Chapter 12 Strategic Accounting Issues in Multinational Corporations

Chapter 12 Strategic Accounting Issues in Multinational Corporations
Multiple Choice Questions

1. Determining a firm's long-term goals and objectives, adopting courses of action, and
allocating resources required to achieve goals is a process called:
A) strategy formulation.
B) strategic planning.
C) strategy implementation.
D) capital budgeting.
Answer: B Level: Easy LO: 1
2. What term is used to describe the process of revising existing goals and adopting new
goals?
A) strategy formulation
B) strategic planning
C) strategy implementation
D) capital budgeting
Answer: A Level: Medium LO: 1
3. What is a plan for next year expressed in quantitative terms?
A) strategy
B) capital budget
C) operating budget
D) management control system
Answer: C Level: Easy LO: 1
4. Influencing subordinates to behave in accordance with the goals and objectives of the
organization is referred to as:
A) performance evaluation.
B) management control.
C) strategic planning.
D) goal congruence .
Answer: B Level: Medium LO: 1
Doupnik, International Accounting 2e

5. What is the role of accounting in formulating strategy?
A) quantifying opportunities and threats
B) preparing budgets
C) making estimates of costs and benefits of various alternatives
D) All of the above
Answer: D Level: Easy LO: 1
6. What is a capital investment?
A) using money to buy goods or services
B) issuing shares of stock of the corporation
C) authorizing and issuing shares of common stock by a multinational corporation
D) committing resources to projects that have costs and benefits well into the future
Answer: D Level: Medium LO: 2
7. The process of identifying, evaluating, and selecting projects that require substantial
amounts of resources and are expected to generate benefits for many years into the
future is called:
A) strategy formulation.
B) strategic planning.
C) capital budgeting.
D) operational budgeting.
Answer: C Level: Medium LO: 2
8. Which of the following is NOT part of the capital budgeting process?
A) project identification
B) project evaluation
C) project monitoring
D) All of the above are parts of the capital budgeting process.
9. Estimating the expected cash inflows and outflows from proposed projects is
performed in what step of the capital budgeting process?
A) project identification
B) project evaluation
C) project monitoring
D) project review

10. Which of the following factors is NOT considered in performing the environmental
analysis phase of strategy formulation?
A) competitors
B) government regulations
C) core competencies
D) customer demand
11. Which of the following factors should be evaluated during the internal analysis phase
of strategic formulation?
A) manufacturing capacity
B) new government regulations pending
C) customer demand
D) strength of the competition
12. Which capital budgeting technique recognizes the time value of money?
A) payback period
B) internal rate of return
C) book rate of return
D) return on investment
13. What is the major limitation of using the payback period as a tool in capital
budgeting?
A) It is difficult to calculate without a computer.
B) It favors large investments.
C) It ignores the time value of money.
D) It does not consider cash flows.
14. Which of the following is a major limitation of using the internal rate of return as a
tool in capital budgeting?
A) ignores the time value of money
B) does not consider cash flows
C) does not use accounting numbers
D) assumes unrealistic reinvestment rate

15. Conceptually, what is the internal rate of return?
A) number of years require for a project to return the cash invested in it
B) discount rate that equates the present value of cash inflows to present value of
cash outflows
C) interest rate a company can generate on its corporate bonds and preferred stock
D) average annual net income divided by initial investment in a project
16. What is the limitation of using the net present value for evaluating capital investment
alternatives?
A) ignores the time value of money
B) does not consider cash flows
C) cannot be used to compare projects of different size
D) All of the above are limitations of the net present value method.
17. How is the payback period used in capital budgeting?
A) as a measure of a project's risk
B) to determine the amount of funds that will be required in the future
C) to measure the relationship between the project's return and the company's cost of
capital
D) None of the above
18. Which capital budgeting technique is preferred in all major industrialized countries?
A) net present value
B) internal rate of return
C) payback period
19. Why is it believed that Japanese companies prefer the payback period over the
discounted cash flow methods for evaluating capital investment alternatives?
A) It is consistent with their corporate strategy of investing in new technology.
B) Japanese companies compete using very short product life cycles.
C) Cash flows over a long period of time are difficult to predict with much accuracy.
D) All of the above

