regulation?
  2. A) High profile scandals in the British business community.
  3. B) Influence of the United States on the ICAEW
  4. C) Directives from the European Union
  5. D) All of the above.

 

LO: 3

 

 

  1. What is the primary role of the Financial Reporting Council in the United Kingdom?
  2. A) Compliance oversight
  3. B) Setting standards for accounting practice
  4. C) Policy over the accounting standard setting process
  5. D) All of the above

 

LO: 3

 

  1. What is the policy for accounting harmonization in the United Kingdom?
  2. A) Eventual adoption of standards promulgated by the IASB
  3. B) Alignment of U.K. GAAP with IFRS where practical
  4. C) Rejection of IASB pronouncements
  5. D) Alignment of K. GAAP with U.S. GAAP

 

LO: 5

 

  1. Financial statements in the United Kingdom are supposed to provide a “true and fair view” of the firm’s financial position and results of operations.  How does U.K. GAAP define “true and fair view?”
  2. A) Objective, free from bias
  3. B) Statements must comply with accounting standards.
  4. C) Relevant
  5. D) K. GAAP does not define “true and fair view.”

 

LO: 4

 

  1. What set of standards must companies listed on the stock exchange in the United Kingdom use for consolidated financial statements?
  2. A) K. GAAP
  3. B) K. GAAP or U.S. GAAP
  4. C) IFRS standards adopted by the European Union
  5. D) There is no specific requirement.

 

LO: 4

 

  1. How is goodwill handled for U.K. GAAP purposes?
  2. A) Expensed right away
  3. B) Capitalized and never amortized
  4. C) Amortized at the firm’s choice
  5. D) There is no specific requirement.

 

Level: Medium LO: 4

 

 

  1. IAS 38 requires the capitalization of development expenses.  How does U.K. GAAP handle development expenses?
  2. A) Expensed right away
  3. B) Permits capitalization
  4. C) Amortized at the firm’s choice
  5. D) There is no specific requirement.

 

LO: 4, 5

 

  1. What is a key component of the U.K.’s true and fair view?
  2. A) Professional judgment
  3. B) Prudence
  4. C) Historical cost
  5. D) Loss bias

 

LO: 4

 

  1. Accounting in Mexico is oriented towards fairness, not:
  2. A) Professional judgment
  3. B) Legal compliance
  4. C)
  5. D) Taxable income.

 

LO: 4

Chapter 07

Foreign Currency Transactions and Hedging Foreign Exchange Risk

 

Multiple Choice Questions

 

  1. According to the World Trade Organization, what was the size of international trade in 2008?
  2. A) $7,000,000,000 (7 billion dollars)
  3. B) $70,000,000,000 (70 billion dollars)
  4. C) $37,000,000,000 (37 billion dollars)
  5. D) $16,000,000,000,000 (16 trillion dollars)

 

LO: 1

 

  1. In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports?
  2. A) 25%
  3. B) 75%
  4. C) 35%
  5. D) 50%

 

LO: 1

 

  1. What is a “foreign exchange rate?”
  2. A) the price to buy a foreign currency
  3. B) the price to buy foreign goods
  4. C) the difference between the price of goods in a foreign currency and the price in a domestic currency
  5. D) the cost to hold all monetary assets in a single currency

 

LO: 1

 

  1. Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?
  2. A) This was a period when the world economy was very stable.
  3. B) There was very little growth in the world economy between 1945 and 1973.
  4. C) Countries linked their currency to the U.S. dollar, which was backed by gold reserves.
  5. D) Most currencies were pegged to the British pound, which could be converted to sterling silver.

 

LO: 2

 

 

  1. The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y.  What can we conclude about these two currencies?
  2. A) Country X is using the Euro.
  3. B) Country X has pegged its currency to the currency of Country Y.
  4. C) Country X has an undesirable currency.
  5. D) Country X allows its currency to float relative to the currency of Country Y.

 

LO: 2

 

  1. When a currency is allowed to increase or decrease in value relative to other currencies, the currency is said to:
  2. A) be pegged to another currency.
  3. B) be less valuable.
  4. C)
  5. D)

 

LO: 2

 

  1. For an upcoming trip, Pat wants to buy Euros at the local bank when the current exchange rate quoted on http://www.OANDA.com was $1.563 per €1.  What should Pat plan to pay for €1,000?
  2. A) exactly $1,563
  3. B) more than $1,563
  4. C) about $640
  5. D) less than $640

 

LO: 2

 

  1. Which of the following statements is true about the Euro?
  2. A) It is the currency used by all countries in the European Union.
  3. B) It is pegged to the U.S. dollar.
  4. C) It is the currency required to be used in financial reporting under international accounting standards.
  5. D) None of the statements above is true.

 

LO: 1

 

 

  1. The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:
  2. A) the spot rate.
  3. B) the exact rate.
  4. C) the forward rate.
  5. D) the retail rate.

 

LO: 2

 

  1. The number of U.S. dollars ($) today to buy one U.K. pound (£) six months from now is called:
  2. A) the spot rate
  3. B) the exact rate
  4. C) the forward rate
  5. D) the prime rate

 

LO: 2

 

  1. What has occurred when one company arranges to buy a foreign currency some time in the future, at an exchange rate quoted today?
  2. A) The company has purchased a foreign currency option.
  3. B) The company has entered a forward contract.
  4. C) The currency has been devalued.
  5. D) None of the above

 

LO: 4

 

  1. What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today?
  2. A) The company has acquired a call option.
  3. B) The company has entered a forward contract.
  4. C) The currency has appreciated relative to the dollar.
  5. D) The company has acquired a put option.

 

LO: 4

 

 

  1. What is a “strike price?”
  2. A) the exchange rate that is used to buy a foreign currency today
  3. B) the price that will be paid for goods in a forward contract
  4. C) the exchange rate that will be used if a foreign currency option is executed
  5. D) the difference between the wholesale rate and the retail rate for foreign currency exchange

 

LO: 4

 

  1. What term is used for an option with a positive intrinsic value?
  2. A) put option
  3. B) over the counter
  4. C) in the money
  5. D) call option

 

LO: 4

 

  1. What is the intrinsic value of a foreign currency option?
  2. A) the difference between the spot rate and the strike price
  3. B) the gain on the option if it was exercised immediately
  4. C) the chance that a currency will rise over time to make the option in the money
  5. D) the difference between a call option and a put option

 

LO: 4

 

  1. What is a foreign currency transaction?
  2. A) It is another name for an international transaction.
  3. B) It is a transaction that involves payment at a date sometime in the future.
  4. C) It is a business deal denominated in a currency other than a company’s domestic currency.
  5. D) It is an economic event measured in a currency other than U.S. dollars.

 

LO: 3

 

  1. What is foreign exchange risk exposure?
  2. A) the possibility of a loss because of changes in the value of a foreign currency
  3. B) losses caused by paying for purchased goods in a foreign currency
  4. C) losses caused by receiving payment in a foreign currency for goods sold
  5. D) All of the above

 

LO: 2

 

 

  1. Under U.S. GAAP, what method is required to account for foreign currency transactions?
  2. A) A one-transaction perspective must be used.
  3. B) The two-transaction perspective must be used.
  4. C) A sale is not recorded until payment is received and converted to U.S. dollars.
  5. D) A sale is not recorded until payment is received in the foreign currency.

 

LO: 3

 

  1. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?
  2. A) A one-transaction perspective must be used.
  3. B) The two-transaction perspective must be used.
  4. C) A sale is not recorded until payment is received and converted to U.S. dollars.
  5. D) A sale is not recorded until payment is received in the foreign currency.

 

LO: 3

 

  1. Why must the two-transaction approach be used for recording foreign currency transactions under U.S. GAAP?
  2. A) The two-transaction approach is required under IFRS.
  3. B) S. GAAP requires conservatism in financial reporting.
  4. C) All other methods are excessively complicated to use and therefore obscure the essence of the transaction.
  5. D) Management made two decisions: one to sell and another to extend credit in a foreign currency.

 

LO: 3

 

  1. Under U.S. GAAP, foreign exchange losses should be recorded by:
  2. A) debiting “Foreign Exchange Loss”.
  3. B) crediting “Foreign Exchange Loss”.
  4. C) debiting “Retained Earnings”.
  5. D) debiting “Sales Revenue”.

 

LO: 3

 

 

  1. What is “asset exposure” to foreign exchange risk?
  2. A) the possibility that an asset denominated in U.S. dollars will decline in value because of changes in the foreign exchange rate
  3. B) the possibility that an asset denominated in a foreign currency will change in value because of a change in the foreign exchange rate
  4. C) the loss resulting from an import purchase when a foreign currency appreciates
  5. D) the loss resulting from an import purchase when a foreign currency depreciates

 

LO: 2

 

  1. Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?
  2. A) They should be deferred on the Balance Sheet until the cash is paid.
  3. B) They should not be recognized until cash is received to complete the transaction.
  4. C) They should be recorded on the Income Statement in the period the exchange rate changes.
  5. D) They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized.

 

LO: 3

 

  1. Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains?
  2. A) They should be deferred on the Balance Sheet until cash is received.
  3. B) The principle of conservatism requires that they should never be recognized.
  4. C) They should not be recorded until cash is received and the exchange transaction is completed.
  5. D) They should be recognized in income on the date the exchange rate changes.

 

LO: 3

 

  1. Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?
  2. A) Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it.
  3. B) It violates the principle of conservatism.
  4. C) It is not objective.
  5. D) There is no reliable method for measuring unrealized foreign exchange gains.

 

LO: 3

 

 

  1. A non-cancelable order of a product that specifies the foreign currency price and date of delivery is called a:
  2. A)
  3. B)
  4. C) foreign currency firm commitment.
  5. D) international transaction.

 

LO: 4

 

  1. What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?
  2. A) They may be shown on the balance sheet or they may be treated as off-balance sheet investments.
  3. B) They must be shown on the balance sheet at fair value.
  4. C) They must be shown on the balance sheet at historical cost.
  5. D) They may be shown on the balance sheet at historical cost or at net realizable value.

 

LO: 6

 

  1. What information is needed to determine the fair value of a foreign currency forward contract?
  2. A) The forward rate at the date the contract was entered
  3. B) The current forward rate for a contract that matures on the same dates as the forward contract that was entered into
  4. C) A discount rate to determine the present value of the contract
  5. D) All of the above information is needed

 

LO: 6

 

  1. How is the fair value of a foreign currency option calculated?
  2. A) by using the Box-Jenkins technique
  3. B) using the principles of the Black-Scholes pricing model
  4. C) through an arms-length transaction
  5. D) using quotes given daily in the Wall Street Journal

 

LO: 6

 

 

  1. Under U.S. GAAP, where are changes in the fair value of derivatives reported?
  2. A) as part of “Accumulated Other Comprehensive Income” on the Balance Sheet
  3. B) They are not recognized until the options are exercised.
  4. C) Retained Earnings
  5. D) None of the above

 

LO: 6

 

  1. What is “hedge accounting?”
  2. A) any record keeping related to purchase, sale, or valuation of derivatives
  3. B) recording options and other derivatives on the Balance Sheet
  4. C) matching gains or losses from hedging with losses or gains from the risk being hedged
  5. D) using multiple accounting methods to offset the effect of foreign currency exchange

 

LO: 5

 

  1. What kind of exposure exists for recognized foreign currency assets and liabilities?
  2. A) fair value exposure
  3. B) cash flow exposure
  4. C) both fair value exposure and cash flow exposure
  5. D) neither fair value exposure nor cash flow exposure

 

LO: 5

 

  1. What kind of exposure exists for foreign currency firm commitments?
  2. A) fair value exposure
  3. B) cash flow exposure
  4. C) both fair value exposure and cash flow exposure
  5. D) neither fair value exposure nor cash flow exposure

 

LO: 5

 

 

  1. Under U.S. GAAP, to qualify for hedge accounting which of the following conditions must be met?
  2. A) There must be formal documentation of the hedging relationship.
  3. B) A derivative must be used specifically to hedge fair value exposure or cash flow exposure.
  4. C) The hedge must be effective.
  5. D) All of the above must be met in order to qualify for hedge accounting.

 

LO: 5

 

  1. Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge?
  2. A) The hedged asset or liability is adjusted to fair value.
  3. B) Foreign exchange gains or losses on the hedged asset or liability are recorded in net income.
  4. C) Increases or decreases in a derivative’s fair value are recorded in accumulated other comprehensive income.
  5. D) Gains or losses resulting from adjusting the fair value of a derivative are recorded in net income.

 

LO: 6

 

  1. Which of the following statements is true about hedge accounting under U.S. GAAP?
  2. A) Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges.
  3. B) If a derivative qualifies as a cash flow hedge, a company may choose to account for it as a fair value hedge.
  4. C) If a derivative is considered a cash flow hedge, it must be accounted for as such.
  5. D) Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date.

 

LO: 5

 

  1. How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?
  2. A) They should be carried on the balance sheet until the contract is completed.
  3. B) They should be included in income in the period the derivative is acquired.
  4. C) They should be amortized over the life of the forward contract.
  5. D) None of the above.

 

LO: 6

 

 

  1. Under U.S. GAAP, what method of amortizing discounts or premiums on forward contracts must be used?
  2. A) effective interest rate method
  3. B) straight line method
  4. C) Companies may choose effective interest rate method or straight line method.
  5. D) Some other method must be used.

 

LO: 6

 

  1. How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies?
  2. A) All assets and liabilities of S. companies must be recorded in U.S. dollars.
  3. B) Conservatism would dictate that liabilities should be recorded in the currency in which they are payable, but assets should be recorded in U.S. dollars, regardless of what currency will be received.
  4. C) There should be separate receivable and payable accounts for each currency that is used by the company.
  5. D) The company should choose any one currency to use for recording receivable and payables so that there is consistency in the accounts.

 

LO: 3

 

  1. On May 1, 20×1, Usstar purchased a put option to sell £50,000 on April 30, 20×2 at a strike price equal to $2, which was the spot rate on May 1, 20×1.  Usstar paid a premium of $0.01 per pound.  How should the option be recorded on May 1, 20×1?
  2. A) Debit FOREIGN CURRENCY OPTION for $100,500.
  3. B) Credit FOREIGN CURRENCY OPTION for $100,500.
  4. C) Debit FOREIGN CURRENCY OPTION for $500.
  5. D) Debit HEDGE EXPENSE for $500.

 

LO: 6

 

  1. What was the effect of introducing the Euro with respect to hedging?
  2. A) Euro-zone trading partners no longer need to hedge each other’s currencies.
  3. B) Accounts receivable from sales to a customer in one Euro-zone country acts as a natural hedge against accounts payable to a supplier in another Euro-zone country for companies outside the Euro-zone.
  4. C) There are fewer currencies to hedge.
  5. D) All of the above

 

LO: 4

 

 

  1. Northland Corporation recorded £1,000,000 in Accounts Receivable for sales to customers in the United Kingdom and recorded Accounts Payable of 2,000,000 yuan for product purchased from China.  If Northland recorded a foreign currency exchange loss on its receivables and a foreign currency gain on its payables, what must have happened to each currency?
  2. A) Yuan appreciated, Pound depreciated
  3. B) Yuan depreciated, Pound appreciated
  4. C) Yuan appreciated, Pound appreciated
  5. D) Yuan depreciated, Pound depreciated

 

LO: 3

 

Use the following to answer questions 43-45:

 

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20×1 for £100,000 with payment required on April 1, 20×1.  Relevant exchange rates are:

 

 

 

The discount factor corresponding to the company’s incremental borrowing rate for 6 months is 0.95.

 

  1. Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20×1 income statement?
  2. A) Loss $1,000
  3. B) Loss $2,000
  4. C) Gain $1,000
  5. D) Gain $1,900

 

LO: 3

 

 

  1. Assume that Amazing Corporation enters a forward contract on October 1, 20×1 to sell £100,000 six months hence, on April 1, 20×2.  How should Amazing Corporation report the forward contract on its December 31, 20×1 financial statements?
  2. A) Asset $1,950
  3. B) Liability $1,950
  4. C) Asset $1,000
  5. D) Asset $950

 

LO: 6

 

  1. What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract?
  2. A) hedge of an unrecognized foreign currency firm commitment
  3. B) hedge of a recognized foreign-currency-denominated asset
  4. C) hedge of a forecast foreign-currency-denominated transaction
  5. D) hedge of net investment in foreign operations

 

LO: 4

 

Use the following to answer questions 46-47:

 

On November 1, 20×1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months.  The relevant exchange rates between the U.S. and Russian currencies are given:

 

 

The company’s incremental borrowing rate provides a discount rate of 0.975 for three months.

 

  1. If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company’s December 31, 20×1 financial statements?
  2. A) $22,000 loss
  3. B) $21,450 loss
  4. C) $8,000 gain
  5. D) $7,800 gain

 

LO: 3

 

 

  1. Assume that on November 1, 20×1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20×2.  How should Zamfir report the forward contract on December 31, 20×1?
  2. A) $8,000 asset
  3. B) $7,800 asset
  4. C) $22,000 asset
  5. D) $7,800 liability

 

LO: 6

 

  1. What is the primary difference between a cash flow hedge and a fair value hedge?
  2. A) The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable.
  3. B) The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable.
  4. C) The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable.
  5. D) The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

 

LO: 5

 

Use the following to answer questions 49-52:

 

On December 1, 20×1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees.  The customer has until March 1, 20×2 to pay.  On December 1, 20×1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20×2, which was the spot rate on December 1, 20×1.  On December 31, 20×1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees.

 

  1. What is the fair value of the option on December 1, 20×1?
  2. A) $0
  3. B) $500
  4. C) $400
  5. D) $10,000

 

LO: 6

 

 

  1. What is the fair value of the option on December 31, 20×1?
  2. A) $0
  3. B) $500
  4. C) $400
  5. D) $10,000

 

LO: 6

 

  1. What is the foreign currency exchange gain or loss on December 31, 20×1?
  2. A) $50,000 loss
  3. B) $50,000 gain
  4. C) $10,000 gain
  5. D) $10,000 loss

 

LO: 3

 

  1. If the spot rate on March 1, 20×2 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day?
  2. A) $15,000 gain
  3. B) $15,000 loss
  4. C) $35,000 gain
  5. D) $35,000 loss

 

LO: 3

 

  1. A bank exchanging foreign currency makes its profit in what manner?
  2. A) on the difference between the spot rate and the foreign rate
  3. B) A bank is forbidden, by law, to charge a premium in foreign currency exchange.
  4. C) on the present value of the forward rate discounted to the date an option is purchased
  5. D) on the difference between the retail rate and the wholesale rate

 

LO: 1

 

 

 

  1. King’s Bank, a British company, purchases market research services from Harris Interactive, a U.S. company, for a contract price to be paid in U.S. dollars when the report is delivered three months later. How would King’s Bank like to see the exchange rate move, assuming it isn’t hedging the transaction.
  2. A) It hopes that the U.S. dollar appreciates in value against the British pound.
  3. B) It hopes that the British pound appreciates in value against the U.S. dollar.
  4. C) It makes no difference, since they are the customer and the sale takes place in the K.
  5. D) It hopes that there is no change between the spot rate and the forward rate.

 

LO: 1

 

  1. In hedge accounting, which of the following items is a bona fide exposure?
  2. A) temporal exposure
  3. B) fair value exposure
  4. C) derivative exposure
  5. D) forward contract exposure

 

LO: 6

 

  1. When accounting for forward contracts, what is meant by the term “executory contract”?
  2. A) No cash changes hands.
  3. B) The CEO of the company is the only one authorized to engage in the contract.
  4. C) There must be a price paid for the option.
  5. D) The contract is not valid unless both parties sign it.

