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I Bus Final - Accounting and Finance in International Business
Terms in this set (21)
What are the 3 things "financial management" involves? Describe them briefly.
: What to finance
: How to finance those decisions
Money management decisions
: How to manage the firm's financial resources
True or false: Accounting is the language of business
Why is accounting harder and more complex for international firms?
-Differences in accounting standards from country to country
-Makes it difficult for investors, creditors, and governments to evaluate firms
-Hard to compare financial reports
What determines "national accounting standards"?
Relationship between business and the providers of capital
: A country's accounting system reflects the relative importance of each constituency as a provider of capital
-Accounting systems in the US and GB are oriented toward individual investors
Political and economic ties with other countries
: Similarities in accounting systems across countries can reflect political or economic ties
-Ex: US accounting system influences the systems in the Philippines
Level of inflation
Level of a country's economic development
-Developed nations often have more sophisticated accounting systems then developing nations --> due to larger, more complex firms create accounting challenges & providers of capital require detailed reports
-Many developing nations have accounting systems that were inherited from former colonial power
The prevailing culture in a country
What are "accounting standards"?
Rules for preparing financial statements --> they define useful accounting info
What are "auditing standards"?
-Specify the rules for performing an audit
-Technical process by which an independent person gather evidence for determining if financial accounts conform to required accounting standards and if they are also reliable
Why were "international accounting standards" created?
-Growth of transnational financing and transnational investment
-Many companies obtain capital from foreign providers who are demanding greater consistency
Why is the "standardization of accounting across nations" probably a good thing for the the world economy?
Because it will facilitate the development of global capital markets
What is the "IASB" and give a brief description of it.
-International Accounting Standards Board
-Most standards are consistent with standards in US
-EU has mandated harmonization of accounting principles for members
What are the 3 ways accounting influences control systems?
1. Subunit goals are jointly determined by the head office and subunit management
2. The head office monitors subunit performance throughout the year
3. The head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary
Why should the evaluation of a subsidiary be separated from the evaluation of managerial performance?
-Subsidiaries operate in different environments that influence profitability
-A manager's evaluation should consider the country's environment for business and take place after making allowances for those items over which managers have no control
How should financial managers quantify the risks, benefits, and costs of an investment decision?
Why is "capital budgeting" more complicated for international businesses?
Distinction must be made between cash flows to the project and cash flows to the parent company
-Parent companies are interested in the cash flows they will receive, not the cash flows the project generates
-Cash flows to the parent may be lower because of host country limits on the repatriation of profits, host country reinvestment requirements, etc.
Political and economic risk
: The likelihood that political forces will cause drastic changes in a country's business environment that hurt the profit and other goals of a business --> higher in countries with social unrest
: Likelihood that economic mismanagement will cause drastic changes in a country's business environment that hurt the profit and other goals of the business --> biggest risk is inflation
The connection between cash flows to the parent and the source of financing must be recgonized
How can firms adjust for risk for foreign investment opportunities?
-By raising the discount rate in countries where political and economic risk is high
-By lowering future cash flow estimates to account for adverse political or economic changes that could occur in the future
What are the two factors firms look at for "financing decisions" in foreign areas? Describe them.
1. How foreign investment will be financed
-The cost of capital is usually lowest in the global capital market
-But, some governments require local debt or equity financing
-Firms that anticipate a depreciation of the local currency, may prefer local debt financing
2. How the financial structure (debt vs. equity) of the foreign affiliate should be configured
-Decide whether to adopt local capital structure norms or maintain the structure used in home country
What are "money management decisions" and how should firms make these decisions internationally? (2 things)
Money management decisions
: Attempt to manage global cash efficiently
Minimize cash balances
: Need cash balances on hand for notes payable and unexpected demands
-Cash reserves are usually invested in money market accounts that offer low rates of interest
-When firms invest in money market accounts they have unlimited liquidity, but low-interest rates
-When they invest in long-term instruments they have higher interest rates, but low liquidity
Reduce transaction costs
: The cost of exchanging
of different currencies
-Most banks also charge a transfer fee for moving cash from one location to another
-Multilateral netting can reduce the number of transactions between subsidiaries and the number of transactions costs
What are the FOUR ways "taxes" can be minimized?
: Allow the firm to reduce the taxes paid to the home gov't by the amount of taxes paid to the foreign gov't
: Agreement specifying what items of income will be taxed by the authorities of the country where the income is earned
: Specifies that parent companies are not taxed on foreign source income until they actually receive a dividend
: Countries with a very low, or no, income tax - firms can avoid income taxes by establishing a wholly-owned, non-operating subsidiary in the country
What are different types of ways firms transfer "liquid funds" across borders?
: Paying dividends is most common method of transferring funds from subsidiaries to the parent
-High tax rates make this less attractive
-Foreign exchange risk --> dividends might speed up in risky countries
-Older subsidiaries remit a higher proportion of their earning in dividends
-Extent of local equity participation - local owners' demands for dividends come into play
Royalty payments and fees
: The money paid to owners of tech, such as patents/trade names for the use of that tech or the right to manufacture and/or sell products under those patents or trade names
-Can be levied as fixed amount or percentage of gross revenues
-Most parent companies charge subsidiaries royalties for the technology
-Royalties and fees are often tax-deductible locally
: the price at which goods and services are transferred between entities within the firm
: Loans between a parent and its subsidiary channels through a financial intermediary, usually a large international bank
How can "transfer prices" be manipulated?
-Reduce tax liabilities by shifting earnings from high-tax countries to low-tax countries
-Move funds out of a country where a significant currency devaluation is expected
-Move funds from a subsidiary to the parent when dividends are restricted by the host gov't
-Reduce import duties when ad valorem tariffs are in effect
When can "transfer pricing" be problematic?
-Gov'ts think they are being cheated out of legitimate income
-Gov'ts believe firms are breaking the spirit of the law when transfer prices are used to circumvent restrictions of capital flows
-Complicates management incentives and performance evaluation
Why do firms use "fronting loans"?
-To circumvent host-country restrictions on the payment of funds from a foreign subsidiary to the parent company
-To gain tax advantages
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