Global Business And Accounting

CHAPTER 15 GLOBAL BUSINESS AND ACCOUNTING OVERVIEW OF EXERCISES, PROBLEMS, CASES, AND INTERNET ASSIGNMENT Learning Objectives 1–8 1, 2 4 2, 7, 8 2, 5 4, 5 3 8

Exercises 15–1 15–2 15–3 15–4 15–5 15–6 15–7 15–8

Topic Accounting terminology Identifying globalization activities Exchange rate conversions Researching foreign countries Currency fluctuations Currency transactions Harmonization around the world Foreign Corrupt Practices Act

Problems 15–1 15–2

Exporting decisions Currency transactions

4, 5 1, 4, 5, 6

15–3 15–4 15–5 15–6 15–7

Exchange rates and income effects Foreign production decisions Global trade agreements Currency fluctuations Tootsie Roll’s globalization

4, 5, 6, 7 3, 4 2, 7 1, 4, 5, 6 1, 2, 6, 7

Cases 15–1 15–2

Globalization activities International accounting standards

1, 2 2, 3, 5

Business Week Assignment 15–3 Business Week assignment: Inside Japan Internet Assignment 15–1

U.S. foreign trade zones

2, 3

1, 2, 7

Character of Assignment Conceptual Conceptual Mechanical Conceptual, analytical Conceptual Conceptual Mechanical, conceptual Conceptual Mechanical, analytical Mechanical, conceptual, analytical Mechanical, analytical Mechanical, analytical Conceptual, analytical Mechanical, conceptual Mechanical, conceptual, real Conceptual Conceptual

Conceptual, real, writing, group assignment

Conceptual

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DESCRIPTIONS OF PROBLEMS, CASES, AND INTERNET ASSIGNMENT Below are brief descriptions of each problem, case, and the first Internet assignment. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers.

Problems 15–1

Cramer Cookie Company Demonstrate how differences in costs and exchange rates between countries can impact the profits earned from exportation. The student must calculate the forecasted amount of profits to be earned from two alternative export locations and consider how exchange rate volatility may impact the decision of which export location to choose.

30

Medium

15–2

Europa-West Prepare journal entries to record payment of liabilities stated in krona. Involves recognition of both gains and losses from fluctuations in exchange rates. Student is asked to explain a hedging technique that would protect the company from losses from exchange rate fluctuations.

25

Easy

15–3

Wallerton, Inc. Students investigate the impact of three exchange rate projections on the income statement. Provides insights into how a strengthening foreign currency impacts earnings.

40

Strong

15–4

Ulsa Company Students calculate profits to be earned in two different production and selling locations. In addition to differences in production costs, the student must consider the costs of foreign import duties and income taxes.

40

Medium

15–5

Global Trade Agreements This is an unstructured problem that asks students to research an international trade agreement and compare and contrast its requirements/restrictions with those of NAFTA. Designed to be a group writing assignment or presentation exercise.

90

Strong

15–6

Wolfe Computer A more comprehensive problem involving gains and losses on both receivables and payables stated in foreign currencies. Student is also asked to explain techniques for hedging against losses on foreign payments and foreign receivables.

40

Strong

15–7

Tootsie Roll’s Globalization This problem demonstrates how the financial statements of a company (Tootsie Roll Industries, Inc.) can be used to assess its level of globalization. By evaluating the number of countries with operations; the percentage of sales, assets and earnings from foreign sources; and the foreign taxes paid, an investor can form an opinion about a firm’s level of globalization.

35

Medium

2

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Cases 15–1

Bristow, Inc. Presents several options a firm has for increasing its presence in a foreign location. The student considers what factors are useful in deciding the option most beneficial to the firm. Also demonstrates that different options result in different informational needs.

40

Medium

15–2

International Accounting Standards Given a set of arguments for and against harmonization of international accounting practices, the student is asked to write a one-page summary of his/her opinions regarding the issue.

50

Medium

70

Strong

40

Medium

Business Week Assignment 15–3

Business Week Assignment: Inside Japan Students will think and write about how environmental variables affect the accounting profession in Japan. In addition, students practice writing and group skills by assessing whether Japanese accounting standards are becoming more like U.S. standards.