 

LO: 6

 

  1. A noncancelable sales order that specifies foreign currency price and date of delivery is known as a:
  2. A)
  3. B) foreign currency firm commitment.
  4. C) forward contract.
  5. D) put option.

 

LO: 3

 

 

 

 

Chapter 08

Translation of Foreign Currency Financial Statements

 

Multiple Choice Questions

 

  1. What is meant by the “translation” of foreign currency financial statements?
  2. A) converting financial statements prepared under foreign GAAP into domestic GAAP
  3. B) converting financial statements of a foreign currency into a domestic currency
  4. C) converting the language used in financial statements from foreign to domestic
  5. D) converting historic cost financial statements into current cost financial statements

 

LO: 1

 

  1. Companies must choose between which exchange rates for consolidating foreign subsidiaries?
  2. A) spot rate and forward rate
  3. B) spot rate and current rate
  4. C) current rate and historical rate
  5. D) domestic rate and international rate

 

LO: 1

 

  1. What is the cause of balance sheet exposure?
  2. A) converting subsidiary account balances to balances denominated in the parent company’s currency at historical exchange rates
  3. B) completing international transactions in currency other than the currency of the home company
  4. C) translating subsidiary account balances to amounts denominated in the parent company’s currency
  5. D) none of the above

 

LO: 2

 

  1. What is another term for “balance sheet exposure?”
  2. A) transaction exposure
  3. B) exchange exposure
  4. C) translation exposure
  5. D) negative exposure

 

LO: 2

 

 

  1. Which items in the balance sheet are subject to accounting exposure?
  2. A) only assets
  3. B) only liabilities and owners’ equity
  4. C) all accounts translated at historical exchange rates
  5. D) all accounts translated at current exchange rates

 

LO: 2

 

  1. Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany.  When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko’s financial statements?
  2. A) When there is net asset exposure, the translation adjustment will be positive.
  3. B) When there is net liability exposure, the translation adjustment will be positive.
  4. C) The direction of the adjustment is indeterminate.
  5. D) There will be no adjustment necessary unless the difference is realized.

 

LO: 2

 

  1. What is the primary difference between transaction exposure and accounting exposure?
  2. A) Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method.
  3. B) Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
  4. C) Transaction exposure must be hedged, but accounting exposure does not need to be hedged.
  5. D) Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

 

LO: 2

 

  1. Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?
  2. A) Temporal method
  3. B) Current/Noncurrent method
  4. C) Current rate method
  5. D) None of these methods are allowed under GAAP.

 

LO: 5

 

 

  1. Which of the following methods for translating foreign currency financial statements may be used under IAS 21?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Temporal method
  5. D) All of the above may be used under IAS 21.

 

LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a subsidiary had actually used the parent company’s currency for all its transactions?
  2. A) Current/Noncurrent method
  3. B) Monetary/Nonmonetary method
  4. C) Current rate method
  5. D) Temporal method

 

LO: 3

 

  1. Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?
  2. A) Current rate method
  3. B) Current/Noncurrent method
  4. C) Temporal method
  5. D) Monetary/Nonmonetary method

 

LO: 3

 

  1. Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a “lower of cost or market” rule.  When consolidating Essco’s balance sheet into Peako’s balance sheet, what exchange rate should be used for the inventory under the temporal method?
  2. A) historical rate
  3. B) current rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

LO: 3

 

 

  1. What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) cannot be determined with the information given

 

LO: 3

 

  1. Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?
  2. A) average rate
  3. B) current rate
  4. C) historical rate
  5. D) forward rate

 

LO: 3

 

  1. When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
  2. A) current rate method
  3. B) current/noncurrent method
  4. C) monetary/nonmonetary method
  5. D) temporal method

 

LO: 1

 

  1. Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?
  2. A) current rate method
  3. B) temporal method
  4. C) current/noncurrent method
  5. D) none of the above

 

LO: 4

 

 

  1. Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
  2. A) It is equal to the amount of assets recorded by the subsidiary.
  3. B) It is equal to the amount of liabilities recorded by the subsidiary.
  4. C) It is equal to total assets minus total liabilities.
  5. D) It is equal to total assets plus total liabilities.

 

LO: 4

 

  1. When would the balance sheet exposure arising from the current rate method become realized?
  2. A) It is realized once the financial statements of the subsidiary and the parent are consolidated.
  3. B) It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date.
  4. C) It is realized when the subsidiary is sold at book value and the proceeds are converted to parent company currency.
  5. D) It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

 

LO: 1

 

  1. Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary’s dividends into parent company currency?
  2. A) current rate
  3. B) historical rate
  4. C) average rate
  5. D) Any of the above methods may be used under both the temporal and current method.

 

LO: 4

 

  1. Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

LO: 4

 

 

  1. Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
  2. A) spot rate at the end of the year
  3. B) average rate during the year
  4. C) spot rate mid-year
  5. D) There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

 

LO: 4

 

  1. Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the “lower of cost or market” rule for inventory valuation?
  2. A) lower of parent currency cost or parent currency market at current exchange rate
  3. B) lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate
  4. C) lower of parent currency cost or parent currency market at appropriate exchange rate
  5. D) lower of subsidiary currency cost or parent currency market at current exchange rate

 

LO: 4

 

Use the following to answer questions 23-24:

 

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010.

 

Inventory, 1/1/10                                £ 100,000

Purchases                                               900,000

Cost of Goods Available for Sale       1,000,000

Inventory, 12/31/10                               200,000

Cost of Goods Sold                            £ 800,000

 

Exchange rates/£

December 31, 2010                             $0.522

December 31, 2009                             $0.560

2010 average                                       $0.547

 

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the current rate method?
  2. A) $417,600
  3. B) $437,600
  4. C) $448,000
  5. D) $443,900

 

LO: 4

 

  1. What amount should be used to consolidate Placo’s cost of goods sold into Limko’s income statement under the temporal method?
  2. A) $443,900
  3. B) $437,600
  4. C) $432,500
  5. D) $448,000

 

LO: 4

 

  1. Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
  2. A) Temporal method for all subsidiaries
  3. B) Current rate method for all subsidiaries
  4. C) S. parent companies may choose between the temporal method and the current rate method.
  5. D) Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

 

LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

LO: 5

 

 

  1. Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?
  2. A) as gains or losses on the current period consolidated income statement
  3. B) as prior period adjustments to retained earnings of the parent
  4. C) as part of other comprehensive income on the consolidated balance sheet
  5. D) None of the above because the temporal method is not allowed under FASB ASC 830.

 

LO: 5

 

  1. Under FASB ASC 830, Foreign Currency Matters, what is the definition of “functional currency?”
  2. A) the primary currency used by the parent company
  3. B) the currency that minimizes the translation adjustment on the consolidated financial statements
  4. C) the currency in which the subsidiary does its financial reporting
  5. D) the primary currency used by the subsidiary

 

LO: 5

 

  1. In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency.  What reason did the researchers give for this management decision?
  2. A) It was easier than proving to the FASB that a subsidiary’s functional currency was the U.S. dollar.
  3. B) Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements.
  4. C) This allows the use of the current method, which defers recognizing translation gains or losses in income.
  5. D) This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

 

LO: 1

 

  1. Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary?
  2. A) Financial Accounting Standards Board
  3. B) International Accounting Standards Board
  4. C) Securities and Exchange Commission
  5. D) Company management

 

LO: 5

 

 

  1. What is the “disappearing plant” problem that is addressed by FASB ASC 830, Foreign Currency Matters?
  2. A) This refers to the accelerated depreciation methods that are popular for fixed asset valuation.
  3. B) High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.
  4. C) Cheap foreign currency results in S. companies moving factory operations offshore.
  5. D) Investment in fixed assets was not being reported on foreign subsidiary financial statements.

 

LO: 5

 

  1. How does FASB ASC 830, Foreign Currency Matters define a “highly inflationary economy?”
  2. A) Inflation rate over 50% annually
  3. B) Inflation rate over 10% annually
  4. C) Cumulative three-year inflation over 26%
  5. D) Cumulative three-year inflation over 100%

 

LO: 5

 

  1. Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?
  2. A) Current rate method
  3. B) Current/noncurrent method
  4. C) Temporal method
  5. D) Monetary/nonmonetary method

 

LO: 5

 

  1. International accounting standards define functional currency as:
  2. A) the currency of the parent company.
  3. B) the currency of the primary economic environment in which the subsidiary operates.
  4. C) the currency of the primary economic environment in which the parent operates.
  5. D) the currency used by a subsidiary for its financial reporting.

 

LO: 5

 

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the parent company’s currency?
  2. A) active local sales market
  3. B) sales price not affected by changes in exchange rate in the short run
  4. C) high volume of intercompany transactions
  5. D) All of the above are indicators that the functional currency is the parent company’s currency.

 

LO: 5

 

  1. According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary’s functional currency is the foreign currency?
  2. A) sales price not affected by changes in exchange rate in the short run
  3. B) high volume of intercompany transactions
  4. C) sales in the local market not significant
  5. D) Most of the subsidiary’s financing comes from the parent.

 

LO: 5

 

  1. Which of the following methods for translating foreign currency financial statements is required under IAS 21?
  2. A) Current rate method
  3. B) Temporal method
  4. C) Current rate method or temporal method, depending on the functional currency of the subsidiary
  5. D) Current rate method or temporal method may be chosen by management of the parent.

 

LO: 5

 

  1. When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:
  2. A) appreciation or depreciation of the foreign currency
  3. B) the nature of the balance sheet exposure
  4. C) both (A) and (B)
  5. D) None of the above

 

LO: 5

 

 

  1. Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko.  How must Parentco handle this translation adjustment when it records the sale of Subko?
  2. A) as an increase in income (gain on disposal)
  3. B) as a decrease in income (loss on disposal)
  4. C) The cumulative translation adjustment will not be affected by the sale.
  5. D) It will be a prior period adjustment to retained earnings.

 

LO: 5

 

  1. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
  2. A) Fluctuations in reported income may affect stock price.
  3. B) Management compensation may be tied to accounting income.
  4. C) Hedging can smooth income.
  5. D) all of the above

 

LO: 6

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the temporal method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) none of the above

 

LO: 3

 

  1. A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone.  The current exchange rate is $0.163/krone.  Under the current rate method, how should the translated amount of the restated asset be interpreted?
  2. A) The S. parent would have to pay $16,300,000 to acquire the building today.
  3. B) The S. parent would have had to pay $13,200,000 to acquire the building in 2010.
  4. C) The building is worth $13,200,000 to the S. parent today.
  5. D) None of the above.

 

LO: 3

 

 

  1. Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
  2. A) The translated asset and liability amounts have no meaningful interpretation.
  3. B) The translation adjustment will usually have a negative impact on income.
  4. C) Financial ratios after translation will be distorted.
  5. D) All of the above are limitations of the temporal method.

 

LO: 4

 

  1. Which of the following actions could a company use to hedge balance sheet exposure?
  2. A) forward contract on foreign currency
  3. B) foreign currency option
  4. C) foreign currency borrowing
  5. D) All of the above may be used to hedge balance sheet exposure.

 

LO: 6

 

  1. Which of the following is a non-derivative hedging instrument?
  2. A) forward contract on foreign currency
  3. B) foreign currency call option
  4. C) foreign currency loan
  5. D) foreign currency put option

 

LO: 6

 

  1. What is the objective in hedging balance sheet exposure?
  2. A) Controlling the movement of foreign currency exchange rates.
  3. B) Balancing foreign currency assets and foreign currency liabilities affected by exchange rates
  4. C) To control the cash flow resulting from changes in the foreign currency exchange rates
  5. D) All of the above.

 

LO: 6

 

 

  1. What is the paradox of hedging balance sheet exposure?
  2. A) Real costs can be incurred to hedge an unrealized translation adjustment.
  3. B) The hedging process rarely works the way management intended.
  4. C) Hedging is a conceptual process that is nearly impossible to undertake in the real world.
  5. D) Markets have yet to be developed that offer the kinds of derivative instruments required for hedging.

 

LO: 6

 

  1. Which of the following is not among the four methods which have been used to translate foreign currency financial statements globally?
  2. A) the historic/non-historic method
  3. B) the monetary/nonmonetary method
  4. C) the temporal method
  5. D) the current/noncurrent method

 

LO: 1

 

  1. High inflationary economies, when considering compounding, have an approximate annual inflation rate of:
  2. A) 25% for four years in a row.
  3. B) 100% for three years in a row.
  4. C) 26% for three years in a row.
  5. D) 50% for two years in a row.

 

LO: 5

 

 

  1. How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?
  2. A) IAS 21 requires that the subsidiary’s financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
  3. B) IAS 21 requires that the temporal method be used for translating the foreign currency financial statement.
  4. C) IAS 21 requires the current rate method without taking into consideration any inflation adjustment.
  5. D) S. GAAP requires that foreign subsidiary financial statements be restated to account for inflation before applying the current rate method.

 

LO: 5

 

  1. Under IAS 21, which of the following is not a factor in determining functional currency?
  2. A) It is the currency that influences sales prices for goods and services.
  3. B) It is the currency that mainly influences labor, material and other costs of providing goods and services.
  4. C) It is the currency least likely to experience hyperinflation.
  5. D) It is the currency in which funds from financing activities are generated.

 

LO: 5

 

  1. Nonmonetary assets do not include:
  2. A) fixed assets.
  3. B)
  4. C) accounts receivable.
  5. D) customer deposits.

 

LO: 1

 

  1. What is one problem in translating retained earnings using either the temporal or current rate method?
  2. A) There is no problem, since both methods use the historic rate method for stockholders’ equity accounts.
  3. B) Dividends are based on an average cost method.
  4. C) Net income is calculated differently, depending upon which method is used.
  5. D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

 

LO: 4

 

Chapter 09

Additional Financial Reporting Issues

Multiple Choice Questions

 

  1. What does it mean to say that the inflation rate last year was 5%?
  2. A) All prices are 5% more at the end of the year than they were at the beginning of the year.
  3. B) The price of specific products increased 5% between the beginning and the end of the year.
  4. C) On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.
  5. D) The general purchasing power of the dollar has increased 5% between the beginning of the year and the end of the year.

 

LO: 1

 

  1. A representative market basket of products cost $250 at the beginning of the year, and the same collection of products costs $280 at the end of the year.  What is the annual rate of inflation?
  2. A) 7%
  3. B) 12%
  4. C) 112%
  5. D) -10.7%

 

LO: 1

 

  1. Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?
  2. A) asset understatement
  3. B) overpayment of income taxes
  4. C) overstated income
  5. D) All of the above are potential problems.

 

LO: 1

 

  1. Holding monetary assets during a period of inflation results in:
  2. A) purchasing power gains.
  3. B) purchasing power losses.
  4. C) transaction gains.
  5. D) translation losses.

 

LO: 1

 

 

  1. Holding monetary liabilities during a period of inflation results in:
  2. A) purchasing power gains.
  3. B) purchasing power losses.
  4. C) transaction gains.
  5. D) translation losses.

 

LO: 1

 

  1. Which method of dealing with inflation in financial reporting updates assets by applying inflation rates to historical costs?
  2. A) current replacement cost method
  3. B) current rate method
  4. C) temporal method
  5. D) general purchasing power method

 

LO: 1

 

  1. Which method of dealing with inflation in financial reporting reflects current replacement cost of specific assets?
  2. A) current replacement cost method
  3. B) general purchasing power method
  4. C) temporal method
  5. D) current rate method

 

LO: 1

 

  1. Under general purchasing power accounting, how is the gain or loss in purchasing power reported?
  2. A) as a prior period adjustment to Retained Earnings
  3. B) as an element of accumulated comprehensive income on the Balance Sheet
  4. C) as an element of income in the current year
  5. D) All of the above methods are acceptable under general purchasing power accounting.

 

LO: 1

 

 

  1. What is a “holding gain?”
  2. A) the increase in owners’ equity resulting from maintaining monetary assets during a period of inflation
  3. B) the increase in income caused by the use of general purchasing power accounting during a period of inflation
  4. C) the increase in owners’ equity resulting from holding nonmonetary assets during a period of inflation
  5. D) the increase in income caused by paying liabilities with cheaper dollars

 

LO: 1

 

  1. Which method of accounting for inflation must be used under U.S. GAAP?
  2. A) Current Replacement Cost method
  3. B) General Purchasing Power method
  4. C) Both Current Replacement Cost and General Purchasing Power methods must be used
  5. D) Neither method must be used since inflation accounting is not required under U.S. GAAP.

 

LO: 2

 

  1. Why has inflation accounting NOT been required in the United States and the United Kingdom since the 1980s?
  2. A) Accounting regulators in the S. and U.K. have not addressed the issue of inflation accounting in their pronouncements.
  3. B) Inflation has not been a significant problem in the S. and the U.K. since the 1980’s.
  4. C) Accounting regulators could not agree on a method for adjusting financial statements for the effect of inflation.
  5. D) Corporations in the U.S and K. voluntarily report inflation-adjusted financial statements, making the regulations unnecessary.

 

LO: 2

 

  1. Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?
  2. A) the Netherlands
  3. B) Mexico
  4. C) Brazil
  5. D) None of the above

 

LO: 2

 

 

  1. Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?
  2. A) Current replacement cost
  3. B) Current cost
  4. C) General purchasing power
  5. D) Historical cost

 

LO: 2

 

  1. Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?
  2. A) No rule is currently in place that generally requires inflation-adjusted financial statements.
  3. B) General purchasing power method must be used.
  4. C) Current replacement cost method must be used.
  5. D) Companies have the option of using current cost or historical cost.

 

LO: 2

 

  1. What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989?
  2. A) choice between current replacement cost and general purchasing power method
  3. B) making inflation-adjusted reporting optional or required
  4. C) specifying the European Central Bank as the official source of inflation rates in the European Union
  5. D) mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

 

LO: 2

 

  1. Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies?
  2. A) current replacement cost
  3. B) general purchasing power
  4. C) historical cost for non-monetary assets and current replacement cost for monetary assets
  5. D) Companies have a choice between current replacement cost and general purchasing power methods.

 

LO: 2

 

 

  1. How do multinational corporations combine operations?
  2. A) The acquired firm is dissolved and is merged into the acquiring company.
  3. B) One company acquires a majority of shares of another company, but both entities continue to exist.
  4. C) Two or more entities dissolve their legal status and merge to create a new corporation.
  5. D) All of the above.

 

LO: 3

 

  1. For the purpose of financial reporting under IASB standards, what is a “group?”
  2. A) a parent corporation and all of its subsidiary corporations
  3. B) any multinational corporation under the jurisdiction of the IASB
  4. C) all countries that have adopted IASB standards
  5. D) a company that is comprised of foreign corporations dissolved into one entity

 

LO: 3

 

  1. According to IAS 27, how can effective control be achieved without owning more than 50% of another company’s voting shares?
  2. A) representation on the company’s board of directors
  3. B) being the primary entity exercising voting rights
  4. C) through a contract between the entities
  5. D) All of the above may result in control by one corporation over another.

 

LO: 3

 

  1. Under IAS 27, how is “control” defined?
  2. A) ownership of 50% of more of the voting shares of another entity
  3. B) representation on another entity’s board of directors
  4. C) the power to govern financial and operating policies of an entity
  5. D) ownership of 30% or more of the voting shares of another entity

 

LO: 3

 

  1. Under ARB 51, “controlling financial interest “is:
  2. A) not defined.
  3. B) defined as 50% ownership of another entity’s voting shares.
  4. C) the direct or indirect ability to make decisions about another entity’s activities.
  5. D) the right to receive the expected residual returns of another entity if they occur.

