Accounting and Finance in the International Business

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investment decisions
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what to finance
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financing decisions
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how to finance those decisions 1. raise funds on global capital market 2. raise funds from local sources
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money management decisions
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how to manage the firm’s financial resources most effciently
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accounting standarads
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rules for preparing financial statements
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auditing standards
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specify the rules for preforming an audit
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International Accounting Standards Board (IASB)
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a major proponent of standardization of accounting standards
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Lessard-Lorange Model
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firms can deal with the problems of exchange rates and control in three ways
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capital budgeting
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involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value
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political risk
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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
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economic risk
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the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business (biggest risk is inflation)
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money management
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decisions attempt to managed global cash resources efficiently 1. minimize cash balances 2. reduce transaction costs 3. minimize corporate tax burden
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minimize cash balances
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need cash balances on hand for notes payable and unexpected demands
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reduce transaction costs
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the cost of exchange
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transfer fee
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fee for moving cash from one location to another
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multilateral netting
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can reduce the number of transactions between subsidiaries and the number of transaction costs
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double taxation
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occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country government
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tax credits
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allow the firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government
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tax treaties
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agreement specifying what items of income will be taxed by the authorities of the country where the income is earned
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deferral principle
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specifics that parent companies are not taxed on foreign source income until they actually receive a dividend
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tax havens
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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
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royalties
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the remuneration paid to owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names
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fee
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compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary
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transfer prices
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the price at which goods and services are transferred between entities within the firm
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fronting loans
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loans between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank
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Accounting systems in the US and Great Britain
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oriented toward individual investors
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Accounting systems in Switzerland and Germany
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focus on giving info. to banks
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how can firms adjust for political and economic risk
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– raise discount rate in countries where risk is high – lower future cash flow estimates
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cost of capital is usually lower in global capital market? (t/f)
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true
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cost of capital is usually lower in global capital market? (t/f)
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true
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cost of capital is usually lower in global capital market? (t/f)
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true

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