Internet Assignment 15–1

U.S. Foreign Trade Zones Using the Web site, the student is asked to find information concerning foreign trade zones located in their home state. The student is also asked to read one of the several case studies included in the site and answer follow-up questions.

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. Different accounting standards have been developed in various countries because of differences in: • Legal and political systems • Economic environments • Levels of stability of the currency 2. The International Accounting Standards Board (IASB) was formed by the major accounting organizations of several countries to develop and promote uniform international accounting standards. The board has been unable to obtain wide-scale application of its standards because it has no enforcement power. 3. a. $1,156,000 = (£800,000 × $1.4450 per British pound) b. $2,674 = (¥350,000 × $.00764 per yen) c. $44,745 = (€50,000 × $.8949 per euro) 4. a. The U.S. company will determine the dollar cost of this purchase by translating 2 million pounds into the equivalent value in U.S. dollars. This is done by multiplying the foreign currency amount by the foreign exchange rate, stated in U.S. dollars, in effect at the date of the transaction. b. The conversion of one currency to another is handled by banks in an international currency exchange. The U.S. company can pay the debt in dollars through its bank. The bank will use these dollars to purchase the needed foreign currency (pounds) and will arrange delivery of this currency to the foreign company’s bank. 5. No. Although the exchange rate for the British pound is much higher than for the yen, this fact does not necessarily mean that the pound is the stronger currency. The higher rate merely indicates the relative size of the basic unit of the currency. A pound is a relatively large denomination, whereas the yen is relatively small. The strength of a currency is determined by the direction in which the exchange rate has been moving recently. Over the last several decades, the exchange rate for the pound has been falling, but the exchange rate for the yen has been rising. Thus, over this time period, the yen has been a “stronger” currency than the pound. 6. a. Increasing exchange rates will create gains for a company that makes credit sales at prices set in a foreign currency. As the exchange rates rise, the company’s foreign accounts receivable will become equivalent to an increasing number of U.S. dollars. b. Increasing exchange rates will cause losses for a company that makes credit purchases in prices stated in a foreign currency. As the exchange rate rises, the company will have to spend more and more dollars in order to purchase the foreign currency needed to pay off its foreign accounts payable. c. A company that sets its sales prices in U.S. dollars will not have its receivables affected by fluctuations in foreign exchange rates. These fluctuations will affect the amounts of foreign currency that the company’s foreign customers must pay for their purchases, but they will not affect the number of dollars that the U.S. company receives. However, an increase in foreign exchange rates may cause a U.S. company’s sales to rise as U.S. prices may become “cheaper” to foreign buyers. 7. The purchasing agent should prefer to buy at prices stated in Mexican pesos. If the exchange rate for the peso falls while the company has accounts payable (in pesos) to its Mexican suppliers, the company will be able to repay these debts with a smaller number of U.S. dollars, thus experiencing gains from the exchange rate fluctuations.

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8. CompuTech should experience primarily gains as a result of the strong U.S. dollar. The phrase “the U.S. dollar has risen against most foreign currencies” is equivalent to saying that most foreign exchange rates have fallen when stated in U.S. dollars. As CompuTech has accounts payable in foreign currencies, it will experience gains from declines in foreign exchange rates. 9. Two ways in which a company that makes purchases on account from foreign companies can protect itself against the risk of losses from increases in the exchange rate are: (1) Specify the purchase prices in U.S. dollars. (2) Hedge the position of foreign currency indebtedness by acquiring an offsetting position in foreign currency future contracts. Then, any loss resulting from an increase in the foreign exchange rate will be offset by a gain in the value of the future contracts. 10. The globalization of business is a process whereby managers begin to incorporate the impact of international events and activities into their strategic planning. At the most basic level, domestic managers become aware that changes in foreign exchange rates, international technological advances, cultural diversity or international political and economic issues will have an impact on their ability to compete in the future. At higher levels of globalization, firms may become multinational enterprises that produce and sell products in multiple countries. 11. A firm’s level of globalization determines what types of decisions and strategies it must consider to compete effectively. Management accountants must understand the firm’s level of globalization in order to know what types of international information is needed to aid in the firms’ decision making process. 12. The weakening of the U.S. dollar relative to the euro means that $1 can purchase (or be exchanged for) relatively fewer euros. Likewise, to obtain a given amount of euros will require more U.S. dollars after the weakening. All else equal, a U.S. customer with a fixed amount of dollars to spend will be able to purchase fewer euros, which will lower the quantity of Italian goods that can be acquired. Thus, the overall quantity of Italian goods sold in the U.S. will likely decline. 13. Current exchange rates can be obtained from sources such as the Wall Street journal or within the business section of most local newspapers. In addition, numerous Web sites with current exchange rate data can be located by searching under the keywords “foreign currency” or “exchange rates.” Two examples are: http://www.x-rates.com http://www.currency-exchange-rate.com 14. In an international licensing agreement, a domestic firm contractually agrees to allow a foreign firm to use its trademarks, patents, technology, designs, or processes, usually in exchange for a fee. An international joint venture is a company that is owned by two or more firms from different countries. 15. Current IASB members are: Sir David Tweedie (U.K.), Thomas Jones (U.K.), Mary Barth (U.S.), Hans-Georg Bruns (Germany), Anthony Cope (U.S.), Robert Garnett (South Africa), Gilbert Ge′lard (France), Robert Herz (U.S.), James Leisenring (U.S.), Warren McGregor (Australia), Tricia O’Malley (Canada), Harry Schmid (Switzerland), Geoffrey Wittington (U.K.), and Tatsuni Yamada (Japan). Indonesia does not have a well-developed capital market. 16. To maintain the highest level of control over production processes and quality, a firm could choose to simply export its domestically produced goods or establish a wholly-owned subsidiary in the target country.