 

LO: 3

 

 

  1. In January 2003, the FASB released Interpretation 46, “Consolidation of Variable Interest Entities,” which:
  2. A) re-emphasized the need for 50% stock ownership to exert effective control.
  3. B) expanded U.S. GAAP to consider effective control rather than legal control for consolidated financial statements.
  4. C) took a “form-over-substance” approach to define control in determining requirements for consolidated financial statements.
  5. D) defined effective control as ownership of 30% or more of another entity’s voting shares.

 

LO: 3

 

  1. What term is used to refer to presenting the financial statements for a group of enterprises as if it was a single entity?
  2. A) harmonization
  3. B) translation
  4. C) consolidation
  5. D) transformation

 

LO: 3

 

  1. How does U.S. GAAP differ from IFRS with respect to presenting consolidated financial statements?
  2. A) S. GAAP requires all controlled subsidiaries to be consolidated, whereas IFRS allows for optional consolidated financial statements.
  3. B) IFRS excludes subsidiaries acquired for disposal within one year from the consolidation requirement, whereas U.S. GAAP requires all controlled subsidiaries to be consolidated.
  4. C) S. GAAP allows a company to exclude subsidiaries it is holding for sale from the consolidation process.
  5. D) IFRS requires the parent company to own 50% of the voting shares of the subsidiary before consolidation is allowed.

 

LO: 4

 

 

  1. Mega Corporation acquired 65% of the voting shares of Forko Ltd and consolidated its accounts by restating assets and liabilities of the subsidiary at fair value on the date the shares were acquired.  What method of accounting for the business combination is Mega Corporation using?
  2. A) Purchase method
  3. B) Fair value method
  4. C) Pooling method
  5. D) Current replacement cost method

 

LO: 4

 

  1. Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger.  Mega Corporation’s interest in Forko Ltd had a restated value of €950 million.  How should Mega account for the difference?
  2. A) as Gain from Acquisition on the current period income statement
  3. B) as Goodwill on the consolidated balance sheet
  4. C) as a Loss from Merger on the current period income statement
  5. D) as Additional Paid-in Capital on the consolidated balance sheet

 

LO: 4

 

  1. Under IFRS 3, which concept must be used to report the assets and liabilities of an acquired company on the parent company financial statements?
  2. A) parent company concept
  3. B) equity concept
  4. C) entity concept
  5. D) historical cost concept

 

LO: 4

 

  1. IFRS 3, issued in 2004, eliminated the use of which concept for reporting assets and liabilities of an acquired company on the parent company’s consolidated financial statements?
  2. A) parent company concept
  3. B) economic concept
  4. C) entity concept
  5. D) All of the above

 

LO: 4

 

 

  1. How must Goodwill resulting from business combinations be treated under U.S. GAAP?
  2. A) It must be amortized over a period of no more than 40 years.
  3. B) It must be expensed when it is acquired.
  4. C) It must be written down when its fair value is less than its carrying value.
  5. D) It must be written down in no less than 5 years and no more than 40 years.

 

LO: 4

 

  1. How is Goodwill resulting from business combinations treated under Japanese GAAP?
  2. A) It is capitalized and amortized over a period of no more than 40 years.
  3. B) It may be expensed in the year the subsidiary is acquired.
  4. C) It is capitalized and written down when its fair value becomes less than its carrying value.
  5. D) It is amortized over between 5 and 40 years.

 

LO: 4

 

  1. According to IFRS 3, how should companies account for Goodwill arising from business combinations?
  2. A) It is capitalized and amortized over a period of no more than 40 years.
  3. B) It is expensed in the year the subsidiary is acquired.
  4. C) It is capitalized and written down when its fair value become less than its carrying value.
  5. D) It is amortized over between 5 and 40 years.

 

LO: 4

 

  1. According to IFRS 3, how should companies account for negative goodwill arising from business combinations?
  2. A) It should be capitalized and amortized over a period of no more than 40 years.
  3. B) It should be treated as a loss on the consolidated income statement.
  4. C) It should be treated as a gain on the consolidated income statement.
  5. D) There is no rule for negative goodwill, because there is no such thing.

 

LO: 4

 

 

  1. How is negative goodwill accounted for under U.S. GAAP?
  2. A) There is no rule for negative goodwill, because there is no such thing.
  3. B) It should be capitalized and amortized over a period of no more than 40 years.
  4. C) It should be treated as an extraordinary loss on the consolidated income statement.
  5. D) It should be treated as an extraordinary gain on the consolidated income statement.

 

LO: 4

 

  1. Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S. corporation for $50,000,000.  The net assets of Bevo had a book value of $35,000,000 and a fair value of $56,000,000.  How should Canto record the business combination?

 

 

  1. A) Entry A
  2. B) Entry B
  3. C) Entry C
  4. D) Entry D

 

LO: 4

 

 

  1. Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S. corporation for $50,000,000.  The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000.  How should Canto record the business combination?

 

 

  1. A) Entry A
  2. B) Entry B
  3. C) Entry C
  4. D) Entry D

 

LO: 4

 

  1. How is accounting for a pooling of interests different from a purchase when business entities combine?
  2. A) Assets and liabilities are not revalued when the pooling of interests is used.
  3. B) Goodwill arises only when the pooling of interests method is used for business combinations.
  4. C) Pooling of interests is used for international consolidations but never for domestic consolidations.
  5. D) The purchase method is used only when less than 100% of an entity’s voting shares are acquired.

 

LO: 4

 

 

  1. Since 2001, which method of accounting for a business combination is required under U.S. GAAP?
  2. A) pooling
  3. B) purchase
  4. C) Both purchase and pooling are allowed.
  5. D) Purchase is required for transnational combinations, but pooling is allowed for domestic combinations.

 

LO: 4

 

  1. What term does IAS 31 use for “a contractual arrangement whereby two or more parties undertake an activity which is subject to joint control?”
  2. A) merger
  3. B) consolidation
  4. C) joint venture
  5. D) business combination

 

LO: 4

 

  1. How are IASB requirements to account for joint ventures different from U.S. GAAP?
  2. A) International standards require the equity method, but U.S. GAAP allows for flexibility in accounting for joint ventures.
  3. B) S. GAAP requires the equity method, whereas the international standards allow for proportionate consolidation.
  4. C) IASB standards and U.S. GAAP are essentially the same for accounting for joint ventures.
  5. D) IASB standards do not specify which methods are allowed to account for joint ventures, whereas U.S. GAAP requires proportional consolidation.

 

LO: 4

 

  1. Under U.S. GAAP and IASB standards, the threshold for determining “significant influence” in an associate enterprise is:
  2. A) 50% ownership of voting shares
  3. B) 5% ownership of voting shares
  4. C) 20% ownership of voting shares
  5. D) 10% ownership of voting shares

 

LO: 4

 

 

  1. Under both IFRS and U.S. GAAP, how should an investing entity report nonconsolidated subsidiaries?
  2. A) equity method
  3. B) fair value
  4. C) proportionate consolidation
  5. D) parent concept

 

LO: 4

 

  1. Why do financial analysts and other readers of financial statements want segmented information?
  2. A) Consolidation obscures facts that may be important for evaluating financial statements.
  3. B) More information is always preferred to less information.
  4. C) to ensure that illegal business combinations are not taking place
  5. D) Models for economic forecasting have not been developed using consolidated financial statement information.

 

LO: 5

 

  1. IFRS 8 adopts which approach to report segmented financial information?
  2. A) geographic approach
  3. B) business lines approach
  4. C) management approach
  5. D) asset test approach

 

LO: 5

 

  1. Under IFRS 8, which of the following criteria is NOT considered by all segments that are considered reportable business segments?
  2. A) The segment must have revenue that is one-tenth or more of combined revenue.
  3. B) The segment must have profit that is 10% or more of combined profit of all segments with profit.
  4. C) The segment must have revenue that is more than half from external sources.
  5. D) The segment must have assets that are 10% or more of combined segment assets.

 

LO: 5

 

 

 

  1. Which of the following are reasons to report segmented accounting information for multinational enterprises?
  2. A) There are different risks in different parts of the world that a reader may need to know about.
  3. B) Different lines of business have different levels of risk that may affect business success.
  4. C) Growth opportunities differ from one nation to another that could affect share value.
  5. D) All of the above are reasons for segmented reporting.

 

LO: 5

 

  1. One difference that exists between IFRS 8 and U.S. GAAP is:
  2. A) There are no differences as the two pronouncements represent total convergence in segment reporting.
  3. B) S. GAAP says that segment assets must be 5% or greater of the total combined assets to be separately disclosed.
  4. C) S. GAAP does not require reporting of segment liabilities.
  5. D) S. GAAP explicitly includes intangibles in the definition of long-lived assets for geographic disclosures.

 

LO: 5

 

  1. Under both IFRS 8 and U.S. GAAP which of the following entity-wide disclosures is NOT required?
  2. A) information about products and services
  3. B) information about intersegmental transfer pricing
  4. C) information about major customers
  5. D) information about geographic areas

 

LO: 5

 

 

  1. According to both IFRS 8 and U.S. GAAP, which of the following information should be disclosed for each separate reportable operating segment?
  2. A) the factors used to identify operating segments
  3. B) total liabilities for each operating segment
  4. C) total compensation expense for each operating segment
  5. D) total rent expense for each operating segment

 

LO: 5

 

  1. In addition to requiring separate reporting for operating segments, U.S. GAAP requires companies to report:
  2. A) operating income for each country in which a material amount of revenue is derived.
  3. B) revenues from external customers and long-lived assets for all foreign countries where it has assets or derives revenue.
  4. C) revenues and long-lived assets for each country that constitutes 10% of more of the combined revenues or assets.
  5. D) operating income adjusted for inflation for each country where it has significant operations.

 

LO: 5

 

  1. What is a term often used to describe the equity method of accounting?
  2. A) the 20% rule
  3. B) one-line consolidation
  4. C) significant influence
  5. D) disaggregated consolidation

 

LO: 3

 

  1. Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?
  2. A) The cumulative inflation rate over a three-year period is 75% or higher.
  3. B) Interest rates are linked to a price index.
  4. C) The price of credit sales includes a “buffer” to compensate for the expected  loss in purchasing power over the credit period.
  5. D) The general population thinks about prices in terms of a stable foreign currency, and prices may actually be quoted in that currency.

 

LO: 2

 

Chapter 10

Analysis of Foreign Financial Statements

Multiple Choice Questions

 

  1. Why is investing in foreign companies an effective way to diversity an individual’s investment portfolio?
  2. A) Foreign economies are stronger than the S. economy.
  3. B) Foreign stocks are less risky than the stocks of S. corporations.
  4. C) Stock returns of companies in foreign companies are highly correlated with stock returns of S. companies.
  5. D) Returns on foreign company stocks do not always change in the same direction as returns on S. stocks.

 

LO: 1

 

  1. Investing in several corporate stocks that have different characteristics is referred to as:
  2. A) diversification
  3. B) portfolio consolidation
  4. C) asset translation
  5. D) income determination

 

LO: 1

 

  1. Which of the following is a reason for analyzing the financial statements of foreign corporations?
  2. A) making credit decisions about foreign customers
  3. B) evaluating international business combinations
  4. C) diversifying an investment portfolio
  5. D) All of the above are reasons for analyzing foreign financial statements.

 

LO: 1

 

  1. Which of the following statements is NOT true concerning reasons for analyzing foreign financial statements?
  2. A) It is important to determine the financial stability of foreign suppliers.
  3. B) The stock returns of foreign corporations are nearly perfectly correlated with returns on S. stocks.
  4. C) In a global economy, managers may use foreign competitors as benchmarks for evaluating performance.
  5. D) Managers should determine the financial health of foreign customers before extending credit.

 

LO: 1

 

 

  1. Which of the following is a limitation of using commercial databases to access foreign company financial statements?
  2. A) Data may be lost when a standard financial statement format is imposed on foreign statements.
  3. B) Errors may occur during data entry.
  4. C) Notes to the financial statements may not be included, or only partially included.
  5. D) All of the above are limitations.

 

LO: 3

 

  1. Which of the following is a potential problem in analyzing foreign financial statements?
  2. A) language
  3. B) data accessibility
  4. C) terminology
  5. D) All of the above pose potential problems.

 

LO: 2

 

  1. What is EDGAR?
  2. A) It is a database provided by the London, England stock exchange that provides financial statement information on K. companies.
  3. B) It is a database created by the U.S. Securities and Exchange Commission that provides reports of all corporations listed on the S. stock exchanges.
  4. C) It is a database of reports filed electronically with the U.S. Securities and Exchange Commission.
  5. D) It is a database that links users to S. company websites much like CAROL does in the U.K.

 

LO: 3

 

  1. What information would most likely NOT be available on the EDGAR system?
  2. A) Form 10-K for a S. corporation listed on the New York Stock Exchange (NYSE)
  3. B) quarterly financial statements for a foreign corporation listed on the American Stock Exchange (AMEX)
  4. C) the annual report for a corporation listed only on the London and Tokyo stock exchanges
  5. D) the notes to the financial statements of a foreign corporation listed on the NYSE

 

LO: 3

 

 

  1. What language will be used for the quarterly reports submitted by foreign companies to the U.S. Securities and Exchange Commission?
  2. A) The quarterly reports may be in the company’s local language.
  3. B) English or German
  4. C) English or one of the languages of the European Union
  5. D) English only

 

LO: 2

 

  1. What is the probable reason that many foreign countries provide convenience translations of their financial statements into English?
  2. A) S. GAAP is the most widely used set of financial accounting standards.
  3. B) Globalization of capital markets has increased the demand for English language financial statements.
  4. C) England is the home of more multinational corporations than any other country.
  5. D) The Securities and Exchange Commission requires all foreign companies doing business in the S. to provide English translations.

 

LO: 3

 

  1. Which of the following statements is true about convenience translations of financial statements?
  2. A) International Business Machines (IBM) is the only corporation in the S. that currently provides convenience translation of its financial statements into a foreign language.
  3. B) Few S. companies translate their financial statements into another language.
  4. C) Convenience translation means that a company will translate its financial statements into English.
  5. D) All of the above statements are true.

 

LO: 3

 

  1. How should currency translation be done in order to appropriately compare a financial statement presented in Japanese yen to a financial statement presented in Chinese yuan?
  2. A) The temporal method should be used.
  3. B) The historical exchange rates should be used convert financial statement amounts.
  4. C) All amounts should be converted at the current exchange rate.
  5. D) Current year statements should be converted at the current exchange rate and prior year statements should be converted at prior year exchange rate.

 

LO: 3

 

 

  1. What is an advantage of using ratio analysis in comparing financial statements from different countries?
  2. A) Ratios are expressed as percentages, making currency differences irrelevant to the analysis.
  3. B) Ratios highlight the holding gains or losses related to currency translation.
  4. C) Purchasing power gains and losses from currency translation show up clearly in ratio analysis.
  5. D) Comparing business ratios across countries removes the effect of economic conditions and business culture.

 

LO: 3

 

  1. Translating foreign financial statements into a convenience language:
  2. A) eliminates all readability problems for a financial analyst.
  3. B) does not always clarify accounting terminology unique to a particular country.
  4. C) is easily and inexpensively done when the convenience language is English.
  5. D) is required for all multinational corporations.

 

LO: 3

 

  1. What is the best short-term solution to alleviate problems of financial statement analysis arising from international differences in accounting terminology?
  2. A) Require all countries to conform to IASB standards.
  3. B) Create standard financial statement terminology for all companies around the world.
  4. C) Analysts should carefully read the notes to financial statements and learn about the business environments of countries they analyze.
  5. D) Convert all financial statements into English.

 

LO: 3

 

  1. Which of the following is true about the format of financial reports?
  2. A) All multinational corporations report Sales Revenue on their income statements.
  3. B) Gross margin is a standard line item on income statements throughout the world.
  4. C) Notes to financial statements may clarify international differences in statement formats.
  5. D) In all countries, total assets are shown on the left side of the balance sheet and liabilities and owners’ equity are shown on the right side.

 

LO: 3

 

 

  1. Which of the following is true about financial statement disclosure?
  2. A) When account balances are aggregated, the analyst has the greatest amount of information.
  3. B) The amount of financial statement disclosure varies widely from one country to another.
  4. C) The concept of full disclosure has been universally adopted around the world.
  5. D) An analyst can always disaggregate financial statement disclosures to obtain needed information.

 

LO: 2

 

  1. Timeliness of financial statements varies across nations.  Which of the following countries has financial statements issued closest to year-end (on average)?
  2. A) Japan
  3. B) Germany
  4. C) Canada
  5. D) Italy

 

LO: 2

 

  1. What steps can be taken by an analyst to alleviate the timeliness problem encountered in comparing financial statements between countries that have different time frames for reporting?
  2. A) Use interim financial statements instead of annual reports.
  3. B) Convert all financial statement items to a common year using current exchange rates.
  4. C) Request financial statements from foreign corporations as soon as they are available.
  5. D) Nothing can be done by the analyst do deal with this challenge.

 

LO: 3

 

  1. What is OIBD?
  2. A) This is the Organization of International Boards of Directors, which is attempting to harmonize accounting standards.
  3. B) It stands for “operating income before depreciation,” which some analysts use to remove the effect of international accounting standard diversity.
  4. C) It is the Organization of International Bond Dealers, whose financial analysts developed EBITDA.
  5. D) None of the above.

 

LO: 4

 

 

  1. What is the intent of using EBITDA for analyzing foreign financial statements?
  2. A) Adding back interest, taxes, depreciation, and amortization to net income takes out elements of earnings that are greatly affected by accounting diversity.
  3. B) It makes foreign GAAP conform to local GAAP.
  4. C) EBITDA brings foreign net income in line with net income under U.S. GAAP.
  5. D) All of the above.

 

LO: 4

 

  1. Which of the following is the major limitation of using EBITDA for analyzing foreign financial statements?
  2. A) It is nearly impossible for most financial analysts to calculate this number.
  3. B) Few analysts understand what this earnings number represents.
  4. C) The excluded items may be important factors for evaluation.
  5. D) It cannot be converted from a foreign currency to a domestic currency.

 

LO: 4

 

  1. How can foreign corporations alleviate the accounting diversity problem related to comparing foreign financial statements?
  2. A) presenting multiple sets of financial statements under various GAAP
  3. B) selecting a widely used set of accounting standards for their financial reporting
  4. C) providing adequate disclosure in notes to the financial statements to allow analysts to make conversions to another country’s GAAP
  5. D) all of the above

 

LO: 3

 

  1. Which of the following is most likely to affect an analyst’s ability to make meaningful comparisons of financial statement ratios for companies in different countries?
  2. A) differences in currency
  3. B) language differences
  4. C) varying business traditions
  5. D) mathematical degrees of magnitude

 

LO: 2

 

 

  1. Which of the following is likely to affect an analyst’s ability to make meaningful comparisons of financial statement ratios for companies in different countries?
  2. A) accounting diversity
  3. B) varying business traditions
  4. C) unique terminology
  5. D) all of the above

 

LO: 2

 

  1. Because differences in business traditions and practices could make cross-country ratio analysis difficult, what should an analyst do to overcome this problem?
  2. A) Learn more about the business environment in relevant countries.
  3. B) Make all decisions using nominal monetary differences rather than ratios.
  4. C) Translate all ratios to a common currency.
  5. D) Avoid recommending investments in foreign companies.

