Chapter 1 Questions
1. How important is international trade to the world economy? a. International sales and trade can be a source of higher profit margins through additional sales. Unique products or technological advantages can provide competitive advantage that a company wishes to exploit by expanding sales in a foreign market 2. What accounting issues arise for a company as a result of engaging in international trade? b. New accounts added to the chart of accounts, foreign currency and exchange rates and the risk of falling rates, hedging, whether or not it is profitable for a company to invest overseas, financial reporting for overseas operations, international taxes, tariffs, fees associated with intercompany transfers, international auditing, cross-listing on exchanges, global accounting standards 3. Why might a company be interested in a foreign direct investment? c. Increase sales and profits through a different market that may have comparative advantage that a company wishes to exploit by expanding sales in a foreign country, enter rapidly growing or emerging markets to gain a foothold in an emerging market overseas, reduce costs by investing overseas sometimes a company can lower labor and manufacturing costs by having a factory close to a supply of materials rather than import them, protect domestic markets by weakening an international competitor in their home market, protect foreign markets to create a stronger presence in a country to protect the market, acquire technological and managerial know how by setting up an operation close to leading competitors and monitoring their activities and even stealing experienced employees. 4. How important is foreign direct investment to the world economy? d. Global sales of foreign affiliates comprises of about 10% of the worldwide gross domestic product and global sales of foreign affiliates were about 1.5 times as high as global exports in 2008. 5. What financial reporting issues arise as a result of making a foreign direct investment? e. Determination of NPV of the potential investment and making sure that the ROI would be adequate and that involves discounting cash flows back to present value and comparing them with the investment and trying to take into account the foreign exchange. There are also different accounting rules in different countries and trying to get a clear picture from companies’ financial statements is not always easy. A company must also know about tax systems from other countries and laws and restrictions imposed on dividends made to parent companies. 6. What taxation issues arise from making a foreign direct investment? f. There could be restrictions or taxes imposed on dividends or intercompany transfers made between the parent and the child companies. Also the taxes that must be paid in the US and how the foreign operations affect those. 7. What are some issues that arise in evaluating and maintaining control over foreign operations? g. The parent company must decide if the foreign operation is going to be judged based on local currency ratios or the basis of US dollar ratios and if factors that the foreign operations had no control over are going to be adjusted to factor out of the evaluation. Who is going to perform the performance evaluations, headquarters or the managers at the plants responsible for the operating units? 8. Why might a company want its stock listed on an exchange outside of its home country? h. Because they are allowed to prepare financial statements using IASB standards and companies can gain contact to many other stock exchanges they might want to possibly enter into. 9. Where might one find information that could be used to measure the multi-nationality of a company? i. The United Nations World Investment Report
10. What would be the advantage of having a single set of accounting standards worldwide? j. So that companies could...
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