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17. Societies described as individualistic tend to place relatively more importance on individual achievement, accountability, and welfare. Collectivist societies tend to focus on group outcomes and welfare. Financial reports in collectivist societies tend to include disclosures related to societal issues. For example, France requires a social balance sheet detailing pay structure, health and safety conditions, hours worked. 18. High power distance societies generally accept greater differences in authority and responsibility across institutional levels. Low power distance societies expect more liberal distribution of power across organizational levels. Firms operating in high power distance countries tend to have fewer hierarchical levels with large power differences between them. Firms in low power distance countries tend to have more levels with less power differences between them. 19. The French furniture maker bears the (transaction) risk of exchange rate gains and losses since it must obtain U.S. dollars. 20. A foreign trade zone is a location in the U.S. where goods can be imported duty free until they are shipped out of the zone. An advantage to operating in a foreign trade zone is that a firm can maintain working capital until later in the production process. For example, firms that import raw materials from a foreign country do not have to pay duty on it until the finished good is shipped out of the zone. 21. Hedging is the practice of minimizing or eliminating the risk of loss associated with foreign currency fluctuations. Natural hedging occurs when a firm holds similar amounts of receivables and payables denominated in the same foreign currency. In this way, any gains and losses from exchange rate fluctuations will cancel each other out.

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SOLUTIONS TO EXERCISES Ex. 15–1

a. b. c. d. e. f. g.

None (this describes an exchange rate) Exporting International licensing Foreign Corrupt Practices Act Hedging None (this describes a market economy) International Accounting Standards Board.

Ex. 15–2

The answers to this exercise will vary greatly depending on the firm chosen for study. Most of the data required can be obtained by carefully reading the firm’s annual report(s) or locating articles concerning the firm contained in business periodicals or newspapers.

Ex. 15–3

The following answers are provided using exchange rates from April 2003. Student responses will vary depending on current exchange rates. a. 15,000 euros = $16,275.48 b. 7,000 Brazilian reais = $2,279.50 c. $3,000 = 23,099 South African rand d. 150 euros = 224.92 Swiss francs

Ex. 15–4

The World Fact Book can be located at: http://www.odci.gov/ Indonesia’s primary imports and exports are manufactured goods, followed by fuels (exports) and raw materials (imports). The labor force numbers approximately 99 million with a high percentage being literate (over 80%). Most of the labor force is engaged in agricultural occupations (45%); 11% in industry and 39% in services. Communication and transportation networks are adequate, but not as extensive as in a fully developed country. The government has been trying to encourage “free market” efforts by following a policy of continued de-regulation. Firms considering locating there must take into account the possibility of political unrest.

