© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–2 1.Explain briefly the function of accounting and describe the two parts of the accounting information system. 2.Describe briefly the function of generally accepted accounting principles (GAAP). 3.Recount the goal of the International Accounting Standards Board and describe why International Financial Reporting Standards are important to global business operations. 4.Explain how auditing contributes to the usefulness of financial reporting.

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–3 5.Explain how financial statement analysis can be used to evaluate a company’s financial situation and compare it to other companies. 6.Describe briefly tax issues that MNCs face.

Accounting as the “Language of Business” Accounting – Is the recording, summarizing, and reporting of the economic activities and events of an organization – Is used to make business decisions – Is essential to managing and controlling operations Financial Statements: – Income statement – Balance sheet – Statement of retained earnings – Statement of cash flows © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–4

Financial Statements Income Statement – Summarizes the revenues earned and the expenses incurred by a business over a period of time Balance Sheet – Lists the balances of the asset, liability, and owners’ equity accounts of a business on a specific date Statement of Retained Earnings – Shows beginning balance, additions and reductions, and ending balance of retained earnings Statement of Cash Flows – Indicates the firm’s inflows and outflows of cash © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–5

Financial Statements © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–6 Summarizes the revenues earned and the expenses incurred by a business over a period of time Income Statement Lists the balances of the asset, liability, and owners’ equity accounts of a business on a specific date Balance Sheet Shows beginning balance, additions and reductions, and ending balance of retained earnings Statement of Retained Earnings Indicates the firm’s inflows and outflows of cash Statement of Cash Flows

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–7 EXHIBIT 15.1 FUNDAMENTAL FINANCIAL QUESTIONS AND ANSWERS Financial StatementQuestionAnswer Income StatementHow much did the firm earn or lose from operations during the period? Revenues − Expenses = Net income (or Net loss) Statement of Retained Earnings In what way did the firm’s retained earnings change during the period? Beginning retained earnings + Net income (or − net loss) − Dividends = Ending retained earnings Balance SheetWhat is the firm’s financial position at a designated point in time? Assets = Liabilities + Owners’ Equity Statement of Cash Flows What amount of cash was generated and spent during the period? Operating cash flows ± Investing cash flows ± Financing cash flows = Increase (or decrease) in cash during

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–8 EXHIBIT 15.2 EXTERNAL USERS OF ACCOUNTING INFORMATION

Generally Accepted Accounting Principles (GAAP) Statements of Financial Accounting Standards (SFAS) – Part of the highest level of generally accepted accounting principles (U.S. GAAP), issued by the Financial Accounting Standards Board (FASB) Certified Public Accountants (CPAs). – Are licensed by state examinations and experience – Provide auditing, tax, and consulting services © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–9

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–10 EXHIBIT 15.3 AUTHORITATIVE ACCOUNTING LITERATURE

International GAAP International Financial Reporting Standards (IFRS or International GAAP) – State how transactions and other events should be reported in financial statements developed by the International Accounting Standards Board – IFRS are regarded as being more principles-based and U.S. GAAP as being more rules-based – Different GAAPs in other countries make it difficult for investors and financial statement users to compare financial reports of firms from different countries © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–11

Differences Between U.S. and International GAAP Factors influencing the development of accounting and financial reporting standards: © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–12 Political and legal systems Sources of capital Business complexity Inflation Taxation Culture Accidents of history

International Financial Reporting Standards International Accounting Standards Board (IASB) – An independent, privately funded accounting standard-setter based in London, U.K., that issues International Financial Reporting Standards Objectives of the IASB – Increasing harmonization of accounting standards and disclosures to meet the needs of the global market – Providing an accounting basis for underdeveloped or newly industrialized countries to follow – Increasing compatibility of domestic and international accounting requirements for audited financial statements © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–13

The Role of Auditing Auditing – Is charged with the responsibility of ensuring that the internal control structure is operating effectively – Works to assure that financial statements do not contain material misstatements, either intentional or unintentional – Provided by an independent external auditor serves to indicate whether those statements are presented according to generally accepted accounting principles © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–14

Steps in the Auditing Process © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–15

Financial Statement Audit Objectives Confirming the existence of assets and liabilities and occurrence of income and expenses Assessing the completeness of the financial statements (all assets, liabilities, income, and expenses are accounted for) Proper valuation of assets, liabilities, income, and expenses Showing that the auditee owns the assets and is obligated to the extent of liabilities shown Assuring that financial statement items are properly presented and disclosure regulations have been followed © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–16

The Sarbanes-Oxley (SOX) Act of 2002 Effects of SOX: – Increased prison sentences for financial statement fraud – Established the Public Company Accounting Oversight Board (PCAOB) to set auditing, attestation, quality control, and ethical standards for auditors formerly self-regulated under the American Institute of Certified Public Accountants’ peer review system © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–17

Financial Statement Analysis – Is an evaluation of financial statements to identify significant trends or relationships among the items Financial Ratios – Use the relationship of a number on the financial statement to another number to assess the firm’s financial condition: © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–18 Debt Ratio = Total Liabilities Total Assets Current Ratio = Current Assets Current Liabilities

Global Tax Matters Types of Taxes Income tax Sales tax Property tax Payroll tax Goods and services tax (GST) Value- added tax (VAT) Corporate income tax © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–19

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–20 EXHIBIT 15.4 CORPORATE INCOME TAX RATES IN OECD COUNTRIES

Transfer Pricing – Is the pricing of goods and services transferred (bought and sold) internally between units of an international firm involving: Raw materials and semi-finished and finished goods Allocation of fixed costs Loans, fees and royalties for use of trademarks and copyrights – Can affect local taxes owed and the firm’s profits – May be subject to the laws and regulations of the countries in which the firm conducts business © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–21

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–22 EXHIBIT 15.5 TRANSFER PRICING SCENARIOS

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15–23 KEY TERMS accounting income statement balance sheet statement of retained earnings statement of cash flows accounting information system (AIS) management accounting financial accounting generally accepted accounting principles (GAAP) Statements of Financial Accounting Standards (SFAS) International Accounting Standards Board (IASB) International Financial Reporting Standards (IFRS) financial statement analysis financial ratio