INTERNATIONAL ISSUES IN

CHAPTER 18

INTERNATIONAL ISSUES IN

MANAGEMENT ACCOUNTING

QUESTIONS FOR WRITING AND DISCUSSION

1.Differences among countries in terms of the political, legal, and cultural environment can all affect the firm. The management accountant may find that practices that work well in the home country do not work as well (or at all) in other countries. It is necessary for the management accountant to be aware of all facets of business and to be knowledgeable and creative in applying accounting concepts in various business environments.

2.A foreign trade zone is an area that is physically on U.S. soil but is considered to be outside U.S. commerce. As a result, goods imported into a foreign trade zone are free of tariff or duty until they leave the zone.Therefore, companies located in a foreign trade zone can postpone payment of tariff and the associated loss of working capital.Additionally, the company does not pay duty on defective materials or inventory that has not been included in the finished product.

3.Outsourcing is the payment by a company for a business function that was formerly done in-house. In an international context, outsourcing refers to the location of business functions in another country.Frequently, the work outsourced is to a lower-wage country. The company receives a comparable quality of work but at a lower cost.

4.Joint ventures are partnerships between two or more companies. The enterprise is co- owned. A company may find joint ventures advantageous when another company has expertise that the first company lacks. In addition, restrictions by certain countries on foreign ownership of business may mean that a joint venture is the only avenue open to a company wishing to expand into the foreign country.

5.Maquiladoras are manufacturing plants located in Mexico that process imported materials and reexport them to the United States. Maquiladoras are exempt from Mexican laws governing ownership, and the U.S. government grants exemptions from or reductions in custom duties levied on reexported goods. Many U.S. firms have embraced the maquiladora because of the low-cost labor, the flexible ownership structure, and the opportunity to locate close to an increasingly important Mexican market.

6.The exchange rate is the amount for which one currency can be traded for another. The spot rate is the exchange rate in effect at the current time. There are also future exchange rates, which describe the rates in effect for future delivery.

7.These three types of risk relate to the impact on the firm of changing exchange rates.Transaction risk refers to the possibility that future cash transactions will be affected by changing exchange rates. Economic risk refers to the possibility that a firm’s present value of future cash flows can be affected by exchange fluctuations. Translation risk is the degree to which a firm’s financial statements are exposed to exchange rate fluctuations.

8.Currency appreciation means that the home country’s currency strengthens against another currency. In other words, one unit of the home currency purchases more units of another currency than it did previously.Currency appreciation makes the products of a foreign country cheaper than before, and thus, it is easier for a company in the home country to import goods.

9.Currency appreciation makes the home country currency more expensive to foreign customers, thereby making the products of the home country firm more expensive than they were before. For example, if the exchange rate is one home country unit to one foreign country unit and the currency appreciates, then the exchange rate might become one home country unit to two foreign units. That is, the home country unit buys more foreign currency as it appreciates. Put differently, the foreign

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Solutions Manual for Managerial Accounting 8th Edition By Hansen Mowen (All Chapters Arranged Reverse 18-1) 1 / 4

currency buys less as the home country currency appreciates.

10.If Mexico devalues the peso, a dollar will buy relatively more pesos, making the cost of Mexican labor cheaper. As the controller, you will revise your estimates of labor costs in the maquiladora downward. The proposed new production facility will be more attractive.As a local labor union leader, you would be displeased by the potential devaluation. If Mexican wages go down relative to U.S.wages, Mexican labor will be relatively more attractive, and more jobs may be outsourced to Mexico.

11.Hedging is a way of insuring against gains and losses on foreign currency exchange.The company that imports the material may be afraid that the exchange rate will change in 90 days and that the home currency will weaken against the foreign currency. In that case, the company may hedge by purchasing a forward contract for the foreign currency, thereby locking in the exchange rate and insuring against adverse exchange rate fluctuations.

12.Disagree. The manager of a subsidiary should not be evaluated on the basis of factors over which he or she has no control.These factors may include transfer prices, currency fluctuations, local taxes, and so on.The subsidiary manager should be evaluated on the basis of revenues and costs.

13.Environmental factors that may affect the performance of divisional managers include economic, legal, political, social, and educational variables.

14.Internal Revenue Code Section 482 outlines the transfer pricing methods acceptable for income tax purposes. The four acceptable methods are the comparable uncontrolled price method, the resale price method, the cost-plus method, and any method jointly acceptable to the IRS and the company.

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EXERCISES

18–1

Your friend will take the traditional accounting and business courses required for a major in accounting. Naturally, these would include international business courses, such as international accounting and international finance. In addition, she/he would be well advised to take classes relating to other cultures, including history, philosophy, literature, and foreign language(s). No individual class is critical; instead, it is the sum of the classes that is important. In other words, your friend will learn a little about other countries in each class. Over time, that little bit will add up, giving your friend the background to understand business practices overseas and to fit business transactions into a cultural context.Suppose your friend is just about to graduate and cannot afford to spend more time in college? Then she/he should do what all management accountants need to do—stay up to date by reading books and articles in a variety of international business areas, including information systems, marketing, management, politics, and economics.Note to Instructors: Your students may want to read Daniel M. Hrisak’s “Global

Challenges Call for More CMAs and CFMs,” Strategic Finance (June 2001): pp.

44–49.

18–2

1.e 2.b 3.d 4.c 5.a

18–3

1.e 2.c 3.d 4.b 5.a

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18–4

1.$14,200,000  0.30 = $4,260,000

2.$4,260,000  9/12  0.10 = $319,500

18–5

1.$14,200,000  0.85  0.30 = $3,621,000

2.Savings= ($4,260,000 – $3,621,000) + $319,500

= $639,000 + $319,500 = $958,500

18–6

Tariff savings = ($3,750,000  0.06  0.25) = $56,250 per year Because broken items will never be sold outside the foreign trade zone, Bulwar will not owe a tariff on them.

18–7

1.70,100 pesos/10.9 = $6,431 2.70,100 pesos/11.4 = $6,149 3.There is an exchange gain of $282 ($6,431 – $6,149).104104

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