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Ex. 15–5

a. Weak dollar. Companies that export United States-made products benefit from a weak dollar, because the higher foreign exchange rates make U.S. goods less expensive for foreign customers. b. Strong dollar. A strong dollar means low foreign exchange rates, which, in turn, make foreign goods less expensive for U.S. customers. c. Strong dollar. A strong dollar (low foreign exchange rates) makes foreign-made goods less expensive to U.S. consumers. Therefore, Japanese imports such as Toyotas are more competitive with U.S. products when the dollar is strong. d. Weak dollar. A weak dollar (high foreign exchange rates) makes U.S. products less expensive to customers who buy these products using a foreign currency. Therefore, U.S. products such as Caterpillar tractors will sell better in foreign countries when the dollar is “weak.” e. Strong dollar. A strong U.S. dollar allows U.S. tourists traveling abroad to buy more foreign currency and, therefore, more goods and services in foreign countries. f.

Weak dollar. Even though this small store has no receivables or payables stated in foreign currency, it still competes with stores selling foreign-made products. A “weak” dollar raises the price of foreign goods to U.S. consumers, thereby making the foreign goods less competitive with United States-made products.

Ex. 15–6 Column

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Case

Type of Credit Transaction 1

Currency Used in Contract 2

Exchange Rate Direction 3

Effect on Income 4

a

Sales

Foreign currency

Falling

Loss

b

Purchases

U.S. dollars

Rising

No effect

c

Purchases

Foreign currency

Rising

Loss

d

Sales

U.S. dollars

Falling

No effect

e

Purchases

Foreign currency

Falling

Gain

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Ex. 15–7

a. There are many countries listed on the website from which students can choose. Some examples are El Salvador, Singapore, and Malaysia. b. Again, there are many countries that do not allow only IFRS financial reports. Examples are U.S., China, Russia, and Bolivia. c. The European Commission, on February 13, 2001, proposed a Regulation that would require all companies listed on a regulated market to use International Financial Reporting Standards (IFRS) by 2005. The Commission supported their proposal with the following language: “The Regulation would help eliminate barriers to cross-border trading in securities by ensuring that company accounts throughout the EU are more transparent and can be more easily compared. This would in turn increase market efficiency and reduce the cost of capital for companies."”(see www.iasb.org.uk under “Other IASB-Related News”)

Ex. 15–8

Under the amended Foreign Corrupt Practices Act, only activity c would be considered illegal since it is intended to help the firm garner business it may not otherwise obtain. Activities a, b and d would be considered facilitating payments as these are intended to speed up the provision of government services (a and d) or result in a higher level of services (b).

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SOLUTIONS TO PROBLEMS 30 Minutes, Medium

PROBLEM 15–1 CRAMER COOKIE COMPANY

a. Profit if sold in the U.S.: Total sales revenue in Danish kroner ($5,200 × 6.80 kroner/dollar*)................................. Materials and labor costs ........................................................................................................ Shipping costs in kroner ($3,000 × 6.80 kroner/dollar)........................................................ Misc. costs in kroner ($400 × 6.80 kroner/dollar)................................................................. Profit in kroner .................................................................................................................... *1 ÷ 0.147

35,360 (8,500) (20,400) (2,720) 3,740

b. Profit if sold in Great Britain: Total sales revenue in Danish kroner (2,800 pounds × 11.36 kroner/pound*)................... Materials and labor costs ........................................................................................................ Shipping costs in kroner ($2,000 × 6.80 kroner/dollar)........................................................ Misc. costs in kroner (480 pounds × 11.36 kroner/pound)................................................... Profit in kroner .................................................................................................................... *1 ÷ 0.088

31,808 (8,500) (13,600) (5,453) 4,255

c. Large fluctuations in exchange rates can affect the level of realized profits. Although the original estimates show a higher level of profits are expected from exporting to Great Britain, a substantial strengthening of the krone relative to the pound could result in significantly lower profits. The risk of lower profits from Great Britain may make exporting to the U.S. more attractive.

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25 Minutes, Easy

PROBLEM 15–2 EUROPA-WEST

a. General Journal Nov 12 Inventory Accounts Payable (Stockholm Motors) To record purchase of automobiles from Stockholm Motors for SK20,000,000 when exchange rate is $.07025 per krona (SK20,000,000 × $.07025 = $1,405,000).

