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GLOBAL BUSINESS AND ACCOUNTING
Chapter
15
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GlobalizationGlobalization
Occurs as managers become aware of an engage in cross-border trade and operations. A high level of globalization is a multinational enterprise that
begins with raw material extraction and ends with final product assembly and sales in multiple foreign
locations.
Occurs as managers become aware of an engage in cross-border trade and operations. A high level of globalization is a multinational enterprise that
begins with raw material extraction and ends with final product assembly and sales in multiple foreign
locations.
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GlobalizationGlobalization
Typically progresses through a series of stages that include:
1. Exporting,
2. Licensing,
3. Joint ventures,
4. Wholly owned subsidiaries, and
5. Global sourcing.
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Environmental Forces Shaping Globalization
Environmental Forces Shaping Globalization
GlobalizationGlobalization
Political and legalsystem
Political and legalsystem
Economicsystem
Economicsystem
CultureCulture
Technology andinfrastructure
Technology andinfrastructure
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Environmental Forces Shaping Globalization
Environmental Forces Shaping Globalization
Planned EconomyGovernment owns factors of production
Market EconomyPeople owns factors of production
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Environmental Forces Shaping Globalization
Environmental Forces Shaping Globalization
Country Individualism
Uncertainty Avoidance
Long-Term Orientation
High Power Distance
Japan L H H MSouth Korea L H H HBrazil L H M HItaly M H * MGermany M M L LUnited States H M L MGreat Britain H L L LSweden M L L L
H = High, M = Medium, L = Low.*Not available
Cultural Mindsets that Differ Significantly
Country Individualism
Uncertainty Avoidance
Long-Term Orientation
High Power Distance
Japan L H H MSouth Korea L H H HBrazil L H M HItaly M H * MGermany M M L LUnited States H M L MGreat Britain H L L LSweden M L L L
H = High, M = Medium, L = Low.*Not available
Cultural Mindsets that Differ Significantly
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Harmonization of Financial Reporting Standards
Harmonization of Financial Reporting Standards
The International Accounting Standards Board (IASB) has as one of its stated goals the harmonization of accounting standards.
Harmonization is used to describe the standardization of accounting methods and
principles used in different countries throughout the world.
The International Accounting Standards Board (IASB) has as one of its stated goals the harmonization of accounting standards.
Harmonization is used to describe the standardization of accounting methods and
principles used in different countries throughout the world.
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Harmonization of Financial Reporting Standards
Harmonization of Financial Reporting Standards
Country/Body Auditors per
100,000
Asset Valuation Method LIFO Used
Depreciation Basis
Segment Diclosure Required
ISA Revaluation
allowed Used Economic
based Yes
United States 168 Historic cost Used Economic
based Yes
United Kingdom 352 Revaluation
allowed Not Used Economic
based Yes Germany 26 Historic cost Not Used Tax based Limited
Brazil 1 Revaluation
allowed Not Used Economic
based No Japan 10 Historic cost Used Tax based Yes
Differences in Accounting Around the World
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Foreign Currencies and Exchange RatesForeign Currencies and Exchange Rates
Country/Region Currency
Exchange Rate
(in dollars)
Exchange Rate (in foreign
currency) Britain Pound (£) $ 1.44500 0.692 Eruope Euro (€) 0.89490 1.117 Japan Yen (¥) 0.00764 130.900 Mexico Peso ($) 0.10946 9.136 India Rupee (Rs) 0.02045 48.889
Foreign Exchange Rate
An exchange rate is the amount it costs to purchase one unit of currency with another currency.
¥1,000,000 × $0.00764 = $7,640¥1,000,000 × $0.00764 = $7,640
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on that date. On January 1,
2005, the exchange rate is $0.97 per Euro.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on that date. On January 1,
2005, the exchange rate is $0.97 per Euro.
Date Description Debit CreditJan. 1 Equipment 97,000
Cash 97,000 (€100,000 x $0.97) = $97,000
U.S. company purchases €100,000 from financial institution.
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
Date Description Debit CreditJan. 1 Equipment 97,000
Accounts payable 97,000 (€100,000 x $0.97) = $97,000
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
Date Description Debit CreditJan. 31 Accounts payable 1,000
Gain on rate fluctuation 1,000
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005 the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005 the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
Date Description Debit CreditFeb. 15 Accounts payable 96,000
Loss on rate fluctuation 2,000 Cash 98,000
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
Date Description Debit CreditJan. 1 Equipment 97,000
Accounts payable 97,000 (€100,000 x $0.97) = $97,000
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
Date Description Debit CreditJan. 31 Accounts payable 1,000
Gain on rate fluctuation 1,000
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
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Accounting for Transactions with Foreign Companies
Accounting for Transactions with Foreign Companies
Date Description Debit CreditFeb. 15 Accounts payable 96,000
Loss on rate fluctuation 2,000 Cash 98,000
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2005. On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On
2/15/05, the exchange rate is €1 = $0.98.
