Answers to Questions.Chapter1

Answers to Questions.Chapter1 - Answers to Questions 1. In...

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Answers to Questions 1. In 2003, companies worldwide exported over $7.5 trillion worth of merchandise. Although international trade has existed for thousands of years, recent growth in trade has been phenomenal. Over the period 1991-2003, U.S. exports increased from $422 billion to $724 billion per year, a 72% increase. During the same period, Chinese exports increased 600% to $438 billion in 2003. From 1990 to 2001, global gross domestic product increased 27% while during the same period total global exports increased 75%. 2. Companies engaged in international trade with imports and exports denominated in foreign currencies are faced with the accounting issue of translating foreign currency amounts into the company’s reporting currency and reporting the effects of changes in exchange rates in the financial statements. 3. As listed in Exhibit 1-1, following are several reasons why companies might want to invest overseas: Increase sales and profits Enter rapidly growing or emerging markets Reduce costs Protect domestic markets Protect foreign markets Acquire technological and managerial know-how 4. FDI is playing a larger and more important role in the world economy. Global sales of foreign affiliates were about twice as high as global exports in 2003, compared to almost parity about two decades earlier. Global sales of foreign affiliates comprises about one tenth of worldwide gross domestic product. 5. Financial reporting issues that result from foreign direct investment are (a) conversion of foreign GAAP to parent company GAAP and (b) translation of foreign currency to parent company reporting currency to prepare consolidated financial statements. In addition, supplementary disclosures about foreign operations might be required. 6. Two major taxation issues related to a foreign direct investment are (a) taxation of the investee’s income by the host country in which the investment is located and (b) taxation of the investee’s income by the investor’s home country. Companies with foreign direct investments need to develop an expertise in the host country’s income tax rules so as to minimize the amount of taxes paid to the host country, as well as in the home country’s tax rules with respect to foreign source income. 7.
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This note was uploaded on 10/07/2011 for the course ACCOUNTING 4220 taught by Professor Brown during the Spring '11 term at UMBC.

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Answers to Questions.Chapter1 - Answers to Questions 1. In...

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