 

LO: 3

 

  1. Foreign companies listed on U.S. stock exchanges must reconcile their net income and stockholders’ equity to U.S. GAAP.  Which ratios can be calculated with the information provided in this reconciliation?
  2. A) operating profit margin
  3. B) asset turnover
  4. C) return on equity
  5. D) current ratio

 

LO: 2

 

  1. What U.S. term was equivalent to “inventories” as it was used in financial statements of companies located in the United Kingdom, prior to adoption of IFRS in 2005?
  2. A) operating assets
  3. B) consumables
  4. C) stocks
  5. D) merchandise

 

LO: 2

 

 

  1. If an analyst saw a “Monetary Position Loss” in a company’s annual report, where would that company be located?
  2. A) The Netherlands
  3. B) Mexico
  4. C) China
  5. D) Sweden

 

LO: 2

 

  1. Imperial Chemical Industries, a U.K. corporation, recorded interest incurred in constructing fixed assets as an expense of £128,000,000.  When reconciling ICI’s financial statements to U.S. GAAP, what should be done with this interest?
  2. A) It should be subtracted from the fixed asset account balance.
  3. B) It should be added to the fixed asset account balance.
  4. C) £128,000,000 should be deducted from retained earnings.
  5. D) This amount should be charged to accumulated depreciation.

 

LO: 4

 

  1. What would be a logical first step that should be taken to restate foreign financial statements to conform to U.S. GAAP, assuming a four-column worksheet will be used to post debit and credit adjustments and reclassifications to arrive at U.S. GAAP statements?
  2. A) Convert the foreign currency amounts to U.S. dollars.
  3. B) Restate historical costs to current cost basis.
  4. C) Re-order foreign financial statements to S. format.
  5. D) Determine the amount of foreign exchange gains or losses.

 

LO: 4

 

  1. What is the basis for Morgan Stanley Dean Witter’s “Apples to Apples” system for financial statement analysis?
  2. A) adjustments needed to compare companies within a single country
  3. B) adjustments needed to compare international companies within specific industries
  4. C) adjustments needed to compare companies in specific countries to S. companies
  5. D) adjustments needed to compare the performance of international brokerage firms

 

LO: 4

 

 

  1. During the 1990’s, a major problem in evaluating the financial statements of Eastern  European companies that had been under the control of the Soviet Union was:
  2. A) that the statements had been used for government planning rather than for private investors.
  3. B) that few people spoke the languages in which the financial statements were written.
  4. C) that East European currencies had been greatly devalued relative to the U.S. dollar.
  5. D) that financial reporting had not been done since the Bolshevik Revolution.

 

LO: 2

 

  1. How would a company decide which foreign languages will be used to present its financial statements?
  2. A) Determine which language is closest to the local language so that translation is less costly.
  3. B) Choose the language based on which countries provide the greatest potential source of funds.
  4. C) Follow the language requirements of its local accounting regulatory agency.
  5. D) Select the language of the most populous country in its region of the world.

 

LO: 3

 

  1. Which of the following statements is true about convenience translations?
  2. A) Translation eliminates the problems associated with comparing financial statements in the same language.
  3. B) Convenience translation means that a company converts both the language and the currency of its financial statements for the convenience of potential investors.
  4. C) Convenience translations require reconciliation to U.S. GAAP, S. format, as well as conversion to English.
  5. D) None of the above statements is true.

 

LO: 3

 

  1. Lack of information about accounting methods used, operating segments, and interim financial results is a problem of:
  2. A)
  3. B)
  4. C)
  5. D)

 

LO: 2

 

 

  1. Footnote disclosures in foreign financial statements are particularly helpful in:
  2. A) overcoming differences in statement format among countries.
  3. B) reconciling statements from one country’s GAAP to another country’s GAAP.
  4. C) learning relevant information not required to be presented in the accounts.
  5. D) all of the above

 

LO: 3

 

  1. In order to address accounting diversity, financial analysts have adopted which of the following strategies?
  2. A) limiting the geographic spread of their investments
  3. B) taking a diversification strategy within a foreign country
  4. C) investing only in foreign government bonds
  5. D) all of the above

 

LO: 3

 

  1. Why should financial analysts endorse the adoption of IFRS worldwide?
  2. A) It would eliminate differences in the financial statements of international companies.
  3. B) It would increase the comparability of financial statements across countries.
  4. C) It would increase the demand for the services of international financial analysts.
  5. D) The services of financial analysts would become more valuable to investors.

 

LO: 3

 

  1. Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.  The current exchange rate is ¥120 = $1.  What is Dynasty Industries’ debt ratio?
  2. A) ¥0.75
  3. B) 133%
  4. C) 75%
  5. D) 25%

 

LO: 3

 

 

  1. Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.  If the exchange rate changes to ¥110 = $1, what will be the change in the debt ratio assuming the account balances remain constant?
  2. A) decrease 8.3%
  3. B) increase 8.3%
  4. C) decrease 9.1%
  5. D) no change

 

LO: 3

 

  1. On what SEC form must foreign corporations with shares listed on U.S. stock exchanges present a reconciliation of net income and stockholders’ equity to U.S. GAAP?
  2. A) Form 1040
  3. B) Form 10-K
  4. C) Form 20-F
  5. D) Form 8-Q

 

LO: 3

 

  1. The debt ratio of Dynasty Industries, a Japanese corporation, is 62%.  Why might this be difficult to compare to the debt ratio of a U.S. manufacturing corporation?
  2. A) S. companies generally have debt ratios greater than 62%.
  3. B) S. companies generally have debt ratios less than 62%.
  4. C) Japanese financing preferences may be different from American preferences.
  5. D) Japanese companies report assets and liabilities in yen, whereas S. companies report in dollars.

 

LO: 2

 

  1. The Morgan Stanley Dean Witter “Apples to Apples” analysis relies on:
  2. A) converting financial statements to U.S. GAAP to compare international investment opportunities.
  3. B) identifying the most significant factors affecting stock value and considering the effect of accounting diversity on these factors.
  4. C) the superiority of U.S. GAAP for determining the true value of international capital investments.
  5. D) converting all the accounts in foreign financial statements to a common set of accounting standards.

 

LO: 3

 

 

  1. What is the advantage of Morgan Stanley Dean Witter’s “Apples to Apples” approach to comparing international financial statement data?
  2. A) It provides complete conversion of foreign financial statements to U.S. GAAP, which may not be available from the reporting entities themselves.
  3. B) It focuses only on the industry-specific factors MSDW believes are most important to stock valuation, which eliminates the need for converting complete financial statements.
  4. C) It is not affected by differences in GAAP across countries.
  5. D) The same measures are used for all industries in all countries, which eliminate comparability issues.

 

LO: 3

 

  1. In order to appropriately analyze the trends in foreign financial statement data, which exchange rates should be used?
  2. A) historical exchange rates
  3. B) beginning of year exchange rates
  4. C) current exchange rates
  5. D) average exchange rates

 

LO: 3

 

  1. Which of the following statements is true relative to accounting for leases internationally?
  2. A) Operating lease disclosure for IFRS and U.S. GAAP is identical.
  3. B) Some analysts believe that all leases must be restated as if they were operating leases.
  4. C) Current rules under IFRS, S. GAAP and other national accounting standards require leases to be capitalized under certain circumstances.
  5. D) S. GAAP requires that future minimum lease payment disclosures be made for each of the next ten years and for all years thereafter.

 

LO: 2

 

  1. Some European companies do not report cost of goods sold as a separate expense item.  What affect does this have on financial statement analysis?
  2. A) It would not be possible to determine the company’s total expenses.
  3. B) Any measure that relies on knowing gross profit cannot be calculated.
  4. C) Income cannot be accurately calculated.
  5. D) There is inadequate aggregation of financial information.

 

LO: 2

 

 

  1. For U.S. companies whose shares are publicly traded on U.S. stock exchanges, how long after year-end must annual reports be filed with the Securities and Exchange Commission (SEC)?
  2. A) 6 months
  3. B) 90 days
  4. C) 60 days
  5. D) 30 days

 

LO: 3

 

  1. British companies whose shares are publicly traded on exchanges in the United Kingdom have how long after year-end to file financial statements with regulators in the U.K.?
  2. A) 6 months
  3. B) 90 days
  4. C) 60 days
  5. D) 30 days

 

LO: 3

 

  1. Which of the following has the least frequent reporting requirements for publicly traded corporations?
  2. A) United States of America
  3. B) United Kingdom
  4. C) European Union
  5. D) Canada

 

LO: 2

 

  1. According to European Union directives, how frequently must its publicly traded corporations publish financial reports?
  2. A) annually
  3. B) semi-annually
  4. C) quarterly
  5. D) monthly

 

LO: 2

 

 

  1. Which of the following is true about reconciling foreign financial statements to U.S. GAAP?
  2. A) A 10% increase in income when converting to U.S. GAAP means that stockholder’s equity will increase by 10% after converting to U.S. GAAP.
  3. B) A 10% increase in income when converting to U.S. GAAP means that stockholder’s equity will increase by 20% after converting to U.S. GAAP.
  4. C) A 10% increase in income when converting to U.S. GAAP means that stockholder’s equity will decrease by 10% after converting to U.S. GAAP.
  5. D) None of the above statements is true.

 

LO: 3

 

  1. Which is NOT one of the common sources of distortions in financial statements?
  2. A) accounting standards that are inconsistent with economic reality
  3. B) management estimation errors
  4. C) miscalculation of foreign currency translation
  5. D) management of earnings

 

LO: 1

 

  1. Which is NOT one of the basic steps in financial statement analysis?
  2. A) prospective analysis
  3. B) accounting analysis
  4. C) translation analysis.
  5. D) financial analysis

 

LO: 1

 

  1. Evaluating liquidity and solvency to assess a company’s ability to meet its obligations is an example of:
  2. A) cash flow analysis
  3. B) risk analysis
  4. C) ROI analysis
  5. D) accounting analysis

 

LO: 1

 

 

Chapter 11

International Taxation

Multiple Choice Questions

 

  1. What is the optimal tax objective for multinational corporations?
  2. A) minimize domestic taxes paid on worldwide income
  3. B) minimize worldwide taxes paid, within the limitations of applicable tax law
  4. C) minimize worldwide taxes paid
  5. D) minimize foreign taxes

 

LO: 1

 

  1. There are two primary taxes imposed on profits earned by corporations in international trade.  One is the corporate income tax.  What is the other type of tax on earnings of multinational corporations?
  2. A) excise tax
  3. B) payroll tax
  4. C) withholding tax
  5. D) value-added tax

 

LO: 1

 

  1. Which of the following affect the effective corporate tax rate?
  2. A) tax-based incentives
  3. B) local corporate tax rate
  4. C) method of determining taxable income
  5. D) all of the above

 

LO: 2

 

  1. How do differences in the effective corporate tax rates between countries affect capital investment decisions?
  2. A) Taxes have a negative effect on cash flows from the investment.
  3. B) Taxes determine the rate used in calculating the discounted cash flows.
  4. C) Taxes affect the amount of depreciation that will be recorded on the investment.
  5. D) all of the above

 

LO: 2

 

 

  1. What is a tax holiday?
  2. A) A trip made to tax havens to buy goods free of sales tax
  3. B) The time between the date of filing the corporate income tax return and the date when taxes are due to be paid
  4. C) This is a period of time when corporations are relieved of paying various taxes.
  5. D) This is the deadline for filing federal tax returns.

 

LO: 3

 

  1. What explains the “follow-the-leader” effect of countries changing their corporate tax rates in response to changes made by other countries?
  2. A) Harmonization of accounting standards
  3. B) Competition for foreign investment
  4. C) Currencies pegged to another country’s currency
  5. D) None of the above

 

LO: 1

 

  1. In the context of international taxation, the Bahamas, Lichtenstein, and Monaco are considered by the OEDC as:
  2. A) tax holidays
  3. B) tax shelters
  4. C) tax havens
  5. D) tax centers

 

LO: 1

 

  1. What is a tax haven?
  2. A) A jurisdiction where taxes are abnormally low
  3. B) A location where tax cheats live to escape prosecution
  4. C) A tax jurisdiction where world-wide tax is eliminated
  5. D) Locations that provide tax-based incentives to corporations

 

LO: 1

 

  1. In addition to having very low effective tax rates, which of the following is also a characteristic of tax havens?
  2. A) lack of transparency in financial reporting
  3. B) lack of effective exchange of information
  4. C) absence of substantial activities requirement
  5. D) all of the above

 

LO: 1

 

 

  1. The Organization for Economic Cooperation and Development (OECD) has established guidelines to eliminate tax havens.  Why, then, can the OECD (as of 2004) still identify over 30 countries as tax havens?
  2. A) The definition of tax haven continuously changes.
  3. B) The concept of tax haven is supported by the United Nations.
  4. C) The OECD has no enforcement powers.
  5. D) The OECD lacks the willingness to enforce the guidelines.

 

LO: 1

 

  1. What is a withholding tax?
  2. A) Income tax paid on corporate earnings.
  3. B) an amount subtracted from a dividend payout and remitted to the government
  4. C) This is an income tax corporations pay to local governments in addition to the national income tax.
  5. D) taxes that lower the effective tax rate in a country

 

LO: 1

 

  1. Because some countries have a lower withholding tax on interest than they do for dividends, multinational corporations may finance foreign operations with debt rather than equity.  What additional reason may a MNC have for using this investment strategy?
  2. A) Interest is generally a deductible expense, whereas dividends paid are not.
  3. B) Dividends require a cash outflow but interest does not.
  4. C) Cash flows from dividends must be discounted using the cost of capital, which is not the case for interest.
  5. D) all of the above

 

LO: 1

 

  1. What is meant by the term “thin capitalization?”
  2. A) undervaluing foreign investments
  3. B) using as little debt financing as a country will allow
  4. C) minimizing the amount of equity capital used to fund foreign operations
  5. D) creating transparency in the methods used to fund foreign operations

 

LO: 1

 

 

  1. What is a value added tax (VAT)?
  2. A) It is the European version of a sales tax, which is paid by the purchaser based on sales price.
  3. B) tax on the difference between the cost of a product and its selling price
  4. C) the tax paid by a foreign corporation on its fixed assets
  5. D) This is the name of the corporate income tax in Canada, Australia, and the United Kingdom.

 

LO: 1

 

  1. Aco Ltd mined diamonds at a cost of FC 1,000,000 and sold them to Beako for FC 2,500,000.  Beako distributed the diamonds to its customers and received FC 4,000,000.  If the national VAT is 20%, how much tax did Beako pay?
  2. A) FC 200,000
  3. B) FC 500,000
  4. C) FC 300,000
  5. D) FC 800,000

 

LO: 1

 

  1. Jane, a citizen of Country X, received a corporate dividend in the amount of £10,000 from a company in the U.K.  Country X did not tax Jane’s dividend.  Country X is using what kind of approach toward foreign source income?
  2. A) nationality approach
  3. B) worldwide approach
  4. C) legalistic approach
  5. D) territorial approach

 

LO: 2

 

  1. Jane, a citizen of Country X, received a corporate dividend in the amount of £10,000 from a company in the U.K.  Country X taxed Jane’s dividend as ordinary income.  Country X is using what kind of approach toward foreign source income?
  2. A) territorial approach
  3. B) worldwide approach
  4. C) legalistic approach
  5. D) None of the above

 

LO: 2

 

 

  1. Dividends received from companies in countries other than one’s home country are classified as:
  2. A) non-taxable income
  3. B) exempt income
  4. C) foreign source income
  5. D) taxable income

 

LO: 2

 

  1. What approach is taken by the United States of America relative to taxing income?
  2. A) citizenship
  3. B) residence
  4. C) both citizenship and residence
  5. D) none of the above

 

LO: 2

 

  1. What is the U.S. policy concerning taxing income of a U.S. corporation’s foreign subsidiary?
  2. A) Tax is imposed on the foreign subsidiary income in the year it is earned.
  3. B) Tax is paid on the foreign subsidiary’s income when the profits are returned to the S. parent as dividends.
  4. C) The government of the S. does not tax foreign source income.
  5. D) Tax credits for losses incurred by the foreign subsidiary are recognized by the parent currently, but taxes on profits are deferred until dividends are paid.

 

LO: 2

 

  1. What is the U.S. policy concerning taxing income of a foreign branch of a U.S. corporation?
  2. A) Tax is imposed on the foreign branch income in the year it is earned.
  3. B) Tax is paid on the foreign branch’s income when the profits are returned to the S. parent as dividends.
  4. C) The government of the S. does not tax foreign source income.
  5. D) Tax credits for losses incurred by the foreign branch are recognized by the parent currently, but taxes on profits are deferred until dividends are paid.

 

LO: 2

 

 

  1. Under U.S. tax law, what is a “resident?”
  2. A) a person living in the United States for 183 days or more per year
  3. B) a person holding a “green card” from the U.S. Immigration and Naturalization Service
  4. C) a corporation organized in the United States
  5. D) all of the above

 

LO: 2

 

  1. What causes double taxation?
  2. A) a taxpayer being subject to tax laws in multiple jurisdictions
  3. B) profits increasing excessively from year to year
  4. C) penalties imposed by a taxing authority for non-payment of taxes
  5. D) none of the above

 

LO: 2

 

  1. In general, why do countries wish to avoid double taxation on corporations?
  2. A) The calculations of the taxes are excessively complex.
  3. B) It discourages foreign direct investment.
  4. C) Enforcement of the tax law becomes excessively burdensome.
  5. D) It contributes to accounting diversity.

 

LO: 2

 

  1. What is the meaning of “tax system neutrality?”
  2. A) Taxes should be minimized.
  3. B) Tax systems should not be a major factor in business decisions.
  4. C) Tax policies should be unbiased.
  5. D) Taxes in one jurisdiction are offset by tax credits in another jurisdiction.

 

LO: 2

 

  1. What term is used for the characteristic of a tax system whereby a company’s decisions to invest domestically or abroad is not affected by taxation?
  2. A) foreign tax credit
  3. B) unbiased
  4. C) capital export neutrality
  5. D) capital investment irrelevance

 

LO: 2

 

 

  1. What is the international norm for determining tax jurisdiction?
  2. A) residence takes precedence over source
  3. B) citizenship takes precedence over residence
  4. C) source takes precedence over residence
  5. D) domestic takes precedence over foreign

 

LO: 3

 

  1. How might a parent company’s home country eliminate double taxation on foreign source income?
  2. A) tax credits for taxes paid to foreign countries
  3. B) tax deductions for taxes paid to foreign countries
  4. C) taking a territorial approach to taxing income
  5. D) all of the above

 

LO: 3

 

  1. In following the international norm concerning tax jurisdiction, how would double taxation be eliminated?
  2. A) The subsidiary’s home country would allow tax credits for taxes paid to the parent’s home country.
  3. B) The parent company’s home country would allow tax credits for taxes paid to the subsidiary’s home country.
  4. C) The home countries of both the parent and the subsidiary would forego taxation on the income earned by the subsidiary.
  5. D) none of the above

 

LO: 3

 

  1. Under U.S. tax laws, how are taxes paid by U.S. corporations to foreign governments treated?
  2. A) Total foreign taxes paid are deductions in calculating taxable income.
  3. B) Foreign income taxes paid are credits against S. taxes owed.
  4. C) Taxpayers may choose between (A) and (B) stated above.
  5. D) none of the above

 

LO: 3

 

 

  1. Under what condition may it be to the taxpayer’s advantage to take a deduction for total foreign taxes paid rather than a tax credit for foreign income taxes?
  2. A) if the foreign income tax rate is greater than the S. federal income tax rate
  3. B) if the foreign income tax rate is less than the S. federal income tax rate
  4. C) if foreign source income is less than domestic income
  5. D) if foreign taxes other than income taxes are substantial

 

LO: 3

 

  1. An indirect foreign tax credit arises when:
  2. A) taxes paid by a parent on foreign branch income is deducted from taxes owed to the parent’s home country.
  3. B) taxes paid by a foreign subsidiary are taken as a credit against a parent’s taxes when dividends are received from the subsidiary.
  4. C) taxing jurisdictions agree to share the taxes paid by a foreign subsidiary.
  5. D) a foreign taxing jurisdiction does not tax a subsidiary within its jurisdiction and allows the parent country to tax the foreign source income.