1 4 0 5 0 0 0 1 4 0 5 0 0 0

Dec 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Payable (Stockholm Motors) To adjust balance of SK20,000,000 account payable to amount indicated by year-end exchange rate: Original account balance $1,405,000 1,429,400 Adjusted balance (SK20,000,000 × $.07147) Required ( $ 24,400 )

2 4 4 0 0

Jan 11 Accounts Payable (Stockholm Motors) Cash Gain on Fluctuations in Foreign Exchange Rates To record payment of SK20,000,000 account to Stockholm Motors and to recognize gain from fall in exchange rate since Dec. 31: $1,429,400 Account payable, adjusted balance Amount paid, Jan. 11 1,421,400 $ 8,000 Gain from decline in exchange rate

1 4 2 9 4 0 0

2 4 4 0 0

1 4 2 1 4 0 0 8 0 0 0

b. Computation of exchange rate on Jan. 11: Amount paid, $1,421,400, divided by liability in Swedish kronor, SK20,000,000 = exchange rate, $.07107 per krona. c. On November 12, Europa-West could have purchased 60-day future contracts on 20 million kronor. These future contracts would have created a krona receivable of the same size as the company’s krona payable to Stockholm Motors. Any gain or loss on the payable as a result of exchange rate fluctuations would then have been offset by a corresponding loss or gain on the future contracts.

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40 Minutes, Strong

PROBLEM 15–3 EXCHANGE RATES AND INCOME EFFECTS

a. Complete the following ProForma Income Statements: C$ = $.75

C$ = $.80

C$ = $.85

$300.00 3.00 303.00

$304.00 3.20 307.20

$307.00 3.40 310.40

Cost of Goods Sold: (4) U.S. (5) Canadian (6) Total

50.00 150.00 200.00

50.00 160.00 210.00

50.00 170.00 220.00

(7) Gross Profit

$103.00

$97.20

$90.40

30.00

30.00

30.00

Sales: (1) U.S. (2) Canadian (3) Total

Operating Expenses: (8) U.S. Fixed (9) U.S. Variable 10% of Sales (10) Total (11)Operating Earnings

30.30 60.30

30.72 60.72

31.04 61.04

$42.70

$36.48

$29.36

Interest Expenses: (12) U.S. (13) Canadian (14) Total Earnings before Tax

3.00 7.50 10.50 $32.20

3.00 8.00 11.00 $25.48

3.00 8.50 11.50 $17.86

b. Wallerton expects more foreign costs (Canadian Cost of Goods Sold = $150) than it expects in foreign revenues (Canadian Sales = $3.00). Therefore, Wallerton’s Earnings Before Tax is negatively affected by the stronger foreign currency. Thus, its earnings decline as the U.S. Dollar purchases fewer and fewer Canadian dollars (i.e., as the Canadian Dollar gets stronger).

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40 Minutes, Medium

a. Sales revenue per unit .................................................................... Cost of components......................................................................... Import duties (.05 × 215; .15 × 20) ................................................ Assembly costs ................................................................................ Pretax profit per unit ..................................................................... Income tax per unit (20%; 10%)................................................... Profit per unit ................................................................................. b. Profit per unit in dollars (175.40 ringgits × .23 dollars/ringgit; 19.80 lira × 2.5 dollars/lira) .........................................................

PROBLEM 15–4 THE ULSA COMPANY Malaysia 645.00 Ringgits (215.00) (10.75) (200.00) 219.25 ( 43.85) 175.40 Ringgits

Malta 70.00 Lira (20.00) (3.00) (25.00) 22.00 (2.20) 19.80 Lira

$40.34

$49.50

The highest profits per unit will be earned by assembling and selling product Y in Malta. c. Total profit in dollars ($40.34 × 12,000 units; $49.50 × 8,000 units).............................. $484,080

$396,000

On a total profit basis, the highest total profits will be earned by assembling and selling product Y in Malaysia.

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90 Minutes, Strong

PROBLEM 15–5 GLOBAL TRADE AGREEMENTS

Answers to this assignment will vary depending on the trade agreement chosen to be compared with NAFTA. Information on various trade agreements can be located on the Internet by typing the key words “international trade agreements” or by accessing www.ita.gov the web site for the U.S. International Trade Administration.