20. What discount rate should be used for calculating net present values of capital
investment alternatives?
A) corporate borrowing rate
B) opportunity cost of capital
C) internal rate of return
D) corporation's return on investment
21. Why is the multinational capital budgeting process more complex than capital
budgeting in a domestic environment?
A) Cash flows must be predicted.
B) An appropriate discount rate must be selected.
C) There are additional risks involved.
D) The payback period is shorter.
22. Schlamp & Co. is considering building a manufacturing facility in Country Z, which
has changed it labor laws frequently and dramatically in the past decade. What kind of
risk is created by these legislative actions?
A) physical risk
B) political risk
C) financial risk
D) economic risk
23. Hyperinflation causes what kind of risk for a multinational corporation?
A) economic risk
B) physical risk
C) financial risk
D) political risk

24. The possibility of loss due to unexpected changes in currency values or interest rates is
called:
A) economic risk
B) business risk
C) financial risk
D) political risk
25. Cash flows related to a proposed capital investment project are subject to what kind of
risk?
A) economic risk
B) financial risk
C) political risk
D) All of the above
26. How can a multinational enterprise incorporate its perception of high level of risk into
its capital budgeting process?
A) conservative estimates of cash inflows
B) liberal estimates of expected cash outflows
C) high discount rate
D) All of the above
Answer: D Level: Hard LO: 2
27. Why is depreciation added to net income to determine cash flow from operations?
A) to compensate for financial risk
B) because depreciation is an expense but does not represent a cash flow
C) It is standard procedure when capital budgeting for a multinational corporation.
D) Net income is understated due to excessive depreciation.

28. Johnson Ltd determined that the net present value of an investment in technological
improvements at its plant in France would be 10,000,000 if pending litigation was
resolved in the company's favor and would be 2,000,000 if the courts ruled against
the company. Johnson's attorneys in France assessed the probability of a favorable
ruling at 70%. What is the expected net present value of the project?
A) 10,000,000
B) 2,000,000
C) 6,000,000
D) 7,000,000
29. What is the effect of conducting a sensitivity analysis in capital budgeting?
A) It helps analysts to determine if results are particularly affected by specific
estimates.
B) It complicates the process of making a decision when there are conflicting signals.
C) Preferences for one capital investment alternative over another will change.
D) All of the above
30. Why is management control particularly complex in decentralized multinational
organizations?
A) Managers abroad are not as well-trained as managers of domestic operations.
B) Decision-making authority is not delegated to the local managers of foreign
operations.
C) Managers of foreign operations may be motivated by local goals rather than
parent's goals.
D) Financial risks are always higher for the local managers of foreign operations than
for managers of domestic operations.
31. Novo Limited uses the same management control system in all of its 100 facilities
throughout the world on the assumption that the culture at the home office is
transferable to all other locations. What principle underlies Novo's control system?
A) polycentrism
B) ethnocentrism
C) geocentrism
D) egocentrism

32. A company that recognizes and adapts its business practices to differences across
cultures in which it operates is referred to as being:
A) geocentric.
B) ethnocentric.
C) polycentric.
D) egocentric.
33. What term is used to describe a unit of a multinational corporation that takes a leading
role in a particular area?
A) implementer
B) global innovator
C) local innovator
D) integrated player
34. When a unit of a multinational corporation develops knowledge that can be used by
other units within the organization, that unit is called a(n):
A) implementer.
B) global innovator.
C) local innovator.
D) integrated player.
35. A unit of a multinational corporation that produces little or no knowledge but rather
uses the ideas and processes developed by other units is referred to as a(n):
A) implementer.
B) local innovator.
C) integrated player.
D) team player.