 

LO: 3

 

  1. How is a foreign subsidiary different from a foreign branch of a domestic corporation?
  2. A) Subsidiaries always generate more foreign source income than branches do.
  3. B) The subsidiary is a company incorporated in the foreign country, whereas a branch is not a separate corporation.
  4. C) A subsidiary is created to manufacture and distribute products in foreign markets, whereas a branch’s only function is sales in the foreign market.
  5. D) The income of a subsidiary is taxable by the country where it is located, but branch income is not subject to tax by the country where it does business.

 

LO: 1

 

  1. Under U.S. tax law, what is the basis for the overall foreign tax credit limitation?
  2. A) to make sure that foreign governments get their fair share of a foreign subsidiary’s income
  3. B) to ensure that the foreign tax credit taken by a corporation does not exceed the actual foreign tax it paid
  4. C) to make sure that the foreign tax credit taken by a corporation does not exceed the amount of taxes the foreign affiliate would have paid in the S.
  5. D) to minimize world-wide taxes on the S. corporation

 

LO: 3

 

 

  1. A U.S. corporation is subject to an income tax rate of 35% and has a branch in the U.K., which paid the national corporate tax rate of 30% on its earnings there.  The branch generated taxable income from operations in the U.K. equivalent to $2,000,000.  What is the amount of the taxes owed to the U.S. government on the income generated in the U.K.?
  2. A) $600,000
  3. B) $700,000
  4. C) $100,000
  5. D) $0

 

LO: 3

 

Use the following to answer questions 36-37:

 

A Japanese branch of a U.S. corporation paid $4,200,000 in taxes to the government of Japan on income it generated there.  The corporation is subject to a 35% tax rate in the U.S.

 

  1. How much foreign tax credit can be taken in calculating the taxes owed to the U.S. on $10,000,000 of Japanese branch income?
  2. A) $4,200,000
  3. B) $3,500,000
  4. C) $0
  5. D) $7,000,000

 

LO: 3

 

  1. How much tax will be owed to the U.S. government on the Japanese branch income?
  2. A) $4,200,000
  3. B) $3,500,000
  4. C) $0
  5. D) $7,000,000

 

LO: 3

 

  1. Under U.S. tax law, what happens to excess foreign tax credit?
  2. A) It reduces taxes on ordinary income in the current year.
  3. B) It can be carried back one year to calculate a refund on additional taxes paid to the S. on foreign source income.
  4. C) It is lost unless the average foreign tax rate paid by the company in the future is greater than the S. tax rate.
  5. D) none of the above

 

LO: 3

 

 

  1. The nine categories of foreign source income defined by the Tax Reform Act of 1986 are referred to as:
  2. A) FTC rates
  3. B) FTC credits
  4. C) FTC baskets
  5. D) FTC brackets

 

LO: 4

 

  1. Under U.S. tax law, what is the relationship between foreign tax credits and the different categories of foreign source income?
  2. A) FTC from one category can offset taxes owed on other categories.
  3. B) Excess FTC from one category can be carried forward to offset future S. taxes payable on another category.
  4. C) Excess FTC from one category can be carried back to offset S. taxes paid on another category in the prior year.
  5. D) none of the above

 

LO: 4

 

  1. Under the American Jobs Creation Act of 2004, how many FTC baskets are used to classify foreign source income?
  2. A) 9
  3. B) 2
  4. C) 12
  5. D) 11

 

LO: 4

 

  1. The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $400,000 (40%) in taxes to Country Y.  The subsidiary paid a dividend to the U.S. parent of $54,000.  How much tax is currently owed to the U.S. government if the federal tax rate is 35%?
  2. A) $18,900
  3. B) $350,000
  4. C) $140,000
  5. D) $0

 

LO: 3

 

 

  1. The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $200,000 in taxes to Country Y.  The subsidiary paid a dividend to the U.S. parent of $150,000.  How much tax is currently owed to the U.S. government if the federal tax rate is 35%?
  2. A) $35,625
  3. B) $28,125
  4. C) $52,500
  5. D) $32,500

 

LO: 3

 

  1. Which of the following is a benefit of tax treaties?
  2. A) They can be used to define tax jurisdiction.
  3. B) They may be used to reduce withholding taxes.
  4. C) They facilitate the exchange of information between countries.
  5. D) all of the above

 

LO: 5

 

  1. The definition of a “permanent establishment” is a key article of the OECD’s model tax treaty.  Which of the following would NOT be considered a permanent establishment by the OECD?
  2. A) branch
  3. B) mine
  4. C) storage facility
  5. D) construction site

 

LO: 5

 

  1. What is a primary difference between the OECD and UN model tax treaties?
  2. A) The model espoused by the UN assumes all countries are equals, whereas the OECD model does not.
  3. B) The model treaty advocated by the UN grants more taxing rights to the host country than does the OECD model when income repatriation is out of developing countries.
  4. C) The model treaty of the UN gives more taxing rights to well-developed countries than developing countries.
  5. D) All of the above are differences between the OECD and UN models.

 

LO: 5

 

 

  1. While the U.S. has tax treaties with more than 50 countries, it does not have a treaty with Brazil, which is a major recipient of U.S. foreign direct investment.  What is the reason for a lack of a U.S.-Brazil treaty regarding withholding taxes?
  2. A) The subsidiaries in Brazil do not pay dividends.
  3. B) The advantage of a treaty would primarily go to the S., so Brazil is not interested in a treaty.
  4. C) The advantage of a treaty would primarily go to Brazil, so the S. is not interested in a treaty.
  5. D) United States has a policy against making tax treaties with countries in South America.

 

LO: 5

 

  1. What term is used to describe a foreign corporation in which U.S. shareholders hold more than 50% of the voting power or fair market value of the corporation’s stock?
  2. A) branch
  3. B) holding company
  4. C) controlled foreign corporation
  5. D) tax-exempt foreign corporation

 

LO: 5

 

  1. How does the U.S. government tax controlled foreign corporations (CFC) differently from other subsidiaries?
  2. A) All income of the CFC is taxed by the S. in the year it is earned rather than when dividends are received.
  3. B) Some income of the CFC is taxed by the S. in the year it is earned rather than when dividends are received.
  4. C) None of the income generated by the CFC is subject to S. tax.
  5. D) Only interest income from CFC is taxed in the year received by the S. government.

 

LO: 5

 

  1. What is “Subpart F” income?
  2. A) all foreign source income
  3. B) foreign income that is not taxable by foreign jurisdictions
  4. C) income that is easily moved to tax havens
  5. D) foreign source income that is exempt from S. taxation

 

LO: 5

 

 

  1. Which of the following is the most important type of Subpart F income?
  2. A) Income from countries engaged in international boycotts
  3. B) Income from foreign base companies
  4. C) Income from insurance of S. risks
  5. D) Income from illegal payments

 

LO: 5

 

  1. Controlled foreign corporations (CFC) will not be taxed on their foreign income currently if:
  2. A) the foreign tax rate is less than 90% of the S. corporate income tax rate.
  3. B) Subpart F income is less than 70% of the CFC’s total income.
  4. C) Subpart F income is less than 5% of the CFC’s total income.
  5. D) none of the above

 

LO: 5

 

  1. What is the “Safe Harbor Rule?”
  2. A) If a foreign tax rate is 90% or more of the S. corporate tax rate, no part of a controlled foreign corporation’s income is considered Subpart F income.
  3. B) This is a guideline issued by the OEDC that encourages developed countries to open branches in underdeveloped countries.
  4. C) If a controlled foreign corporation’s Subpart F income is less than 10% of its total income, it will not be taxed currently by the S. government.
  5. D) If a controlled foreign corporation’s Subpart F income is less than 10% of its total income, it will not be taxed until dividends are received by the parent.

 

LO: 5

 

  1. To calculate U.S. tax, what exchange rate must be used to translate foreign branch net income?
  2. A) current rate
  3. B) rate at the beginning of the year
  4. C) average rate for the year
  5. D) rate at the end of the year

 

LO: 6

 

 

  1. The exchange gain or loss on repatriated funds from a foreign branch is calculated by multiplying the nominal amount of the funds by:
  2. A) the difference between the exchange rate at the beginning of the year and the exchange rate at the end of the year.
  3. B) the difference between the exchange rate on the date of repatriation and the exchange rate used to translate the branch’s pretax income.
  4. C) the difference between the current exchange rate and the exchange rate at the end of the year.
  5. D) the difference between the exchange rate on the date of repatriation and the exchange rate at the beginning of the year.

 

LO: 6

 

  1. Why might a developing country offer a tax holiday?
  2. A) to encourage job creation
  3. B) to encourage foreign investment in the country
  4. C) to stimulate foreign trade
  5. D) all of the above

 

LO: 7

 

  1. What is a major limitation to the apparent incentive of tax holidays?
  2. A) If a MNC is taxed on worldwide income, it will eventually pay tax on the foreign income when it is repatriated.
  3. B) Income earned by multinational corporations must remain in the foreign country offering the tax holiday.
  4. C) The tax holidays are only available to large multinational corporations.
  5. D) Tax holidays are offered only by governments with the ten weakest economies.

 

LO: 7

 

  1. What is another name for the worldwide approach of tax jurisdiction?
  2. A) nationality approach
  3. B) global approach
  4. C) international approach
  5. D) boundary approach

 

LO: 1

 

 

  1. Under the citizenship approach of tax jurisdiction, if Company A, incorporated in Country X, was based in Country Y and earned dividends in Country Z, the dividends would be ultimately taxed in which country?
  2. A) Country Z
  3. B) Country Y
  4. C) Country X
  5. D) none of the above, based on tax neutrality

 

LO: 1

 

  1. If a company is unable to use all its foreign tax credit in a tax year, what happens to the excess?
  2. A) It is carried forward until it is used up.
  3. B) It is carried back 3 years and forward 5 years.
  4. C) It is carried back 1 year and forward 10 years.
  5. D) It is lost forever.

 

LO: 3

 

  1. What is the main advantage of the American Jobs Creation Act of 2004 over the Tax Reform Act of 1986 relative to FTC baskets.
  2. A) A newer tax act is always more advantageous.
  3. B) It has much fewer baskets and, as a result, more chance that a company won’t have excess unused FTC’s.
  4. C) There is no advantage, as excess FTC’s from one basket still can’t be used to offset tax in another basket.
  5. D) The carryforward period for excess FTC’s was extended.

 

LO: 4

 

  1. Under the U.S. model tax treaty, which of the following statements is correct?
  2. A) Interest and royalties are exempt from withholding.
  3. B) Dividends are subject to a maximum 20% withholding.
  4. C) Interest and royalties are subject to a maximum 15% withholding.
  5. D) No passive income is exempt from withholding.

 

LO: 5

 

 

  1. Which of the following statements about China is correct?
  2. A) It has not enacted any legislation to allow tax holidays.
  3. B) In 2002 it surpassed the S. as the largest recipient of foreign direct investment.
  4. C) It is isolationist and shuns foreign investment within its borders.
  5. D) None of the above statements is correct.

 

Answer: B  LO: 7

 

 

Chapter 12

International Transfer Pricing

 

Multiple Choice Questions

 

  1. The monetary amount used to record intercompany transactions is called:
  2. A) exchange rate
  3. B) transfer price
  4. C) conversion rate
  5. D) incremental cost

 

LO: 1

 

  1. What is the term used for intercompany transactions from a parent to a subsidiary?
  2. A) upstream transfer
  3. B) downstream transfer
  4. C) international transfer
  5. D) none of the above

 

LO: 1

 

  1. What is the term used for intercompany transactions from a subsidiary to a parent?
  2. A) upstream transfer
  3. B) downstream transfer
  4. C) international transfer
  5. D) none of the above

 

LO: 1

 

  1. In 2009, what portion of total U.S. goods trade was made up of intercompany transactions?
  2. A) 20%
  3. B) 82%
  4. C) 40%
  5. D) 11%

 

LO: 1

 

  1. What is the primary characteristic of a decentralized organization?
  2. A) size of divisions
  3. B) number of divisions
  4. C) delegation of decision making authority
  5. D) diversity of foreign operations

 

LO: 1

 

 

  1. While there are many advantages of decentralization, what is the major disadvantage of decentralized organizations?
  2. A) manageability of multiple divisions in both domestic and international operations
  3. B) possible conflict between division managers’ decisions and goals of the organization
  4. C) making timely operating decisions
  5. D) all of the above

 

LO: 1

 

  1. What is goal congruence?
  2. A) making the goals of individual managers the same as corporate goals
  3. B) equating managerial goals to corporate goals
  4. C) aligning managerial goals with corporate goals
  5. D) giving managers complete autonomy to make decisions

 

LO: 1

 

  1. How is goal congruence achieved in decentralized organizations?
  2. A) forcing managers to take on corporate goals as their personal goals
  3. B) creating incentives for managers to make decisions that are consistent with corporate goals
  4. C) setting policies that direct managers in the way decisions should be made
  5. D) eliminating the authority for divisional managers to make operating decisions

 

LO: 1

 

  1. Which of the following is a limitation of cost-based transfer pricing?
  2. A) determining which cost to use
  3. B) lack of incentive for selling division to control cost
  4. C) inefficiencies in one unit may be transferred to another unit
  5. D) all of the above

 

LO: 5

 

 

  1. A multinational corporation may attempt to minimize the taxes it pays in a country with a high effective tax rate by setting a very high transfer price on goods transferred to a subsidiary in a high-tax country.  Why is this often not successful?
  2. A) Laws in the foreign country may prohibit such a scheme.
  3. B) The high transfer price would actually increase taxes.
  4. C) Foreign exchange losses will eliminate any tax savings.
  5. D) none of the above.

 

LO: 1

 

  1. In a 2007-2008 survey by Ernst &Young, what issue did 39% percent of respondents identify as the most important international tax issue they face?
  2. A) foreign currency translation of taxable income
  3. B) double taxation
  4. C) transfer pricing
  5. D) withholding taxes

 

LO: 1

 

  1. What is the primary difficulty of using market-based transfer prices for intercompany transactions?
  2. A) markets that are too complex
  3. B) lack of a well-developed market
  4. C) lack of objectivity
  5. D) operating inefficiencies are transferred from one subsidiary to another

 

LO: 1

 

  1. What is the primary advantage of a negotiated transfer price?
  2. A) It is objectively determined.
  3. B) It reflects managers’ ability to control cost.
  4. C) It is based on arms-length transactions with unrelated parties.
  5. D) It preserves managerial autonomy to make decisions.

 

LO: 1

 

 

  1. When a transfer price is set by the management of a parent company rather than by the subsidiary managers, what kind of transfer price is being used?
  2. A) market-based transfer price
  3. B) negotiated transfer price
  4. C) discretionary transfer price
  5. D) cost-based transfer price

 

LO: 3

 

  1. Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization.  They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y.  Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y.  What is advantage of this decision?
  2. A) Net income for Subsidiary X will increase by $30 per unit.
  3. B) Net income for the corporation as a whole will increase by $30 per unit.
  4. C) Net income for the corporation as a whole will increase by $3 per unit.
  5. D) Net income for Subsidiary Y will decrease by $30 per unit.

 

LO: 3

 

  1. Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization.  They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y.  Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y.  How will subsidiary managers in the decentralized organization view this decision by parent company management?
  2. A) They will embrace it whole-heartedly because corporate profits will increase.
  3. B) The manager of Subsidiary Y will be concerned about the decline in Y’s profit and the effect this will have on his/her bonus.
  4. C) They won’t mind because the intercompany transaction will still occur.
  5. D) They won’t notice because all decisions in the decentralized organization are made by the parent.

 

LO: 3

 

 

  1. What is the primary problem with using discretionary transfer prices to minimize costs in a decentralized organization?
  2. A) They don’t really minimize tax costs.
  3. B) The appropriate transfer price to minimize costs cannot be determined by the parent company.
  4. C) The benefits of decentralization may be lost.
  5. D) They are extremely difficult to administer.

 

LO: 3

 

  1. How can the conflict between cost minimization and performance evaluation be overcome in a decentralized organization?
  2. A) dual transfer pricing systems
  3. B) market-based transfer pricing systems
  4. C) cost-based transfer pricing systems
  5. D) negotiated transfer pricing systems

 

LO: 3

 

  1. Withholding taxes on dividends paid by a foreign subsidiary to a parent can be reduced by:
  2. A) raising prices paid by the parent for goods it acquires from the subsidiary.
  3. B) raising prices paid by the subsidiary for goods it acquires from the parent.
  4. C) negotiated transfer pricing.
  5. D) reducing prices charged by the parent for good transferred to the subsidiary.

 

LO: 3

 

  1. What is an ad valorem import duty?
  2. A) a requirement that a parent buy the output of a foreign subsidiary
  3. B) a tariff charged by a government on the invoice price of goods coming into its country
  4. C) a requirement that a subsidiary acquire its material inputs from a foreign parent
  5. D) a tax charged on intercompany transactions

 

LO: 3

 

 

  1. Which of the following is a reason for a parent to use discretionary transfer prices?
  2. A) improve competitive position of foreign operation
  3. B) minimize import duties
  4. C) avoid restrictions on repatriation of funds
  5. D) All of the above

 

LO: 3

 

  1. What is the general rule for international transfer pricing advocated by the Organization for Economic Cooperation and Development (OECD)?
  2. A) cost-based prices
  3. B) negotiated prices
  4. C) arm’s length prices
  5. D) discretionary prices

 

LO: 4

 

  1. What power is given to the Internal Revenue Service (IRS) under code section 482?
  2. A) power to eliminate intercompany transactions
  3. B) authority to audit international transfer prices
  4. C) authority to impose tariffs on foreign imports
  5. D) All of the above

 

LO: 4

 

  1. Which of the following is NOT within the power of the Internal Revenue Service (IRS) under code Section 482?
  2. A) authority to audit international transfer prices
  3. B) authority to adjust international transfer prices
  4. C) authority to levy addition taxes if a transfer price is deemed inappropriate
  5. D) authority to stop intercompany transactions

 

LO: 4

 

  1. According to IRS code Section 482, what is the standard used by the IRS for international transfer pricing?
  2. A) cost-based prices
  3. B) discretionary prices
  4. C) negotiated prices
  5. D) arm’s length prices

 

LO: 4

 

 

  1. IRS code Section 482 describes appropriate transfer prices as “the prices which would have been agreed upon between unrelated parties engaged in the same or similar transactions under the same or similar conditions in the open market.”  How does it refer to such prices?
  2. A) arm’s length prices
  3. B) market prices
  4. C) international prices
  5. D) comparable prices

 

LO: 4

 

  1. According to the Internal Revenue Service, the most reliable measure of an arm’s length prices for sales of tangible property in intercompany transactions is:
  2. A) cost-plus method
  3. B) comparable profits method
  4. C) comparable uncontrolled price method
  5. D) resale price method

 

LO: 5

 

  1. In keeping with Internal Revenue Code, Clarence Company transfers goods to Marguerite Corporation, its foreign subsidiary, at the price Marguerite will sell the product to its customers, less the industry’s average gross profit margin of 30%.  What method of transfer pricing is Clarence using?
  2. A) cost-plus method
  3. B) comparable uncontrolled price method
  4. C) comparable profits method
  5. D) resale price method

 

LO: 5

 

  1. Under what condition does the IRS consider the resale price method acceptable as a transfer price?
  2. A) The subsidiary is a foreign controlled corporation.
  3. B) The related party is primarily a sales subsidiary.
  4. C) The divisions are part of a decentralized organization.
  5. D) There is no market price upon which to base the transfer price.