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40 Minutes, Strong

PROBLEM 15–6 WOLFE COMPUTER

a. General Journal Oct 28 Inventory of Raw Materials Accounts Payable (Mitsutonka) To record purchase of 20,000 disk drives from Mitsutonka for ¥180,000,000 due in 30 days. Exchange rate, $.0105 (¥180,000,000 × $.0105 = $1,890,000). Nov

9 Accounts Receivable (Bank of England) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 700 computers to Bank of England for £604,500, due in 30 days. Exchange rate $1.65 (£604,500 × $1.65 = $997,425). 27 Accounts Payable (Mitsutonka) Gain on Fluctuations in Foreign Exchange Rates Cash To record payment of ¥180,000,000 liability to Mitsutonka and to recognize gain from decline in exchange rate: Original account balance $1,890,000 Amount paid 1,836,000 Gain from decline in exchange rate $ 54,000

Dec

1 8 9 0 0 0 0 1 8 9 0 0 0 0

9 9 7 4 2 5 5 1 8 0 0 0 5 1 8 0 0 0 9 9 7 4 2 5

1 8 9 0 0 0 0 5 4 0 0 0 1 8 3 6 0 0 0

2 Inventory of Raw Materials Accounts Payable (German Optical) To record purchase of 10,000 monitors from German Optical for €1,200,000, due in 60 days. Exchange rate, $.7030 (€1,200,000 × $.7030 = $843,600).

8 4 3 6 0 0

9 Cash Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (Bank of England) Collected £604,500 receivable from Bank of England when exchange rate was $1.63 per British pound: Original receivable $997,425 985,335 Amount collected (£604,500 × $1.63) Loss from fall in exchange rate $ 12,090

9 8 5 3 3 5 1 2 0 9 0

11 Accounts Receivable (Computique) Cost of Goods Sold Inventory of Finished Goods Sales To record sale of 10,000 computers to Computique for SwF23,750,000, due in 30 days. Exchange rate $.6000 per franc (SwF23,750,000 × $.6000 = $14,250,000).

8 4 3 6 0 0

9 9 7 4 2 5

14 2 5 0 0 0 0 7 4 0 0 0 0 0

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7 4 0 0 0 0 0 14 2 5 0 0 0 0

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PROBLEM 15–6 WOLFE COMPUTER (concluded) General Journal b. Adjusting Entries Dec 31 Accounts Payable (German Optical) Gain on Fluctuations in Foreign Exchange Rates To adjust balance of €1,200,000 liability to German Optical to amount indicated by year-end exchange rate: Original account balance $843,600 840,000 Adjusted balance (€1,200,000 × $.7000) Required adjustment (gain) $ 3,600 Dec 31 Loss on Fluctuations in Foreign Exchange Rates Accounts Receivable (Computique) To adjust balance of SwF23,750,000 receivable from Computique to amount indicated by year-end exchange rate: Original $14,250,000 Adjusted balance (SwF23,750,000 × $.5980) 14,202,500 Required adjustment (loss) $ 47,500 c.

Computation of unit sales price: Sales price, 700 units, in British pounds Sales price, 700 units, in U.S. dollars (£604,500 × $1.65 per pound) Sales price per unit ($997,425 ÷ 700 units) Alternative computation, using sale in francs: Sales price, 10,000 units, in Swiss francs Sales price in U.S. dollars (SwF23,750,000 × $.6000 per franc) Sales price per unit ($14,250,000 ÷ 10,000 units)

d.

3 6 0 0 3 6 0 0

4 7 5 0 0 4 7 5 0 0

£

6 0 4 5 0 0

$ $

9 9 7 4 2 5 1 4 2 5

SwF23 7 5 0 0 0 0 $14 2 5 0 0 0 0 $ 1 4 2 5

Computation of exchange rate for yen on Nov. 27: Amount paid, $1,836,000, divided by liability in yen, ¥180,000,000, equals exchange rate, $.0102 per yen.

e. (1) Wolfe Computers could have hedged its position in foreign accounts payable by purchasing an equivalent amount of future contracts in these currencies, maturing at the same time as the liabilities must be paid. These contracts are essentially receivables in foreign contracts. Any gains or losses on the foreign payables would then be offset by a counterbalancing loss or gain on the future contract. (2) Wolfe’s position in its foreign receivables (payables) could be hedged by selling (buying) future contracts in those currencies. From the viewpoint of the seller (or buyer) of a future contract, the contract is a liability to pay (receive) a fixed amount of foreign currency at a future date. Thus, Wolfe would be creating foreign payables (receivables) to offset its foreign receivables (payables).