36. Senior management of Bina Confections Ltd, a multinational corporation, has taken a
polycentric approach to manufacturing, marketing, and distributing its candies. What
would be evidence of this perspective?
A) explicit policy and procedures manuals for managing foreign operations
B) high degree of decentralization of decision-making authority
C) standard product branding and packaging throughout the organization
D) implementing strategies perfected by managers at the home office
37. What is cultural proximity?
A) similarity of values, expectations, and traditions between one country and another
B) countries which are located on the same continent
C) relative importance of individual differences among units of a multinational
corporation
D) a short geographic distance between the host country of one subsidiary and the
host country of another subsidiary
38. Which of the following would be characteristic of a bureaucratic control system?
A) goals are more likely to be achieved by local managers
B) detailed policy and procedures manuals are used throughout an organization
C) meetings between parent and subsidiary managers are scheduled when needed
rather than on a specific schedule
D) budgets play a minor role in the management control system
39. Where would a divisional manager look to find the targets she is expected to reach in
the next fiscal year?
A) strategic plan
B) capital budget
C) operating budget
D) strategic formulation

40. Which of the following is the role of performance evaluation system in a multinational
corporation?
A) monitor organizational effectiveness
B) identify areas that need improvement
C) assess how well division managers are doing
D) All of the above
41. What measures may be used in the performance evaluation system of a multinational
corporation?
A) financial measures such as profit, cost, and return on investment
B) quality and customer satisfaction
C) market share
D) All of the above
42. According to surveys in the U.S. and the United Kingdom, what are the most
frequently used financial performance measures by multinational organizations?
A) stock price, return on investment, profit
B) budgeted profit vs. actual profit, stock price, sales
C) budgeted profit vs. actual profit, return on investment, profit
D) internal rate of return, profit, return on investment
43. Which of the following is a non-financial measure of performance?
A) return on investment
B) market share
C) earnings per share
D) return on equity
Answer: B Level: Easy LO: 4
10

44. The balanced scorecard includes non-financial measures of performance with the
financial measures of performance traditionally used. Which of the following are
included in the balanced scorecard?
A) Customer satisfaction
B) Internal business processes
C) Innovation and learning
D) All of the above
45. SSM Corporation, a multinational healthcare system, measures the number of minutes
between a patient's arrival at the emergency room and the time he/she is seen by a
physician. This measure focuses on what aspect of the balanced scorecard?
A) financial perspective
B) customer perspective
C) internal business processes perspective
D) innovation and learning perspective
46. MSM Ltd has a strategy of being the first to market with new products and so it
measures the number of new products introduced each year. Where does this measure
fit in the balanced scorecard?
A) financial perspective
B) customer perspective
C) internal business process perspective
D) innovation and learning perspective
47. In designing an effective management control system for a multinational corporation,
the accountant should measure factors appropriate for each unit's level of
responsibility. Which of the following measures would be appropriate for evaluating
the performance of a profit center?
B) residual income
C) EBIT
D) All of the above
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48. In designing an effective management control system for a multinational corporation,
the accountant should measure factors appropriate for each unit's level of
responsibility. Which of the following measures would be appropriate for evaluating
the performance of a cost center?
B) EBIT
C) output volume
D) residual income
49. What result can be expected if a management control system encourages managers to
focus on inappropriate measures?
A) Managers will work extra hard to achieve the targets set in terms of those
measures.
B) Managers will engage in dysfunctional behaviors.
C) Profits will go up for the foreign operation and for the corporation as a whole.
D) None of the above.
50. Which of the following statements is true about performance evaluation in a
multinational organization?
A) A division that is performing poorly indicates that the manager of that division has
performed poorly.
B) Good performance by a division indicates that its manager has been performing to
expectations.
C) Divisional performance is the same as managerial performance.
D) None of the above is true.
51. The Squeaky Division of Household Products Corporation showed a net loss of
5,000,000 last year, but Squeaky's manager received a bonus for outstanding
performance. Why would Household Products' management control system
appropriately allow for this apparent inconsistency?
A) Economic factors outside the manager's control caused the loss.
B) Household Products' management control system is ineffective.
C) The bonus represents a payoff to Squeaky's manager to keep her quiet about the
loss.
D) The loss was due to controllable factors.
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52. Holding managers accountable only for those factors over which they have control is
called:
A) management control systems
B) responsibility accounting
C) decentralization
D) centralization
53. What is the advantage of using operating income or EBIT as a measure of
performance in a profit center of a multinational corporation?
A) It is much easier to calculate than other measures.
B) It is the only measure available to the senior management of the parent company.
C) It excludes interest and taxes, which are beyond the manager's control.
D) Divisional managers will maximize output if this measure is used for management
control.
54. If only one currency is used for evaluating subsidiary performance in a multinational
corporation, what currency is it most likely to be?
A) euros
B) local currency of the subsidiary
C) currency of the parent company's home country
55. Under what condition should the gain or loss from translating foreign currency profit
of subsidiary into the parent's home currency be included in the subsidiary's measure
of performance?
A) if the subsidiary manager is authorized to hedge the translation exposure
B) if there is a translation gain, but not if there is a translation loss
C) if the multinational corporation is using the same method of translation for
performance evaluation as it does for financial reporting
D) if the impact on cash flows from foreign exchange is minimal
13