 

LO: 5

 

 

  1. A cost-plus transfer pricing scheme is allowed by the Internal Revenue Service when:
  2. A) it is easiest for the taxpayer to calculate.
  3. B) the related party is primarily a sales subsidiary.
  4. C) there is no readily comparable market price and the related buyer is more than just a distributor.
  5. D) the average industry mark-up is greater than the taxpayer’s standard markup.

 

LO: 5

 

  1. Using the comparable profits method of transfer pricing, the transfer price is determined by:
  2. A) backing into it based on objective measures of sales, operating expenses, and a reasonable profit margin on sales.
  3. B) adding a standard profit margin to the operating expenses of the buying division.
  4. C) dividing a reasonable amount of profit between the selling and buying divisions.
  5. D) comparing the normal profits of the selling and buying divisions and basing the price on the highest margin.

 

LO: 5

 

  1. In addition to regulating the transfer prices on tangible property, the Internal Revenue Service also provides guidance on:
  2. A) interest charged on intercompany loans.
  3. B) transfer prices for intangible property.
  4. C) charges for intercompany services.
  5. D) all of the above.

 

LO: 5

 

  1. Correlative relief is a component of the U.S. Model Income Tax Treaty.  What is correlative relief?
  2. A) Additional tax imposed by the IRS related to a transfer pricing audit is offset with a foreign tax credit in the same amount.
  3. B) When the IRS adjusts an international transfer price, the tax authority in the foreign country makes a corresponding adjustment.
  4. C) The burden of revising transfer pricing schemes is offset by reduction of the corporate tax rate on foreign source income.
  5. D) IRS and foreign taxing authorities will collaborate in determining the appropriate international transfer price.

 

LO: 5

 

 

  1. What is an advance pricing agreement?
  2. A) a transfer price that is negotiated between two divisions of a decentralized organization
  3. B) a transfer pricing method accepted by the IRS before an intercompany transaction is completed
  4. C) a contract between a parent company and a foreign subsidiary to complete a transaction at a specified future price
  5. D) a foreign currency firm commitment with payment before delivery of the product

 

LO: 6

 

  1. What is the advantage of an advance pricing agreement?
  2. A) IRS will not challenge the transfer price after the tax return is filed if the agreement is followed.
  3. B) World-wide taxes will be minimized.
  4. C) The brief form explaining the transfer price to be used can be completed with minimal effort by the taxpayer, but will reduce a tremendous amount of work later.
  5. D) All of the above are advantages of APA.

 

LO: 6

 

  1. Which of the following is true about advance pricing agreements?
  2. A) They are only granted for intercompany transactions between a S. parent and a foreign subsidiary.
  3. B) They are only granted for intercompany transactions between a foreign parent and a S. corporation.
  4. C) In 2003, the IRS approved several thousand advance pricing agreements for S. taxpayers.
  5. D) None of the above is true.

 

LO: 6

 

  1. According to a U.S. General Accounting Office report, what percent of foreign-controlled corporations paid $0 of federal income tax in the period 1996-2000?
  2. A) 22%-27%
  3. B) 35%-45%
  4. C) 67%-73%
  5. D) 80%-92%

 

LO: 7

 

 

  1. In a 2007 Ernst & Young survey, which industry was found most at risk for a transfer pricing adjustment?
  2. A) consumer packaged goods
  3. B) pharmaceuticals
  4. C) petroleum
  5. D) manufacturing

 

LO: 7

 

  1. Worldwide, which type of transfer is most likely to be audited?
  2. A) royalties paid for intangible assets
  3. B) r & d conducted for related parties
  4. C) intercompany services
  5. D) interest on intercompany loans

 

LO: 7

 

  1. Which is NOT a common risk associated with local authorities’ scrutiny of a company’s transfer prices?
  2. A) potential double taxation
  3. B) uncertainty as to the group’s worldwide tax burden
  4. C) problems in relationships with local tax authorities
  5. D) discovery of a tax treaty violation

 

LO: 7

 

  1. For what reason are the transfer prices of imports more closely monitored worldwide than are exports?
  2. A) political implications
  3. B) effect on local job availability
  4. C) impact on a country’s balance of trade
  5. D) All of the above

 

LO: 7

 

 

  1. Of the signals that may cause a taxing authority to audit a company’s transfer price, which one is the most important?
  2. A) the nature of the business of the multinational corporation
  3. B) unexpectedly low profit
  4. C) profits higher than expected for a specific industry
  5. D) parent company located in an emerging economy

 

LO: 7

 

  1. According to a 2007 study by Ernst & Young, what percentage of respondents had experienced a transfer pricing audit somewhere in the world since 2003?
  2. A) 10%
  3. B) 25%
  4. C) 50%
  5. D) 90%

 

LO: 7

 

  1. Which of the following statements is true about applying the arm’s-length standard for transfer pricing?
  2. A) A unique transfer price will be objectively determined using the arm’s-length concept.
  3. B) Since a range of transfer prices would conform to the arm’s-length concept, taxpayers can minimize taxes by choosing a transfer price at one end of the range.
  4. C) The arm’s-length concept is accepted worldwide as the optimal transfer pricing model.
  5. D) Purchasing divisions prefer the arm’s-length standard for transfer pricing over alternative methods.

 

LO: 3

 

  1. The comparable uncontrolled transaction (CUT) method is one alternative for determining an arm’s-length transfer price for what kind of intercompany transaction?
  2. A) interest on intercompany loans
  3. B) sale of tangible property
  4. C) licenses of intangible property
  5. D) intercompany services

 

LO: 5

 

 

  1. The “price” for using intangible property is called:
  2. A)
  3. B)
  4. C)
  5. D) service charge.

 

LO: 5

 

  1. Which cost will be minimized by setting a low transfer price?
  2. A) withholding taxes on a downstream transfer
  3. B) import duties
  4. C) currency devaluation of foreign cash flows
  5. D) all of the above

 

LO: 2

 

  1. The Internal Revenue Service determined that Covington Ltd should have been using a transfer price of $400 for the purchase of goods from its U.S. subsidiary, but had set the price at $50.  What is the rate of penalty that the IRS can impose on the taxpayer?
  2. A) 10% of the amount of taxes underpaid
  3. B) 20% of the amount of taxes underpaid
  4. C) 40% of the amount of taxes underpaid
  5. D) 100% of the amount of taxes underpaid

 

LO: 4

 

  1. What is a prime reason that the IRS has found it difficult to obtain information needed to examine the transfer pricing scheme of foreign parents with U.S. subsidiaries?
  2. A) The information is held by the foreign parent, which is beyond the jurisdiction of the S. taxing authority.
  3. B) Since transfer pricing is not a significant issue to multinational corporations, little information about it exists.
  4. C) United States does not have tax treaties with the most important countries involved in foreign direct investment in this country.
  5. D) Computer systems have not been adapted to receive the data from companies in foreign countries.

 

LO: 7

 

 

  1. What is the time frame in which taxpayers must produce documentation to the IRS, in which it justifies the transfer pricing method that it has selected as being the most reliable measure of arm’s-length price?
  2. A) 90 days
  3. B) 60 days
  4. C) immediately upon request
  5. D) 30 days

 

LO: 4

 

Chapter 13

Strategic Accounting Issues in Multinational Corporations

 

Multiple Choice Questions

 

  1. Determining a firm’s long-term goals and objectives, adopting courses of action, and allocating resources required to achieve goals is a process called:
  2. A) strategy formulation.
  3. B) strategic planning.
  4. C) strategy implementation.
  5. D) capital budgeting.

 

LO: 1

 

  1. What term is used to describe the process of revising existing goals and adopting new goals?
  2. A) strategy formulation
  3. B) strategic planning
  4. C) strategy implementation
  5. D) capital budgeting

 

LO: 1

 

  1. What is a plan for next year expressed in quantitative terms?
  2. A) strategy
  3. B) capital budget
  4. C) operating budget
  5. D) management control system

 

LO: 1

 

  1. Influencing subordinates to behave in accordance with the goals and objectives of the organization is referred to as:
  2. A) performance evaluation.
  3. B) management control.
  4. C) strategic planning.
  5. D) goal congruence .

 

LO: 1

 

 

  1. What is the role of accounting in formulating strategy?
  2. A) quantifying opportunities and threats
  3. B) preparing budgets
  4. C) making estimates of costs and benefits of various alternatives
  5. D) all of the above

 

LO: 1

 

  1. What is a capital investment?
  2. A) using money to buy goods or services
  3. B) issuing shares of stock of the corporation
  4. C) authorizing and issuing shares of common stock by a multinational corporation
  5. D) committing resources to projects that have costs and benefits well into the future

 

LO: 2

 

  1. The process of identifying, evaluating, and selecting projects that require substantial amounts of resources and are expected to generate benefits for many years into the future is called:
  2. A) strategy formulation.
  3. B) strategic planning.
  4. C) capital budgeting.
  5. D) operational budgeting.

 

LO: 2

 

  1. Which of the following is NOT part of the capital budgeting process?
  2. A) project identification
  3. B) project evaluation
  4. C) project monitoring
  5. D) All of the above are parts of the capital budgeting process.

 

LO: 2

 

  1. Estimating the expected cash inflows and outflows from proposed projects is performed in what step of the capital budgeting process?
  2. A) project identification
  3. B) project evaluation
  4. C) project monitoring
  5. D) project review

 

LO: 2

 

 

  1. Which of the following factors is NOT considered in performing the environmental analysis phase of strategy formulation?
  2. A) competitors
  3. B) government regulations
  4. C) core competencies
  5. D) customer demand

 

LO: 1

 

  1. Which of the following factors should be evaluated during the internal analysis phase of strategic formulation?
  2. A) manufacturing capacity
  3. B) new government regulations pending
  4. C) customer demand
  5. D) strength of the competition

 

LO: 1

 

  1. Which capital budgeting technique recognizes the time value of money?
  2. A) payback period
  3. B) internal rate of return
  4. C) book rate of return
  5. D) return on investment

 

LO: 2

 

  1. What is the major limitation of using the payback period as a tool in capital budgeting?
  2. A) It is difficult to calculate without a computer.
  3. B) It favors large investments.
  4. C) It ignores the time value of money.
  5. D) It does not consider cash flows.

 

LO: 2

 

  1. Which of the following is a major limitation of using the internal rate of return as a tool in capital budgeting?
  2. A) ignores the time value of money
  3. B) does not consider cash flows
  4. C) does not use accounting numbers
  5. D) assumes unrealistic reinvestment rate

 

LO: 2

 

 

  1. Conceptually, what is the internal rate of return?
  2. A) number of years require for a project to return the cash invested in it
  3. B) discount rate that equates the present value of cash inflows to present value of cash outflows
  4. C) interest rate a company can generate on its corporate bonds and preferred stock
  5. D) average annual net income divided by initial investment in a project

 

LO: 2

 

  1. What is the limitation of using the net present value for evaluating capital investment alternatives?
  2. A) ignores the time value of money
  3. B) does not consider cash flows
  4. C) cannot be used to compare projects of different size
  5. D) All of the above are limitations of the net present value method.

 

LO: 2

 

  1. How is the payback period used in capital budgeting?
  2. A) as a measure of a project’s risk
  3. B) to determine the amount of funds that will be required in the future
  4. C) to measure the relationship between the project’s return and the company’s cost of capital
  5. D) None of the above

 

LO: 2

 

  1. Which capital budgeting technique is preferred in all major industrialized countries?
  2. A) net present value
  3. B) internal rate of return
  4. C) payback period
  5. D) none of the above

 

LO: 2

 

  1. Why is it believed that Japanese companies prefer the payback period over the discounted cash flow methods for evaluating capital investment alternatives?
  2. A) It is consistent with their corporate strategy of investing in new technology.
  3. B) Japanese companies compete using very short product life cycles.
  4. C) Cash flows over a long period of time are difficult to predict with much accuracy.
  5. D) All of the above

 

LO: 2

 

 

  1. What discount rate should be used for calculating net present values of capital investment alternatives?
  2. A) corporate borrowing rate
  3. B) opportunity cost of capital
  4. C) internal rate of return
  5. D) corporation’s return on investment

 

LO: 2

 

  1. Why is the multinational capital budgeting process more complex than capital budgeting in a domestic environment?
  2. A) Cash flows must be predicted.
  3. B) An appropriate discount rate must be selected.
  4. C) There are additional risks involved.
  5. D) The payback period is shorter.

 

LO: 2

 

  1. Schlamp & Co. is considering building a manufacturing facility in Country Z, which has changed it labor laws frequently and dramatically in the past decade.  What kind of risk is created by these legislative actions?
  2. A) physical risk
  3. B) political risk
  4. C) financial risk
  5. D) economic risk

 

LO: 2

 

  1. Hyperinflation causes what kind of risk for a multinational corporation?
  2. A) economic risk
  3. B) physical risk
  4. C) financial risk
  5. D) political risk

 

LO: 2

 

 

  1. The possibility of loss due to unexpected changes in currency values or interest rates is called:
  2. A) economic risk
  3. B) business risk
  4. C) financial risk
  5. D) political risk

 

LO: 2

 

  1. Cash flows related to a proposed capital investment project are subject to what kind of risk?
  2. A) economic risk
  3. B) financial risk
  4. C) political risk
  5. D) all of the above

 

LO: 2

 

  1. How can a multinational enterprise incorporate its perception of high level of risk into its capital budgeting process?
  2. A) conservative estimates of cash inflows
  3. B) liberal estimates of expected cash outflows
  4. C) high discount rate
  5. D) all of the above

 

LO: 2

 

  1. Why is depreciation added to net income to determine cash flow from operations?
  2. A) to compensate for financial risk
  3. B) because depreciation is an expense but does not represent a cash flow
  4. C) It is standard procedure when capital budgeting for a multinational corporation.
  5. D) Net income is understated due to excessive depreciation.

 

LO: 2

 

 

  1. Johnson Ltd determined that the net present value of an investment in technological improvements at its plant in France would be €10,000,000 if pending litigation was resolved in the company’s favor and would be €2,000,000 if the courts ruled against the company.  Johnson’s attorneys in France assessed the probability of a favorable ruling at 70%.  What is the expected net present value of the project?
  2. A) €10,000,000
  3. B) €2,000,000
  4. C) €6,000,000
  5. D) €7,000,000

 

LO: 2

 

  1. What is the effect of conducting a sensitivity analysis in capital budgeting?
  2. A) It helps analysts to determine if results are particularly affected by specific estimates.
  3. B) It complicates the process of making a decision when there are conflicting signals.
  4. C) Preferences for one capital investment alternative over another will change.
  5. D) all of the above

 

LO: 2

 

  1. Why is management control particularly complex in decentralized multinational organizations?
  2. A) Managers abroad are not as well-trained as managers of domestic operations.
  3. B) Decision-making authority is not delegated to the local managers of foreign operations.
  4. C) Managers of foreign operations may be motivated by local goals rather than parent’s goals.
  5. D) Financial risks are always higher for the local managers of foreign operations than for managers of domestic operations.

 

LO: 3

 

  1. Novo Limited uses the same management control system in all of its 100 facilities throughout the world on the assumption that the culture at the home office is transferable to all other locations.  What principle underlies Novo’s control system?
  2. A) polycentrism
  3. B) ethnocentrism
  4. C) geocentrism
  5. D) egocentrism

 

LO: 3

 

 

  1. A company that recognizes and adapts its business practices to differences across cultures in which it operates is referred to as being:
  2. A)
  3. B)
  4. C)
  5. D)

 

LO: 3

 

  1. What term is used to describe a unit of a multinational corporation that takes a leading role in a particular area?
  2. A) implementer
  3. B) global innovator
  4. C) local innovator
  5. D) integrated player

 

LO: 3

 

  1. When a unit of a multinational corporation develops knowledge that can be used by other units within the organization, that unit is called a(n):
  2. A)
  3. B) global innovator.
  4. C) local innovator.
  5. D) integrated player.

 

LO: 3

 

  1. A unit of a multinational corporation that produces little or no knowledge but rather uses the ideas and processes developed by other units is referred to as a(n):
  2. A)
  3. B) local innovator.
  4. C) integrated player.
  5. D) team player.

 

LO: 3

 

 

  1. Senior management of Bina Confections Ltd, a multinational corporation, has taken a polycentric approach to manufacturing, marketing, and distributing its candies.  What would be evidence of this perspective?
  2. A) explicit policy and procedures manuals for managing foreign operations
  3. B) high degree of decentralization of decision-making authority
  4. C) standard product branding and packaging throughout the organization
  5. D) implementing strategies perfected by managers at the home office

 

LO: 3

 

  1. What is cultural proximity?
  2. A) similarity of values, expectations, and traditions between one country and another
  3. B) countries that are located on the same continent
  4. C) relative importance of individual differences among units of a multinational corporation
  5. D) a short geographic distance between the host country of one subsidiary and the host country of another subsidiary

 

LO: 3

 

  1. Which of the following would be characteristic of a bureaucratic control system?
  2. A) goals are more likely to be achieved by local managers
  3. B) detailed policy and procedures manuals are used throughout an organization
  4. C) meetings between parent and subsidiary managers are scheduled when needed rather than on a specific schedule
  5. D) budgets play a minor role in the management control system

 

LO: 3

 

  1. Where would a divisional manager look to find the targets she is expected to reach in the next fiscal year?
  2. A) strategic plan
  3. B) capital budget
  4. C) operating budget
  5. D) strategic formulation

 

LO: 1

 

 

  1. Which of the following is the role of a performance evaluation system in a multinational corporation?
  2. A) monitor organizational effectiveness
  3. B) identify areas that need improvement
  4. C) assess how well division managers are doing
  5. D) all of the above

 

LO: 5

 

  1. What measures may be used in the performance evaluation system of a multinational corporation?
  2. A) financial measures such as profit, cost, and return on investment
  3. B) quality and customer satisfaction
  4. C) market share
  5. D) all of the above

 

LO: 5

 

  1. According to surveys in the U.S. and the United Kingdom, what are the most frequently used financial performance measures by multinational organizations?
  2. A) stock price, return on investment, profit
  3. B) budgeted profit vs. actual profit, stock price, sales
  4. C) budgeted profit vs. actual profit, return on investment, profit
  5. D) internal rate of return, profit, return on investment

 

LO: 5

 

  1. Which of the following is a non-financial measure of performance?
  2. A) return on investment
  3. B) market share
  4. C) earnings per share
  5. D) return on equity

 

LO: 4

 

 

  1. The balanced scorecard includes non-financial measures of performance with the financial measures of performance traditionally used.  Which of the following are included in the balanced scorecard?
  2. A) customer satisfaction
  3. B) internal business processes
  4. C) innovation and learning
  5. D) all of the above

 

LO: 5

 

  1. SSM Corporation, a multinational healthcare system, measures the number of minutes between a patient’s arrival at the emergency room and the time he/she is seen by a physician.  This measure focuses on what aspect of the balanced scorecard?
  2. A) financial perspective
  3. B) customer perspective
  4. C) internal business processes perspective
  5. D) innovation and learning perspective

 

LO: 5

 

  1. MSM Ltd has a strategy of being the first to market with new products and so it measures the number of new products introduced each year.  Where does this measure fit in the balanced scorecard?
  2. A) financial perspective
  3. B) customer perspective
  4. C) internal business process perspective
  5. D) innovation and learning perspective

 

LO: 5

 

  1. In designing an effective management control system for a multinational corporation, the accountant should measure factors appropriate for each unit’s level of responsibility.  Which of the following measures would be appropriate for evaluating the performance of a profit center?
  2. A) return on investment
  3. B) residual income
  4. C) EBIT
  5. D) all of the above

 

LO: 4

 

 

  1. In designing an effective management control system for a multinational corporation, the accountant should measure factors appropriate for each unit’s level of responsibility.  Which of the following measures would be appropriate for evaluating the performance of a cost center?
  2. A) return on investment
  3. B) EBIT
  4. C) output volume
  5. D) residual income

 

LO: 4

 

  1. What result can be expected if a management control system encourages managers to focus on inappropriate measures?
  2. A) Managers will work extra hard to achieve the targets set in terms of those measures.
  3. B) Managers will engage in dysfunctional behaviors.
  4. C) Profits will go up for the foreign operation and for the corporation as a whole.
  5. D) none of the above

 

LO: 4

 

  1. Which of the following statements is true about performance evaluation in a multinational organization?
  2. A) A division that is performing poorly indicates that the manager of that division has performed poorly.
  3. B) Good performance by a division indicates that its manager has been performing to expectations.
  4. C) Divisional performance is the same as managerial performance.
  5. D) None of the above is true.