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35 Minutes, Medium

PROBLEM 15–7 TOOTSIE ROLL’S GLOBALIZATION

a. Tootsie Roll has subsidiaries in Mexico and Canada. Tootsie Roll also exports its products to several countries. b. Percentages of foreign assets, sales and earnings increased between 2002 to 2001 as the following table shows:

Net Assets Sales Net Earnings

2002 2.85% ($14,997/$526,740) 6.93% ($27,265/$393,185) 1.47% ($975/$66,388)

2001 3.72% ($18,909/$508,461) 7.52% ($29,465/$391,755) .483% ($317/$65,687)

c. Management states in its discussion of operations that the Canadian subsidiary reported increased sales in 2002 while sales in Mexico declined (see p. 6). d. Foreign currency translations negatively impacted comprehensive income (Note 11, page 8) in 2002 ($1,533,000) but positively impacted earnings in 2001 by $846,000. There is some evidence that Tootsie Roll uses formal hedging techniques such as purchasing futures contracts to lower their currency exchange risk (see Note 1, p. 13). e. According to note 4 in 2002, Tootsie Roll paid $553/$34,379 = 1.61% of current taxes to foreign countries. f.

Tootsie Roll is not a multinational company. Tootsie Roll’s management has started on a path of globalization, which includes exporting and Canadian and Mexican (North American) manufacturing operations. However the percentage of sales and earnings generated from international operations is very small compared to truly multinational companies.

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SOLUTIONS TO CASES 40 Minutes, Medium

CASE 15–1 BRISTOW, INC.

There are many factors that must be taken into account when faced with multiple globalization strategy choices. These factors include (but are not limited to) control issues, feasibility issues, cost, and fit between a particular choice and the firm’s long-term global strategy. If Bristow chooses to simply export to Country Y to satisfy the needs of Kale, it will maintain strict control over production and quality, but will face high shipping costs and longer delivery times. If Bristow chooses to export, information on more efficient shipping options would be of great importance. To maintain a high level of control and reduce shipping times, Bristow may opt to purchase the local company and operate it as a wholly-owned subsidiary. This option would likely involve a substantial outlay of capital to update the facility’s existing technology. Bristow would need to do an extensive analysis of this option to determine if the return on the investment in the subsidiary would be satisfactory. Bristow would need to address the questions of whether it had the necessary capital (or how to obtain it), how the subsidiary would be staffed, and whether enough business could be obtained to make operating the facility profitable. Bristow would also need information regarding taxes and other governmental laws and regulations. Given Bristow’s lack of experience in international activities, establishing a wholly-owned subsidiary may prove very difficult. If issues of control are not of primary importance, Bristow should consider licensing its technology to a domestic firm or establishing a joint venture with Kale. A licensing agreement would allow Kale to be supplied with Bristow products on a timely basis, but without a substantial investment of capital and with less risk. Before entering into such an agreement, Bristow would need to ensure that the licensed firm would not take away its “regular” business by selling its products to Bristow’s customers in the U.S. If Bristow intends to pursue a more aggressive globalization strategy, entering into a joint venture with Kale may prove beneficial even though it involves some relinquishment of control. Having operations in other foreign locations, Kale will likely be familiar with the complexities of doing business in other countries. Bristow’s managers would have an opportunity to learn from Kale, allowing Bristow to more easily establish foreign operations in the future.

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50 Minutes, Medium

CASE 15–2 INTERNATIONAL ACCOUNTING STANDARDS

Student opinions will vary on the topic. Interesting background information can be located by browsing the IOSCO web site at: www.iosco.org

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70 Minutes, Strong

CASE 15–3 BUSINESS WEEK ASSIGNMENT INSIDE JAPAN

a. The following environmental variables may be discussed by students. 1. Legal and Political: • The accounting rules are created by the Ministry of Finance and the Ministry of Finance also overseas tax rules, bank rules and securities market rules. Because accounting standards are not created by the accounting profession, it has less power and control than in other countries where the profession does create standards. 2. Economic: • The industrial organization in Japan is based on keiretsu. The keiretsu includes a bank that funds many of the projects of the group of companies in the keiretsu. •

Because most funding comes from banks, the financial accounting disclosure levels in Japan have historically been lower than in the U.S. and the need for auditors is lower.

