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Why is international accounting more challenging than domestic accounting?
it involves a) translation of accounts from one currency to another and b) reconciling different formats of reporting when consolidating income statements and balance sheets.
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Explain how and why accounting for personal taxes of global executives and staff can become complicated.
they may have to file taxes in multiple jurisdictions requiring knowledge of tax laws of multiple countries
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Assume a U.S. company purchases goods worth €1,500,000 from a German company and has to make payment in sixty days. The exchange rate is US$1.50/€1. When the payment is made sixty days later, the exchange rate is US$1.25/€1. How would the company record the transaction on the order date and the payment date?
The U.S. company will have to record the purchase of goods as €1,500,000 x $1.50 = $2,250,000 on order date. On payment date, the U.S. company pays $1,875,000 because the exchange rate sixty days later is US$1.25/€1. It will record the payment of $2,250,000 to offset the accounts payable but also record an exchange gain of $375,000 for a net effective payment of $1,875,000.
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Why is the two-step procedure to record foreign exchange transactions better than the one-step procedure?
it can identify the gains and losses due to exchange rate changes in the period between the order and payment dates.
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The balance sheet of a U.S. company has US$200 million in assets and US$200 million in equity. Its subsidiary in Belgium has assets and equity valued at €100 million. The exchange rate today is US$1.50/€1. At the end of the year, the exchange rate changes to US$1.25/€1. Do they report an unrealized loss or gain, and how much?
The value of the Belgium assets has decreased to $125 million from $150 million. The U.S. company in its consolidated balance sheet will report an unrealized loss of $25 million on a separate line in its equity account.
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Explain the current and temporal methods of translating the asset and liabilities of a subsidiary.
In the temporal method, all monetary items of a balance sheet are translated at current exchange rates at year end. In the current method, all assets and liabilities in a balance sheet are translated at the current exchange rates.
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What common theme runs through the scandals of Enron, WorldCom, and Parmalat?
overstating of revenues and understating of expenses in order to inflate earnings.
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Compare principles-based versus rules-based accounting standards for financial reporting.
A principles-based approach is more conceptual in that it expects companies to provide reliable and accurate reports based on specific objectives and intent of the disclosure. The methods to achieve the objectives can vary. In a rules-based approach, although the objectives may be the same, the procedures and methodology are rigidly defined
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What is major difference between IFRS and U.S. GAAP? Under which system is it easier to use loopholes?
the former is principles-based while the latter is rules-based. It is easier to use loopholes in a rules-based system.
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What benefits may a company obtain if it adopts the IFRS, according to the OECD report?
The OECD reports that the benefits of adopting IFRS includes include improved information for managers to make better decisions, reduced cost of capital, enhanced competition, better access to capital, consistent reporting of subsidiaries and transparency that can assist in mergers and acquisitions
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Distinguish between corporate taxes, withholding taxes, and indirect taxes.
Corporate taxes are based on the income earned by the company whereas withholding taxes are applied to dividends and interests that are repatriated out of the country. Indirect taxes are taxes imposed on consumption such as sales tax and value added tax.
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What approaches have countries used when taxing the repatriated profits of companies that conduct business overseas?
Countries have used two approaches to tax repatriated profits of domestic companies from overseas subsidiaries. In one case, no taxes are imposed recognizing that companies have a right to go to whichever country it deems fit to be competitive globally. The second approach establishes a level playing field between domestic and overseas operations. If a domestic company chooses to go overseas and pay lower taxes abroad, it is expected to pay the difference when they repatriate the profits back home.
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An aluminum manufacturer sells the equivalent of US$5 per sheet to a manufacturer of aluminum trays. The aluminum-tray manufacturer in turn delivers finished trays to a major retailer for US$10 per tray. The retailer sells it to a final customer for US$15. If the VAT and sales tax is 6 percent, show how the total taxes paid to the taxing authorities are the same under both indirect taxes.
With sales tax, the tax payment takes place at the final sale. The amount is $15 x 0.06 = $0.90. Total taxes received by the government is $0.90.With VAT, the aluminum manufacturer charges VAT of 6 percent to the tray manufacturer and deposits $5 x 0.06 = $0.30 to the government.The tray manufacturer in turn charges $15 x 0.06 = $0.90 to the final customer and pays the government the difference in VAT, $0.90 – $0.30 = $0.60. Total taxes received by the government is $0.90.
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