 

LO: 5

 

  1. The Squeaky Division of Household Products Corporation showed a net loss of £5,000,000 last year, but Squeaky’s manager received a bonus for outstanding performance.  Why would Household Products’ management control system appropriately allow for this apparent inconsistency?
  2. A) Economic factors outside the manager’s control caused the loss.
  3. B) Household Products’ management control system is ineffective.
  4. C) The bonus represents a payoff to Squeaky’s manager to keep her quiet about the loss.
  5. D) The loss was due to controllable factors.

 

LO: 5

 

 

  1. Holding managers accountable only for those factors over which they have control is called:
  2. A) management control systems
  3. B) responsibility accounting
  4. C) decentralization
  5. D) centralization

 

LO: 5

 

  1. What is the advantage of using operating income or EBIT as a measure of performance in a profit center of a multinational corporation?
  2. A) It is much easier to calculate than other measures.
  3. B) It is the only measure available to the senior management of the parent company.
  4. C) It excludes interest and taxes, which are beyond the manager’s control.
  5. D) Divisional managers will maximize output if this measure is used for management control.

 

LO: 4

 

  1. If only one currency is used for evaluating subsidiary performance in a multinational corporation, what currency is it most likely to be?
  2. A) euros
  3. B) local currency of the subsidiary
  4. C) currency of the parent company’s home country
  5. D) none of the above

 

LO: 5

 

  1. Under what condition should the gain or loss from translating foreign currency profit of subsidiary into the parent’s home currency be included in the subsidiary’s measure of performance?
  2. A) if the subsidiary manager is authorized to hedge the translation exposure
  3. B) if there is a translation gain, but not if there is a translation loss
  4. C) if the multinational corporation is using the same method of translation for performance evaluation as it does for financial reporting
  5. D) if the impact on cash flows from foreign exchange is minimal

 

LO: 5

 

 

  1. Which of the following is not measured by the accounting system of a multinational corporation?
  2. A) translation exposure
  3. B) economic exposure
  4. C) transaction exposure
  5. D) None of the above is measured by the accounting system.

 

LO: 4

 

  1. Assume that the Chinese government allowed the yuan to float relative to the U.S. dollar.  Appreciation in the yuan could have an adverse affect on sales of Chinese goods to the U.S.  This possible impact on Chinese exports is referred to as:
  2. A) translation exposure
  3. B) transaction exposure
  4. C) economic exposure
  5. D) accounting exposure

 

LO: 5

 

  1. How should multinational corporations reduce the impact of economic exposure?
  2. A) hedging foreign currency using a call option
  3. B) hedging foreign currency using put options
  4. C) competitive strategic and operational decisions
  5. D) forward contracts on the foreign currency

 

LO: 3

 

  1. Which of the following should NOT be included in implementing performance evaluation systems?
  2. A) Feedback and review
  3. B) Fair and achievable measures
  4. C) Understandability
  5. D) Changing systems annually

 

LO: 5

 

 

  1. What is the likely outcome of using performance measures that subsidiary managers perceive to be unachievable?
  2. A) frustrated managers
  3. B) diligent attention to operational efficiency
  4. C) success
  5. D) optimal decision-making

 

LO: 5

 

  1. Implementing multinational corporate strategy to influence human behavior in a positive way should include:
  2. A) a target for managers that is possible under ideal conditions
  3. B) consideration of cultural differences across units
  4. C) all exchange rate gains and losses
  5. D) measures of profit, residual income, and return on investment for all units

 

LO: 5

 

  1. Which of the following is NOT an influence affecting the operating environment of foreign subsidiaries?
  2. A) regulatory controls
  3. B) social norms and attitudes
  4. C) inflation rates
  5. D) All of the above are influences.

 

LO: 5

 

  1. In a 2002 PriceWaterhouseCoopers survey, which factor did CFOs consider most important in contributing to long-term shareholder return?
  2. A) current financial results
  3. B) operating efficiency
  4. C) product and service quality
  5. D) innovation

 

LO: 5

 

  1. Which of the following is a true statement about the use of the payback period technique in capital budgeting?
  2. A) It is simple to use and understand.
  3. B) It considers the time value of money.
  4. C) It is difficult to appraise risk with this technique.
  5. D) It can’t be used to measure liquidity.

 

LO: 2

 

  1. Which of the following calculations will yield return on investment (ROI)?
  2. A) annual net income/book value of investment
  3. B) average annual net income/book value of investment
  4. C) average annual net income/present value of investment
  5. D) book value of investment/annual net income

 

LO: 2

 

  1. Assume that an initial investment is $100,000 and that the estimated annual cash flows for the next 5 years are $18,000.  What is the internal rate of return (IRR) for this investment?
  2. A) 56%
  3. B) 18%
  4. C) 1%
  5. D) It is impossible to calculate without additional information.

 

LO: 2

 

  1. Which of the following is NOT a perspective under the balanced scorecard approach?
  2. A) parent company perspective
  3. B) internal business perspective
  4. C) customer perspective
  5. D) financial perspective

 

LO: 5

 

 

 

 

 

Chapter 14

Comparative International Auditing and Corporate Governance

 

Multiple Choice Questions

 

  1. What term is used to describe the relationships between a company’s management, its board, shareholders, and other stakeholders that create a structure through which the objectives of the company are set, attained, and monitored?
  2. A) management control
  3. B) corporate governance
  4. C) internal auditing
  5. D) government regulation

 

LO: 1

 

  1. According to OECD guidelines, what group is ultimately responsible for governing a multinational organization?
  2. A) regulatory agencies in the host country
  3. B) management
  4. C) board of directors
  5. D) common shareholders

 

LO: 1

 

  1. In multinational corporations, to whom are the external auditors responsible according to OECD guidelines?
  2. A) corporate management
  3. B) stockholders
  4. C) government of the host country
  5. D) creditors

 

LO: 2

 

  1. The OECD believes which group in a multinational corporation should oversee the financial reporting function to ensure that appropriate controls are in place to safeguard information integrity?
  2. A) corporate management
  3. B) internal auditors
  4. C) board of directors
  5. D) information systems department

 

LO: 1

 

 

  1. What act of the U.S. Congress advocated creating the Public Company Accounting Oversight Board, required financial statement certification by the CEO and CFO, and requires external auditors to report directly to an audit committee?
  2. A) Securities Act of 1933
  3. B) Securities and Exchange Act of 1934
  4. C) Sherman Anti-Trust Act of 1890
  5. D) Sarbanes-Oxley Act of 2002

 

LO: 1

 

  1. Recently enacted listing requirements of the New York Stock Exchange focuses attention on independent directors.  How does the NYSE define an independent director?
  2. A) no material relationship with the listed corporation
  3. B) not a member of corporate management
  4. C) owns fewer than 10,000 shares of the corporation’s stock
  5. D) does not meet regularly with the board of directors

 

LO: 1

 

  1. What caused the U.S. Congress, the OECD, the International Federation of Accountants, and other organizations to enact stricter rules on corporate governance in recent years?
  2. A) sudden increase in world trade
  3. B) high-profile corporate scandals
  4. C) significant decline in world trade
  5. D) expansion of the European Union membership

 

LO: 1

 

  1. What is the primary role of external auditing in multinational corporations?
  2. A) preparing the annual report to corporate shareholders
  3. B) designing a working system of internal accounting controls
  4. C) assuring that financial statement information is high quality
  5. D) selecting independent members for the board of directors

 

LO: 2

 

 

  1. What is the primary role of internal auditing in multinational corporations?
  2. A) preparing the annual report to corporate shareholders
  3. B) selecting independent members for the board of directors
  4. C) helping external auditors with the financial statement audit
  5. D) monitoring risks and assessing their effect on the company

 

LO: 2

 

  1. What is the first line of enforcement of legal and professional financial reporting standards?
  2. A) prosecuting attorney
  3. B) International Accounting Standards Board
  4. C) local civil court system in the home country
  5. D) external auditing

 

LO: 2

 

  1. What impact did the Asian financial market crisis in the late 1990s and the corporate scandals in the United States this century have on the auditing profession?
  2. A) Regulation of the external auditing profession was reduced.
  3. B) CPAs were no longer allowed to provide external audit services for multinational corporations.
  4. C) Reputation for being the watchdogs of financial reporting integrity was reduced.
  5. D) External auditors were required to sit on the boards of directors of multinational corporations.

 

LO: 1

 

  1. Who is considered to be the client for external auditors in the United Kingdom?
  2. A) corporate shareholders
  3. B) the government
  4. C) society as a whole
  5. D) all of the above

 

LO: 3

 

 

  1. In Germany, who do external auditors consider as their clients?
  2. A) the government
  3. B) board of directors
  4. C) society as a whole
  5. D) all of the above

 

LO: 3

 

  1. Why has corporate financial reporting in China not resembled reporting in Anglo-Saxon countries?
  2. A) There was a lack of distinction between business functions and social service functions in Chinese reporting entities.
  3. B) China has only recently become involved in international trade.
  4. C) The concept of accounting was only introduced to China recently and therefore it has not had time to develop properly.
  5. D) The 1960’s Cultural Revolution eliminated the requirements that Chinese corporations provide information on business operations.

 

LO: 3

 

  1. Why is litigation against external auditors, which is very common in the United States, virtually unknown in Japan?
  2. A) Japanese auditors rarely make mistakes in their professional work.
  3. B) Such litigation is inconsistent with Japanese values of interpersonal harmony.
  4. C) Japan lacks a sophisticated court system for handling complex cases involving accounting matters.
  5. D) External auditors are not responsible for the quality of work performed for a corporate client.

 

LO: 3

 

  1. What explains the reason for the historically very low (1/3% to 1/2%) limit on allowance for doubtful accounts in China?
  2. A) The primary customer in China was the government, which was presumed to have very good credit.
  3. B) This is the international accounting standard for companies operating in eastern Asia.
  4. C) Prior to being admitted to the World Trade Organization (WTO), China was required to reduce its bad debt level.
  5. D) all of the above

 

LO: 3

 

 

  1. What reason has been given to explain the lack of well-developed auditing professions in less-developed economies?
  2. A) inability to train auditors given the lack of educational systems
  3. B) Since investors are not major players in these economies, there is little need for audited financial statements.
  4. C) Investors and creditors in these countries do not want external auditors attesting to financial statement reliability.
  5. D) In these cultures, financial statements are presumed to be accurate and therefore do not require independent audits.

 

LO: 3

 

  1. In what countries would one expect auditing standards to evolve based on the needs perceived by the auditing profession?
  2. A) code law countries
  3. B) members of the European Union
  4. C) countries that follow common law
  5. D) countries with strong accounting laws

 

LO: 3

 

  1. What term is used to refer to the probability that an accounting error or irregularity is detected and reported?
  2. A) accounting risk
  3. B) audit risk
  4. C) audit quality
  5. D) transaction risk

 

LO: 3

 

  1. Which of the following is NOT a factor influencing the probability that an auditor will detect an accounting error?
  2. A) competence of the auditor
  3. B) quality review and monitoring
  4. C) financial reporting requirements
  5. D) independence of the auditor

 

LO: 3

 

 

  1. Which of the following is a factor influencing the probability that an auditor will report a detected error or irregularity?
  2. A) competence of the auditor
  3. B) independence of the auditor
  4. C) quality review and monitoring
  5. D) financial reporting requirements

 

LO: 3

 

  1. What is the focus of Section 404 of the Sarbanes-Oxley Act?
  2. A) requirement that all members of the board of directors be independent of the corporation
  3. B) It addresses the need for a consistent set of international auditing standards.
  4. C) attesting to the reliability of internal controls in the annual report
  5. D) This defines the membership in the Public Company Accounting Oversight Board (PCAOB).

 

LO: 3

 

  1. Which of the following terms is NOT defined by statute in the Companies Act of the United Kingdom?
  2. A) accountant
  3. B) auditor
  4. C) independence
  5. D) None of these terms is defined in the Companies Act of the K.

 

LO: 3

 

  1. Which group is responsible for establishing auditing standards in the United Kingdom?
  2. A) Department of Trade and Industries (DTI)
  3. B) Consultative Committee of Accountancy Bodies (CCAB)
  4. C) Auditing Practices Board (APB)
  5. D) Institute of Chartered Accountants in England and Wales (ICAEW)

 

LO: 3

 

 

  1. In China, who is responsible for regulating auditing practice?
  2. A) Chinese Institute of Certified Public Accountants (CICPA)
  3. B) government, through local audit bureaus
  4. C) Chinese stock exchange
  5. D) Auditing Practices Board (APB)

 

LO: 3

 

  1. Why is international harmonization of auditing standards important?
  2. A) to be consistent with harmonized international accounting standards
  3. B) to ensure the independence of external auditors of multinational corporations
  4. C) to assure international capital markets that auditing has been consistent across companies
  5. D) to reduce the authority of individual governments to enact accounting laws

 

LO: 4

 

  1. In what area is external auditing consistent internationally?
  2. A) audit report
  3. B) auditing standards
  4. C) regulation of the profession
  5. D) none of the above

 

LO: 3

 

  1. What group is responsible for developing international auditing standards?
  2. A) International Accounting Standards Board (IASB)
  3. B) International Auditing and Assurance Standards Board (IAASB)
  4. C) International Organization of Securities Commissions (IOSCO)
  5. D) Organization for Economic Cooperation and Development (OECD)

 

LO: 4

 

 

  1. Why was the issuance of International Standard on Auditing 13 (IAS 13) considered so important to harmonization of auditing standards?
  2. A) It required all multinational corporations to adopt international auditing standards by 2008.
  3. B) It specified the form and content of the annual report.
  4. C) It provided guidance on the form and content of the audit report.
  5. D) It requires the auditor to express an opinion on whether the statements give a true and fair view of corporate performance.

 

LO: 4

 

  1. According to international auditing standards, if audit work has been limited in its scope, the auditors have had a disagreement with management, or there is significant uncertainty associated with the financial statements, what kind of audit opinion should be rendered?
  2. A) disclaimer of opinion
  3. B) unqualified
  4. C) adverse
  5. D) qualified

 

LO: 4

 

  1. What does ISA 700 say about the interpretation of an audit opinion?
  2. A) It enhances the credibility of the financial statements of corporation.
  3. B) It guarantees the future viability of the corporation.
  4. C) It assures readers that no errors have been made in the financial statements.
  5. D) It tells shareholders that management has operated the corporation efficiently.

 

LO: 4

 

  1. According to the International Auditing Practices Committee, financial statements have conformed to International Financial Reporting Standards (IFRS) if:
  2. A) they have complied with at least 75% of the IFRS.
  3. B) they have complied with at least one-half of the provisions of the IFRS.
  4. C) they have complied with all requirements and interpretations of the IFRS.
  5. D) they have complied with most of the IFRS or with U.S. GAAP.

 

LO: 4

 

 

  1. In an effort to harmonize international auditing standards on a regional level, the European Union has issued directives pertaining to this end.  Its Eighth Directive caused the United Kingdom to change the country’s long-held standard for individuals wishing to be auditors.  Which of the following is a new requirement for auditors in the UK?
  2. A) Auditors must be members of a recognized professional association, such as the ICAEW.
  3. B) New entrants to the auditing profession must hold a university degree in accountancy.
  4. C) Auditors may now be a citizen of any country in the European Union rather than just the UK.
  5. D) New members of the auditing profession must have a university degree.

 

LO: 4

 

  1. If an auditor breaks a contractual obligation, such as failing to complete an audit within the time frame specified in the engagement letter, what kind of liability does the auditor face?
  2. A) criminal liability
  3. B) civil liability
  4. C) professional sanctions
  5. D) none of the above

 

LO: 5

 

  1. Who may bring civil litigation against an auditor?
  2. A) only the client company
  3. B) only shareholders
  4. C) the client company and shareholders
  5. D) It depends on a country’s laws governing auditor liability.

 

LO: 5

 

 

  1. How does the principle of “joint and several liability” affect auditors in countries where it is applied?
  2. A) This limits civil liability to only those people who conducted the audit negligently.
  3. B) All partners in the accounting firm can be personally liable for the negligence of any one partner.
  4. C) All audit partners are liable for the actions of the firm only up to the level of their investment in the firm.
  5. D) It creates limited liability for auditors accused of wrong-doing by their clients.

 

LO: 5

 

  1. Auditors in the United States may form limited liability partnerships.  What does this mean for civil liability of auditors?
  2. A) It allows negligent auditors to escape civil litigation for their failures.
  3. B) Auditors are limited to serving clients that agree not to pursue litigation for audit negligence.
  4. C) The personal wealth of partners who are not negligent is protected from litigation against the audit firm.
  5. D) It has no impact on civil liability because it provides limitations only on criminal liability.

 

LO: 5

 

  1. The Institute of Chartered Accountants in New Zealand (ICANZ) proposed a policy of proportionate liability to replace the country’s existing “joint and several liability” approach.  Why was the proposal denied?
  2. A) Proportionate responsibility for damages cannot be determined objectively.
  3. B) Fairness to the defendants was not relevant to ensuring fairness to the injured party.
  4. C) Large auditing firms would be paying proportionately higher damage awards than small firms.
  5. D) Such a policy is inconsistent with harmonization of international auditing standards.

 

LO: 5

 

 

  1. Auditors in the United Kingdom sometimes include disclaimers of liability in their audit reports.  According to the U.S. Securities and Exchange Commission, how effective is this approach to limiting civil liabilities?
  2. A) It has no effect when included in the financial statements of S. companies.
  3. B) It effectively caps the damage awards that will be made in S. civil courts.
  4. C) It limits who can bring civil action in cases involving the audit of S. companies.
  5. D) It limits both civil and criminal liability against auditors of S. companies.