56. Which of the following is not measured by the accounting system of a multinational
corporation?
A) translation exposure
B) economic exposure
C) transaction exposure
D) None of the above is measured by the accounting system.
57. Assume that the Chinese government allowed the yuan to float relative to the U.S.
dollar. Appreciation in the yuan could have an adverse affect on sales of Chinese
goods to the U.S. This possible impact on Chinese exports is referred to as:
A) translation exposure
B) transaction exposure
C) economic exposure
D) accounting exposure
58. How should multinational corporations reduce the impact of economic exposure?
A) hedging foreign currency using a call option
B) hedging foreign currency using put options
C) competitive strategic and operational decisions
D) forward contracts on the foreign currency
59. Which of the following should NOT be included in implementing performance
evaluation systems?
A) Feedback and review
B) Fair and achievable measures
C) Understandability
D) Changing systems annually
14

60. What is the likely outcome of using performance measures that subsidiary managers
perceive to be unachievable?
A) frustrated managers
B) diligent attention to operational efficiency
C) success
D) optimal decision-making
Answer: A Level: Easy LO: 5
61. Implementing multinational corporate strategy to influence human behavior in a
positive way should include:
A) a target for managers that is possible under ideal conditions
B) consideration of cultural differences across units
C) all exchange rate gains and losses
D) measures of profit, residual income, and return on investment for all units
62. Which of the following is NOT an influence affecting the operating environment of
foreign subsidiaries?
A) regulatory controls
B) social norms and attitudes
C) inflation rates
D) All of the above are influences.
63. In a 2002 PriceWaterhouseCoopers survey, which factor did CFOs consider most
important in contributing to long-term shareholder return?
A) current financial results
B) operating efficiency
C) product and service quality
D) innovation
15
64. Which of the following is a true statement about the use of the payback period
technique in capital budgeting?
A) It is simple to use and understand.
B) It considers the time value of money.
C) It is difficult to appraise risk with this technique.
D) It cant be used to measure liquidity.
65. Which of the following calculations will yield return on investment (ROI)?
A) annual net income/book value of investment
B) average annual net income/book value of investment
C) average annual net income/present value of investment
D) book value of investment/annual net income
66. Assume that an initial investment is $100,000 and that the estimated annual cash flows
for the next 5 years are $18,000. What is the internal rate of return (IRR) for this
investment?
A) 5.56%
B) 18%
C) 1%
D) It is impossible to calculate without additional information.
67. Which of the following is NOT a perspective under the balanced scorecard approach?
A) parent company perspective
B) internal business perspective
C) customer perspective
D) financial perspective
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Multiple Choice Questions

Doupnik, International Accounting 2e