•

The keiretsu organization also encourages company members of the keiretsu to cross hold each other’s stocks. These cross holdings are not typically clearly identified on the financial statements.

•

Finally, a much lower percent of the general Japanese population holds stock. Savings and investments are typically done at banks. As a result, there is much lower investor demand for accounting disclosures.

3. Culture: • Japan is a collectivist society that is risk averse and respects authority. One result is the country is slow to change because of a need for consensus. In addition, financial reporting tends to be less transparent than in the U.S. or the U.K. 4. Infrastructure: • The number of accountants in Japan is very small compared to the U.S. •

Japan is a highly literate society.

b. There is a lot of evidence that Japanese standards are shifting to U.S. standards. The so-called 1999 “accounting big bang” is discussed in the chapter and referred to in the article. Also a consortium of the largest Japanese businesses announced in August of 2001 that they were creating a Japanese Accounting Standards Board to create new financial accounting standards. This board has been admitted to membership by the IASB. However, at the time of writing this, the newly created Japanese Board has not been recognized by the Japanese Ministry of Finance as the primary accounting standard setter for Japan.

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© The McGraw-Hill Companies, Inc., 2005

SOLUTION TO INTERNET ASSIGNMENT 40 Minutes, Medium

INTERNET 15–1 U.S. FOREIGN TRADE ZONES

The National Association of Foreign Trade Zones home page is located at: http://www.naftz.org Answers to parts a through c can be located by clicking on the icon: FTZ. a. Legally, a Foreign-Trade Zone (FTZ) is an area within the United States that the Government considers outside the country, or at least, outside of the U.S. Customs territory. Certain types of merchandise can be imported into a Zone without going through formal Customs entry procedures or paying import duties. A Subzone is a special-purpose zone established as part of a zone project for a limited purpose that cannot be accommodated within an existing general-purpose zone. Subzones must be sponsored by the grantee of a general-purpose zone. b. The answers will differ depending on the state. The activities that can occur in a foreign trade zone include the following: Assembled Tested Sampled Relabeled Manufactured

Repackaged Destroyed Mixed Manipulated

Cleaned Stored Salvaged Processed

c. The answers to the request for other information are below: 1. The website describes the creation of FTZs as follows: Applications for foreign trade zones are submitted to the Foreign Trade Zones Board Staff within the Import Administration of the Department of Commerce. The application submitted to the Board must provide extensive information on the proposed zone project. Customarily, applicants are state or local government entities, port or airport authorities, economic development agencies or not-for-profit corporations. If the application is approved, the recipient is then known as the grantee. If a private corporation seeking zone benefits requests subzone status, the application is submitted by the grantee of the foreign trade zone on behalf of that company.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al

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2. The following companies are listed on the website as using FTZs: ATOFINA Petrochemicals, Inc. Caterpillar, Inc. Conoco, Inc. General Electric Company Kawasaki Motors Manufacturing Corp. Northrop Grumman Tosco Refining Company Xerox Corporation

BMW Manufacturing Corp. Conair Corporation Eastman Kodak JVC America, Inc. Motica Enterprises LLC The Premcor Refining Group Wyeth Nutritionals, Inc.

3. The following benefits are listed on the website: Ten Ways Your Company Can Benefit From Using a Foreign Trade Zone 1. Imports may be admitted and held in a foreign trade zone without paying U.S. Customs duties. 2. FTZ users can pay the duty rate on component material or merchandise produced from component material, whichever is lower. 3. Customs duties are never paid on merchandise exported from a zone. 4. Duties are reduced or eliminated on materials subject to defect, damage, obsolescence, waste or scrap. 5. Merchandise may be exported and returned to an FTZ without duty payment. 6. Spare parts may be stored, returned, or destroyed without duty payment. 7. Delays in Customs clearances and duty drawback are eliminated. 8. Duties are not owed on labor, overhead, or profit attributed to FTZ production operations. 9. Quality control inspections can identify substandard goods to be destroyed or returned without duty payment. 10. No duty is owed on in-bound, zone-to-zone transfer of FTZ merchandise.

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© The McGraw-Hill Companies, Inc., 2005