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HedgeHedge
Fair Value HedgeFair Value HedgeAny gain or loss is recognized currently in Any gain or loss is recognized currently in
earningsearnings. If the hedge is on available-for-sale . If the hedge is on available-for-sale securities, any gain or loss is reported in securities, any gain or loss is reported in
other comprehensive incomeother comprehensive income on the equity on the equity section of the balance sheet.section of the balance sheet.
Fair Value HedgeFair Value HedgeAny gain or loss is recognized currently in Any gain or loss is recognized currently in
earningsearnings. If the hedge is on available-for-sale . If the hedge is on available-for-sale securities, any gain or loss is reported in securities, any gain or loss is reported in
other comprehensive incomeother comprehensive income on the equity on the equity section of the balance sheet.section of the balance sheet.
Future contracts are the right to receive a specified quantity of foreign currency at a
future date.
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Translation of Foreign Currency Financial Statements
Translation of Foreign Currency Financial Statements
Peso U.S. $January 1, 2005 1 0.125$ December 31, 2005 1 0.100$ Average for the year 1 0.110$
This is the first year of operations for a 100%
owned Mexican subsidiary of the U.S. enterprise, Matrix, Inc.
This is the first year of operations for a 100%
owned Mexican subsidiary of the U.S. enterprise, Matrix, Inc.
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Translation of Foreign Currency Financial Statements
Translation of Foreign Currency Financial Statements
Pesos Rate DollarsRevenues 17,000 0.110$ 1,870$ Expenses 10,200 0.110 1,122 Net income 6,800 748$
Pesos Rate DollarsRevenues 17,000 0.110$ 1,870$ Expenses 10,200 0.110 1,122 Net income 6,800 748$
Peso U.S. $January 1, 2005 1 0.125$ December 31, 2005 1 0.100$ Average for the year 1 0.110$
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Translation of Foreign Currency Financial Statements
Translation of Foreign Currency Financial Statements
If dividends are paid, the translation is based on the historical rate when the dividend is paid. The
translated ending retained earnings carries forward to the next accounting period.
If dividends are paid, the translation is based on the historical rate when the dividend is paid. The
translated ending retained earnings carries forward to the next accounting period.
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Pesos Rate DollarsCash 2,000 0.100$ 200$ Receivables 4,000 0.100 400 Inventory 1,800 0.100 180
Equipment 16,000 0.100 1,600 Total assets 23,800 2,380$
Translation of Foreign Currency Financial Statements
Translation of Foreign Currency Financial Statements
Pesos Rate DollarsAccounts payable 2,000 0.100$ 200$ Notes payable 5,000 0.100 500 Common stock 10,000 0.125 1,250
Retained earnings 6,800 748 Translation adjustments (318) Total assets 23,800 2,380$
Zapato de Nationale, SABalance Sheet
At December 31, 2005
Cash 200$ Accounts receivable 400 Supplies 180 Equipment 1,600 Total assets 2,380$
Liabilities Accounts payable 200$ Notes payable 500 Total liabilities 700$ Stockholders' equity Common stock 1,250 Retained earnings 430 Total stockholders' equity 1,680 Total liabilities and stockholders' equity 2,380
Assets
Liabilities and Stockholders' Equity
The translation adjustment is
reported in other comprehensive income in the
equity section of the balance
sheet
The translation adjustment is
reported in other comprehensive income in the
equity section of the balance
sheet
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Global SourcingGlobal Sourcing
Differences in exchange rates in many different countries can create significant complexities for
firms practicing global sourcing.
Many companies underestimate the cost of globalizing their business operations because they
are not familiar with the environmental characteristics discussed on the early slides in this
presentation.
Differences in exchange rates in many different countries can create significant complexities for
firms practicing global sourcing.
Many companies underestimate the cost of globalizing their business operations because they
are not familiar with the environmental characteristics discussed on the early slides in this
presentation.
€€
¥¥
££₣₣₧₧
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In many countries around the world, bribery is part of doing business. In many
countries, this officially sanctioned corruption is not viewed as wrong or
unethical. However, U.S.-based businesses are prohibited from influence peddling. The IMF and World Bank instituted policies to
cut off funding to countries ignoring corrupt practices.
In many countries around the world, bribery is part of doing business. In many
countries, this officially sanctioned corruption is not viewed as wrong or
unethical. However, U.S.-based businesses are prohibited from influence peddling. The IMF and World Bank instituted policies to
cut off funding to countries ignoring corrupt practices.
Foreign Corrupt Practices ActForeign Corrupt Practices Act