1. © 2017 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. Chapter 15 Accounting and Taxation in Global Business Introduction to Global Business

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. © 2017 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. After studying this chapter, you should be able to:

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. © 2017 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. After studying this chapter, you should be able to:

4. Introduction Accounting is the “language of business.” Accounting is the recording, summarizing, and reporting of the economic activities and events of an organization. –Used to make business decisions –Essential to managing and controlling operations Financial statements are the most important reports produced by the accounting information system. © 2017 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.

5. Introduction (continued) For a corporation, financial statements are: –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 © 2017 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.

6. EXHIBIT 15.1FUNDAMENTAL FINANCIAL QUESTIONS AND ANSWERS © 2017 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.

7. Accounting and Financial Reporting in Global Business The accounting information system (AIS) has two principal objectives: –To provide all the financial information internally needed by management for business decision making, known as management accounting –To provide financial information to various external users concerned with the financial activities of the organization, known as financial accounting © 2017 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.

8. Management Accounting Management accounting –Provides financial information needed internally by business managers for efficient (timely) and effective (correct) decision making Management accounting in most firms includes similar kinds of financial analysis –Cost-volume-profit analysis –Capital budgeting –Inventory planning Sophisticated technology has had an impact on how management accounting tasks are performed. © 2017 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.

9. Financial Accounting Financial accounting –Provides financial information needed by external users, such as investors and lenders –Two major categories of external users: Organizations that require or expect information to be reported Organizations that receive information on an as-needed basis Organizations that require accounting information to be reported include federal, state, and local governments. Organizations that expect accounting information include lenders, credit-rating agencies, suppliers, employers, and customers. © 2017 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.

10. EXHIBIT 15.2EXTERNAL USERS OF ACCOUNTING INFORMATION © 2017 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.

11. Generally Accepted Accounting Principles (GAAP) Financial statements of publicly traded companies must be prepared according to generally accepted accounting principles (GAAP). Accounting practices have developed in each country in the world that relate to the culture and business environment of that country. Differences in culture and business environments have led to differences in GAAP among different countries. © 2017 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.

12. U.S. GAAP In the United States, GAAP is primarily developed by the Financial Accounting Standards Board (FASB). The FASB issues the Statements of Financial Accounting Standards (SFAS), which provides the procedures for dealing with specific accounting matters. Three primary fields of work for accountants: –In the AIS of a business firm –In a public accounting firm –In the AIS of a government entity or other nonprofit organization Accountants who work in public accounting must be licensed as Certified Public Accountants (CPAs). © 2017 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.

13. EXHIBIT 15.3AUTHORITATIVE ACCOUNTING LITERATURE © 2017 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.

14. International GAAP GAAP used by companies based in other countries is determined by the governments in those countries. Different GAAPs in other countries made it difficult for investors and financial statement users to compare financial reports of firms from different countries. International GAAP is now used by many countries. –International GAAP is developed by the International Accounting Standards Board. –The Board’s international GAAP is called International Financial Reporting Standards (IFRS) © 2017 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. Differences Between U.S. and International GAAP Factors influencing the development of accounting and financial reporting standards are unique to each country and include: –Political and legal systems –Sources of capital –Business complexity –Inflation and taxation –Culture –Accidents of history © 2017 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.

16. Differences Between U.S. and International GAAP © 2017 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. U.S. GAAP More rules-based Rules provide narrow, detailed guidance Common format for presentation of financial statements IFRS More principles-based Principles provide broad, general guidance No particular format for presentation of financial statements, so multiple formats have evolved

17. International Financial Reporting Standards International Accounting Standards Board (IASB) –An independent, privately funded accounting standard-setter based in London, UK, that issues International Financial Reporting Standards (IFRS) 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 © 2017 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.

18. The Role of Auditing and the Sarbanes-Oxley Act Many business firms have an internal audit function charged with the responsibility of ensuring that the internal control structure is operating effectively. Publicly traded companies use independent external auditors to assure that –Financial statements do not contain material misstatements, either intentional or unintentional –Financial statements are fairly presented according to generally accepted accounting principles © 2017 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.

19. Steps in the Auditing Process Plan the audit Obtain and evaluate evidence Arrive at an audit opinion Communicate the audit results © 2017 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.

20. Financial Statement Audit Objectives Confirm the existence of assets and liabilities and occurrence of income and expenses Assess the completeness of the financial statements (all assets, liabilities, income, and expenses are accounted for) Ensure proper valuation of assets, liabilities, income, and expenses Show that the auditee owns the assets and is obligated to the extent of liabilities shown Assure that financial statement items are properly presented and disclosure regulations have been followed © 2017 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.

21. 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 © 2017 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.

22. Financial Statement Analysis Financial statement analysis –An evaluation of financial statements to identify significant trends or relationships among the items –Begins with the information provided on financial statements and builds to provide a comprehensive understanding of a company’s financial situation –Can provide answers to questions asked by management, investors, lenders, and others © 2017 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.

23. Financial Ratios © 2017 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.

24. Evaluating Trends Positive trends in financial performance indicate that a company has positive future prospects. –Good news for investors, typically leading to higher stock prices –Good news for lenders, indicating a high likelihood that loans will be repaid Negative trends suggest a difficult time for a firm. © 2017 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.

25. 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 © 2017 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.

26. Tax Rates Among Selected Countries Almost every country has a corporate income tax. –Countries that have little or no corporate tax are tax havens. –Countries that are tax havens may still impose other taxes. Taxes are just one factor to consider when locating business operations in a country. –Other factors such as strong economy, quality labor force, good access to transportation, well-established legal system, and political stability can outweigh tax rates. © 2017 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.

27. EXHIBIT 15.4CORPORATE INCOME TAX RATES IN OECD COUNTRIES © 2017 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.

28. Transfer Pricing 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 Transfer pricing can affect local taxes owed and the firm’s profits. Transfer pricing may be subject to the laws and regulations of the countries in which the firm conducts business. © 2017 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.

29. EXHIBIT 15.5TRANSFER PRICING SCENARIOS © 2017 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.

30. 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 © 2017 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. Key Terms