 

LO: 5

 

  1. The Canadian Institute of Chartered Accountants (CICA) has taken a principles-based approach to auditor independence, whereas the Federation des Experts Comptables Europeens (FEE) has taken a conceptual approach.  What is the difference?
  2. A) The principles-based approach has been effective, but the conceptual approach has not.
  3. B) The principles-based approach offers more flexibility in compliance than the conceptual approach does.
  4. C) The principles-based approach gives specific rules and prohibitions that must be followed, but the conceptual approach asks auditors to focus on the aim of independence rather than rules.
  5. D) The conceptual approach is only theoretical and hasn’t yet been applied, whereas the principles-based approach is currently in practice.

 

LO: 5

 

  1. An auditor may be subject to criminal liability under which of the following situations?
  2. A) She willingly participates in defrauding the company’s stockholders.
  3. B) She breaks a contract with the client.
  4. C) She violates a rule on the manner of advertising allowed by the professional accounting and auditing association.
  5. D) none of the above

 

LO: 5

 

  1. Which of the following is the responsibility of an audit committee?
  2. A) oversee the internal control system
  3. B) oversee internal auditing and the independent public accounting function
  4. C) monitor the financial reporting process
  5. D) all of the above

 

LO: 6

 

 

  1. What is an audit committee?
  2. A) It is a group of audit firms that develop national or international standards for auditing practice.
  3. B) It is a subset of a corporate board of directors with oversight of the auditing function.
  4. C) It is the team of external auditors (i.e. CPAs) that conducts audit testing and prepares the audit report.
  5. D) It is a management group responsible for negotiating the audit engagement with a public accounting firm.

 

LO: 6

 

  1. Under the Sarbanes-Oxley Act of 2002, to whom does the audit committee report?
  2. A) management of the corporation
  3. B) external auditor
  4. C) board of directors
  5. D) internal audit department

 

LO: 6, 9

 

  1. Under the Sarbanes-Oxley Act of 2002, who is responsible for paying the independent auditor?
  2. A) management
  3. B) audit committee
  4. C) government who has jurisdiction over the corporation
  5. D) American Institute of Certified Public Accountants (AICPA)

 

LO: 6, 9

 

  1. Under Securities and Exchange Commission regulations, who may be a member of an audit committee for a listed company?
  2. A) any member of the corporate board of directors
  3. B) any member of the corporate board of directors who is not a Certified Public Accountant (CPA)
  4. C) only members of the corporate board of directors who do not have a material interest in the company
  5. D) any manager or director of the corporation

 

LO: 6

 

 

  1. Which of the following is a limitation of SEC requirements for audit committee membership?
  2. A) The additional responsibilities make service on the committee less desirable to competent directors.
  3. B) External auditors are unwilling to report to an independent audit committee.
  4. C) The audit committee compromises the external auditor’s independence.
  5. D) Only the United Kingdom and the United States require audit committees, putting corporations in these countries at a disadvantage.

 

LO: 6

 

  1. What is the role of internal auditing?
  2. A) to substitute for the external auditor whenever possible
  3. B) to provide assurance and consulting services to improve an organization’s operations
  4. C) to assist the audit committee in negotiations with the external auditor
  5. D) to mediate disagreements between the external auditor and corporate management

 

LO: 8

 

  1. What is the position of the U.S. Securities and Exchange Commission (SEC) with respect to internal auditing?
  2. A) It requires all companies, including foreign enterprises, listed on S. stock exchanges to have an internal audit function.
  3. B) Since 2000, the SEC has been silent with respect to internal auditing.
  4. C) Internal auditing is recommended by the SEC, but it is not required for listed companies.
  5. D) Only multinational companies are required to have internal auditing systems.

 

LO: 8

 

  1. What reason can be given for the importance of internal auditing in multinational corporations?
  2. A) a serious lack of external auditors available to audit an international company
  3. B) a growing demand for risk management skills possessed by internal auditors
  4. C) reluctance by multinational corporations to hire external auditors to comply with international regulations
  5. D) decline in the reputation of external auditors

 

LO: 8

 

 

  1. What does the Foreign Corrupt Practices Act have to do with accounting?
  2. A) It requires that S. companies properly record bribes made to obtain business from foreign clients.
  3. B) It requires that appropriate internal control systems be maintained by publicly traded S. companies.
  4. C) It mandates the use of the temporal method of translating assets obtained illegally in foreign countries.
  5. D) It demands that publicly traded S. companies follow international best-practices when auditing illegal operations abroad.

 

LO: 8

 

  1. A recent survey of multinational corporations found that the Sarbanes-Oxley Act had the effect of increasing the percentage of U.S. companies with a financial expert on the audit committee from 65% to:
  2. A) 67%
  3. B) 70%
  4. C) 75%
  5. D) 95%

 

LO: 9

 

  1. Which of the following is NOT a concern in the 2008 IFAC report “Financial Reporting Supply Chain—Current Perspectives and Directions”?
  2. A) governance in name, but not in spirit
  3. B) overregulation
  4. C) the development of a checklist mentality
  5. D) trend towards less disclosure and transparency in business and financial reporting

 

LO: 1

 

  1. Which of the following is NOT a key driver of audit quality based on the 2008  U.K. FRC publication “The Audit Quality Framework”?
  2. A) the composition of a company’s audit committee
  3. B) the culture within an audit firm
  4. C) the effectiveness of the audit process
  5. D) the skills and personal qualities of audit partners and staff

 

LO: 1

 

 

  1. What are the two main theories of corporate governance?
  2. A) audit reliance and board of directors’ responsibility
  3. B) agency and stakeholder
  4. C) common law and code law
  5. D) internal auditing and external auditing

 

LO: 1

 

  1. In proposed PCAOB Rule 4012, “Inspection of Foreign Registered Public Accounting Firms” issued for comment in December 2007, which of the following is NOT one of the broad principles upon which the Board may place full reliance on the inspection program of qualified non-U.S. auditor oversight entities?
  2. A) transparency of the oversight system
  3. B) adequacy and integrity of the oversight system
  4. C) rigidity of professional standards mandated by the oversight system
  5. D) independence of the oversight system’s source of funding

 

LO: 5

 

  1. According to the 2004 Management Barometer Survey conducted with senior executives of MNCs, in addition to internal control effectiveness, which was the next highest area in need of improvement?
  2. A) security controls
  3. B) internal audit effectiveness
  4. C) fraud programs
  5. D) financial processes

 

LO: 9

 

  1.    Who oversees the work of the IFAC committees?
  2. A) PIOB
  3. B) PCAOB
  4. C) IOSCO
  5. D) OECD

 

LO: 7

 

 

 

 

Chapter 15

International Corporate Social Reporting

 

Multiple Choice Questions

 

  1. The meaning of corporate social reporting (CSR) is derived from the notion of:
  2. A) governmental societal responsibility.
  3. B) organizational societal responsibility.
  4. C) Maslow’s hierarchy of needs.
  5. D) the Sarbanes-Oxley Act of 2002.

 

LO: 1

 

  1. Accountability is defined as what kind of a concept?
  2. A) reactive
  3. B) financial
  4. C) proactive
  5. D) regulatory

 

LO: 1

 

  1. The corporate social reporting (CSR) theory that environmental disclosures are made in response to a demand for environmental and social information is called the:
  2. A) legitimacy theory.
  3. B) stakeholder theory.
  4. C) Superfund theory.
  5. D) depletable resource theory.

 

LO: 2

 

  1. The corporate social reporting (CSR) theory that social reporting is a means to deal with the firm’s exposure to political, economic and social pressures is called the:
  2. A) government accountability theory.
  3. B) depletable resource theory.
  4. C) legitimacy theory.
  5. D) stakeholder theory.

 

LO: 2

 

 

  1. How do Australian managers tend to view the annual corporate social report?
  2. A) It is required by Australian statute and is not an option.
  3. B) It has been greeted with skepticism.
  4. C) It is doomed to fail as a legitimating vehicle.
  5. D) It is useful in maintaining or reestablishing legitimacy.

 

LO: 2

 

  1. How do Irish companies view annual corporate social reports?
  2. A) They have been greeted with skepticism and have ceased to engage in preparing them.
  3. B) They embrace them as a way of maintaining or reestablishing legitimacy.
  4. C) They are required to prepare them under Irish statute.
  5. D) Irish culture demands CSR reports.

 

LO: 2

 

  1. Which is NOT one of Hofstede’s structural elements of culture that affect organizational behavior?
  2. A) individualism vs. collectivism
  3. B) high-profile corporate scandals
  4. C) strong vs. weak uncertainty avoidance
  5. D) large vs. small power distance

 

LO: 5

 

  1. Which is NOT one of Gray’s accounting values?
  2. A) secrecy vs. transparency
  3. B) conservatism vs. optimism
  4. C) capitalizing vs. expensing
  5. D) uniformity vs. flexibility

 

LO: 5

 

 

  1. The Treadway Commission Report in the United States published in 1987 used the phrase:
  2. A) “bottom up accounting.”
  3. B) “top down accounting.”
  4. C) “management culture incentive.”
  5. D) “tone at the top.”

 

LO: 3, 5

 

  1. Japanese companies’ attitudes towards information for disclosure to outsiders can be described in what way?
  2. A) They believe in the principles of full disclosure.
  3. B) The Emperor has mandated full disclosure.
  4. C) Banking scandals have encouraged full disclosure.
  5. D) They are generally reluctant to provide such information.

 

LO: 3, 5

 

  1. The Intergovernmental Panel on Climate Change (IPCC) has found that the concentration of atmospheric carbon dioxide has increased by how much in the past 250 years?
  2. A) 150%
  3. B) 65%
  4. C) 35%
  5. D) 100%

 

LO: 5

 

  1. What was a key finding of the 2007 Stern Report in the United Kingdom on the Economics of Climate Change?
  2. A) The costs of extreme weather over the next few decades could reach .5% to 1% of world GDP per annum.
  3. B) Climate change should promote forced savings over the next few decades.
  4. C) Climate change bears little, if any correlation to economic disruption.
  5. D) The costs of extreme weather over the next few decades could reach 10% to 15% of world GDP per annum.

 

LO: 5

 

 

  1. What is a carbon tax?
  2. A) It is a tax imposed by the World Bank on excessive carbon usage.
  3. B) It is a tax imposed by the U.S. government on excessive vehicle emissions.
  4. C) It is a regressive tax.
  5. D) It is a tax on the use of fuels that cause the emission of carbon dioxide and other greenhouse gases into the atmosphere.

 

Level: Easy  LO: 5

 

  1. Which of the following are significant shortcomings with voluntary CSR practices?
  2. A) reliability
  3. B) bias and a tendency towards being self-laudatory
  4. C) minimal disclosure of negative information
  5. D) all of the above

 

LO: 4

 

  1. What effect has social and environmental legislation had on top management in Thailand?
  2. A) Top management can be jailed for failure to make social and environmental disclosures.
  3. B) There has been no motivation towards increased corporate social and environmental disclosures.
  4. C) Top management is highly motivated to make social and environmental disclosures.
  5. D) There is no social and environmental legislation in Thailand.

 

LO: 4

 

  1. What organization is the only cap and trade system for all six greenhouse gases in North America?
  2. A) The Chicago Climate Exchange
  3. B) The Toronto Climate Exchange
  4. C) The Nuclear Regulatory Agency
  5. D) The Los Angeles Climate Exchange

 

LO: 4

 

 

  1. Which is a goal of the Chicago Climate Exchange (CCX)?
  2. A) to help inform the public debate on managing the risk of climate change
  3. B) to facilitate capacity-building in both public and private sectors to facilitate GHG migration
  4. C) to build the skills and institutions needed to cost effectively manage GHGs
  5. D) all of the above

 

LO: 4

 

  1. What are GHGs?
  2. A) governmental heating guides
  3. B) governmental hierarchy of gases
  4. C) greenhouse gases
  5. D) good health guides

 

LO: 4

 

  1. In August 2010 what was the price per ton of carbon?
  2. A) $1.00
  3. B) $2.50
  4. C) $.10
  5. D) $25.00

 

Level: Hard  LO: 4

 

  1. Carbon trading is underpinned by what product?
  2. A) carbon neutrality
  3. B) carbon credits
  4. C) carbon taxes
  5. D) carbon offsets

 

LO: 4

 

 

  1. The discovery of toxic waste dumps in the United States in the 1980s led to passage of what legislation?
  2. A) offshore drilling
  3. B) Superfund
  4. C) Sarbanes-Oxley
  5. D) Gramm-Rudman

 

LO: 4

 

  1. Which country has not ratified the 2005 Kyoto Protocol?
  2. A) Japan
  3. B) France
  4. C) the U.S.
  5. D) Spain

 

LO: 4, 6

 

  1. What does EU ETS stand for?
  2. A) European Union Emissions Trading Scheme
  3. B) European Union Emissions and Toxic Sludge
  4. C) Eastern European Emergency Toxic Standards
  5. D) Eastern European Electricity Transmission Standards

 

LO: 6

 

  1. The countries ratifying the Kyoto Protocol are committed to reducing greenhouse gases by how much from their 1990 level by 2011?
  2. A) 25%
  3. B) 10%
  4. C) 5%
  5. D) 50%

 

LO: 4, 6

 

 

  1. GRI stands for:
  2. A) Global Research Initiative
  3. B) Global Reporting Initiative.
  4. C) Greenhouse Reporting for Industries
  5. D) Greenhouse Regulation Initiative

 

LO: 7

 

  1. What do investors in the Prototype Carbon Fund (PCF) receive in return for their investment?
  2. A) a guaranteed 10% return
  3. B) the satisfaction of contributing to corporate societal values
  4. C) a reduction of the carbon tax
  5. D) a pro-rata share of the carbon credits

 

LO: 6, 7

 

  1. What is the purpose of the IFAC’s Sustainability Framework?
  2. A) to target professional accountants who can influence integration of sustainability into organizations’ objectives, strategies, management, and definition of success
  3. B) to promote global adoption of GRI
  4. C) to target elected officials who can influence integration of sustainability into organizations’ objectives, strategies, management, and definition of success
  5. D) to integrate the concept of sustainability into the Accounting Framework

 

LO: 6, 7

 

  1. Which country is NOT a member of the Asia-Pacific Partnership on Clean Development and Climate?
  2. A) Japan
  3. B) New Zealand
  4. C) India
  5. D) Korea

 

LO: 6, 7

 

 

  1. Where is the Secretariat of the GRI located?
  2. A) New York
  3. B) Montreal
  4. C) Amsterdam
  5. D) Vienna

 

LO: 6, 7

 

  1. Part I of the GRI Sustainability Guidelines defines all but which one of the following?
  2. A) report content
  3. B) quality
  4. C) boundary
  5. D) standards for disclosure

 

LO: 7

 

  1. Part II of the GRI Sustainability Guidelines defines which one of the following?
  2. A) report content
  3. B) quality
  4. C) boundary
  5. D) standards for disclosure

 

LO: 7

 

  1. Part II of the GRI Sustainability Guidelines identifies all but which of the following types of disclosure?
  2. A) strategy and profile
  3. B) management approach
  4. C) reduction in GHG emissions
  5. D) performance indicators

 

LO: 7

 

 

  1. What does G3 represent?
  2. A) an annual summit of countries committed to the reduction of GHGs
  3. B) the third type of GHG
  4. C) the United States, Canada and Mexico
  5. D) the third generation of the GRI’s Sustainability Reporting Guidelines

 

LO: 7

 

  1. In which country has the “GRI-Certified Training Program” been implemented?
  2. A) Brazil
  3. B) India
  4. C) the United States
  5. D) all of the above

 

LO: 7

 

  1. In its sustainability report for 2009 which major company states that it plans to cut carbon emissions of its airline by an additional 20% by 2020?
  2. A) Southwest Airlines
  3. B) Federal Express
  4. C) Jet Blue
  5. D) UPS

 

LO: 8

 

 

  1. In which company is there a strong correlation between high profitability and sustainability reporting?
  2. A) Coca-Cola
  3. B) Microsoft
  4. C) IBM
  5. D) all of the above

 

LO: 8

 

  1. What are the most disclosed social report items by the U.S., the U.K. and Australia?
  2. A) research and development of sustainable products
  3. B) greenhouse gas policies and procedures
  4. C) human resources and community involvement
  5. D) zero tolerance for racial, religious and gender bias

 

LO: 8

 

  1. Which of the following sectors does NOT report financial savings from their actions to improve their social targets?
  2. A) information technology
  3. B) financial services
  4. C) oil and gas
  5. D) pharmaceuticals

 

LO: 8

 

 

  1. What are the most disclosed social report items in Thai annual reports?
  2. A) employee information and environmental information
  3. B) Thailand tends not to issue corporate social reports.
  4. C) amount of carbon credits traded
  5. D) community involvement

 

LO: 8

 

  1. In which country do companies tend to focus on non-monetary disclosures that are more favorable to the company, especially around the time of negative events?
  2. A) Libya
  3. B) Ireland
  4. C) Australia
  5. D) China

 

LO: 8

 

  1. In which of the following countries do companies tend to provide the most extensive environmental disclosure?
  2. A) Canada
  3. B) The United States
  4. C) The United Kingdom
  5. D) Australia

 

LO: 8

 

  1. In which of the following countries do companies tend to provide the most extensive reporting on climate change?
  2. A) Canada
  3. B) The United States
  4. C) The United Kingdom
  5. D) Japan

 

LO: 8

 

 

  1. What is one thing that few companies tend to report on in their corporate social report disclosures?
  2. A) international disaster response
  3. B) the risk of legal action or business disruptions caused by climate issues
  4. C) the level of GHG reduction
  5. D) community involvement

 

LO: 8

 

  1. What is another name by which corporate social reporting (CSR) is also known?
  2. A) corporate integrity reporting
  3. B) corporate image reporting
  4. C) ecological footprint reporting
  5. D) non-monetary bottom line reporting

 

LO: 1

 

  1. What is another name by which corporate social reporting (CSR) is also known?
  2. A) corporate integrity reporting
  3. B) environmental social governance reporting
  4. C) corporate image reporting
  5. D) non-monetary bottom line reporting

 

LO: 1

 

  1. Which of the following are drivers of corporate social reporting?
  2. A) the level of media attention
  3. B) social pressure groups
  4. C) environmental pressure groups
  5. D) all of the above

 

LO: 5

 

 

  1. Under the Kyoto Protocol what mechanism is used to promote emissions reduction in developing countries?
  2. A) Clean Development Mechanism (CDM)
  3. B) Clean Air Initiative (CAI)
  4. C) The Kyoto Protocol only focuses on developed countries.
  5. D) none of the above

 

LO: 4

 

  1. According to Gray which characteristic influences Spain’s accounting values and reporting?
  2. A) transparency
  3. B) secrecy
  4. C) flexibility
  5. D) optimism

 

LO: 5

 

  1. To be carbon neutral means that:
  2. A) an equal amount of gas has been removed from the atmosphere as has been put there through various emissions.
  3. B) a company pledges not to produce carbon-based products.
  4. C) a company has overpaid its carbon tax.
  5. D) the type of carbon released into the atmosphere has no negative implications on the environment.

 

LO: 5

 

  1. ESG is an acronym for:
  2. A) environmentally-specific gases
  3. B) environmental social governance reporting
  4. C) European societal goals
  5. D) ecologically-safe groundwater

 

LO: 1