Chap 010

Chapter 10 - Analysis of Foreign Financial Statements
Chapter 10
Analysis of Foreign Financial Statements
Multiple Choice Questions
1. Why is investing in foreign companies an effective way to diversity an individual's

investment portfolio?
A) Foreign economies are stronger than the U.S. economy.
B) Foreign stocks are less risky than the stocks of U.S. corporations.
C) Stock returns of companies in foreign companies are highly correlated with stock
returns of U.S. companies.
D) Returns on foreign company stocks do not always change in the same direction as
returns on U.S. stocks.
Answer: D Level: Medium LO: 1
2. Investing in several corporate stocks that have different characteristics is referred to as:
A) diversification
B) portfolio consolidation
C) asset translation
D) income determination
Answer: A Level: Easy LO: 1
3. Which of the following is a reason for analyzing the financial statements of foreign
corporations?
A) making credit decisions about foreign customers
B) evaluating international business combinations
C) diversifying an investment portfolio
D) All of the above are reasons for analyzing foreign financial statements.
Answer: D Level: Easy LO: 1
4. Which of the following statements is NOT true concerning reasons for analyzing foreign
financial statements?
A) It is important to determine the financial stability of foreign suppliers.
B) The stock returns of foreign corporations are nearly perfectly correlated with returns
on U.S. stocks.
C) In a global economy, managers may use foreign competitors as benchmarks for
evaluating performance.
D) Managers should determine the financial health of foreign customers before
extending credit.
Answer: B Level: Medium LO: 1
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5. Which of the following is a limitation of using commercial databases to access foreign

company financial statements?
A) Data may be lost when a standard financial statement format is imposed on foreign
statements.
B) Errors may occur during data entry.
C) Notes to the financial statements may not be included, or only partially included.
D) All of the above are limitations.
6. Which of the following is a potential problem in analyzing foreign financial statements?

A) language
B) data accessibility
C) terminology
D) All of the above pose potential problems.
Answer: D Level: Easy LO: 2
7. What is EDGAR?
A) It is a database provided by the London, England stock exchange that provides
financial statement information on U.K. companies.
B) It is a database created by the U.S. Securities and Exchange Commission that
provides reports of all corporations listed on the U.S. stock exchanges.
C) It is a database of reports filed electronically with the U.S. Securities and Exchange
Commission.
D) It is a database that links users to U.S. company websites much like CAROL does in
the U.K.
Answer: C Level: Medium LO: 3
8. What information would most likely NOT be available on the EDGAR system?
A) Form 10-K for a U.S. corporation listed on the New York Stock Exchange (NYSE)
B) quarterly financial statements for a foreign corporation listed on the American Stock
Exchange (AMEX)
C) the annual report for a corporation listed only on the London and Tokyo stock
exchanges
D) the notes to the financial statements of a foreign corporation listed on the NYSE
10-2
9. What language will be used for the quarterly reports submitted by foreign companies to
the U.S. Securities and Exchange Commission?
A) The quarterly reports may be in the company's local language.
B) English or German
C) English or one of the languages of the European Union
D) English only
Answer: A Level: Medium LO: 2
10. What is the probable reason that many foreign countries provide convenience translations
of their financial statements into English?
A) U.S. GAAP is the most widely used set of financial accounting standards.
B) Globalization of capital markets has increased the demand for English language
financial statements.
C) England is the home of more multinational corporations than any other country.
D) The Securities and Exchange Commission requires all foreign companies doing
business in the U.S. to provide English translations.
11. Which of the following statements is true about convenience translations of financial
statements?
A) International Business Machines (IBM) is the only corporation in the U.S. that
currently provides convenience translation of its financial statements into a foreign
language.
B) Few U.S. companies translate their financial statements into another language.
C) Convenience translation means that a company will translate its financial statements
into English.
D) All of the above statements are true.
12. How should currency translation be done in order to appropriately compare a financial
statement presented in Japanese yen to a financial statement presented in Chinese yuan?
A) The temporal method should be used.
B) The historical exchange rates should be used convert financial statement amounts.
C) All amounts should be converted at the current exchange rate.
D) Current year statements should be converted at the current exchange rate and prior
year statements should be converted at prior year exchange rate.
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13. What is an advantage of using ratio analysis in comparing financial statements from
different countries?
A) Ratios are expressed as percentages, making currency differences irrelevant to the
analysis.
B) Ratios highlight the holding gains or losses related to currency translation.
C) Purchasing power gains and losses from currency translation show up clearly in ratio
analysis.
D) Comparing business ratios across countries removes the effect of economic
conditions and business culture.
14. Translating foreign financial statements into a convenience language:

A) eliminates all readability problems for a financial analyst.
B) does not always clarify accounting terminology unique to a particular country.
C) is easily and inexpensively done when the convenience language is English.
D) is required for all multinational corporations.
15. What is the best short-term solution to alleviate problems of financial statement analysis
arising from international differences in accounting terminology?
A) Require all countries to conform to IASB standards.
B) Create standard financial statement terminology for all companies around the world.
C) Analysts should carefully read the notes to financial statements and learn about the
business environments of countries they analyze.
D) Convert all financial statements into English.
16. Which of the following is true about the format of financial reports?
A) All multinational corporations report Sales Revenue on their income statements.
B) Gross margin is a standard line item on income statements throughout the world.
C) Notes to financial statements may clarify international differences in statement
formats.
D) In all countries, total assets are shown on the left side of the balance sheet and
liabilities and owners' equity are shown on the right side.
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17. Which of the following is true about financial statement disclosure?

A) When account balances are aggregated, the analyst has the greatest amount of
information.
B) The amount of financial statement disclosure varies widely from one country to
another.
C) The concept of full disclosure has been universally adopted around the world.
D) An analyst can always disaggregate financial statement disclosures to obtain needed
information.
18. Timeliness of financial statements varies across nations. Which of the following
countries has financial statements issued closest to year-end (on average)?
A) Japan
B) Germany
C) Canada
D) Italy
19. What steps can be taken by an analyst to alleviate the timeliness problem encountered in
comparing financial statements between countries that have different time frames for
reporting?
A) Use interim financial statements instead of annual reports.
B) Convert all financial statement items to a common year using current exchange rates.
C) Request financial statements from foreign corporations as soon as they are available.
D) Nothing can be done by the analyst do deal with this challenge.
20. What is OIBD?

A) This is the Organization of International Boards of Directors, which is attempting to
harmonize accounting standards.
B) It stands for “operating income before depreciation,” which some analysts use to
remove the effect of international accounting standard diversity.
C) It is the Organization of International Bond Dealers, whose financial analysts
developed EBITDA.
D) None of the above.
10-5
21. What is the intent of using EBITDA for analyzing foreign financial statements?
A) Adding back interest, taxes, depreciation, and amortization to net income takes out
elements of earnings that are greatly affected by accounting diversity.
B) It makes foreign GAAP conform to local GAAP.
C) EBITDA brings foreign net income in line with net income under U.S. GAAP.
D) All of the above.
22. Which of the following is the major limitation of using EBITDA for analyzing foreign
A) It is nearly impossible for most financial analysts to calculate this number.
B) Few analysts understand what this earnings number represents.
C) The excluded items may be important factors for evaluation.
D) It cannot be converted from a foreign currency to a domestic currency.
23. How can foreign corporations alleviate the accounting diversity problem related to
comparing foreign financial statements?
A) presenting multiple sets of financial statements under various GAAP
B) selecting a widely used set of accounting standards for their financial reporting
C) providing adequate disclosure in notes to the financial statements to allow analysts to
make conversions to another country's GAAP
D) all of the above
24. Which of the following is most likely to affect an analyst's ability to make meaningful
comparisons of financial statement ratios for companies in different countries?
A) differences in currency
B) language differences
C) varying business traditions
D) mathematical degrees of magnitude
10-6
25. Which of the following is likely to affect an analyst's ability to make meaningful
comparisons of financial statement ratios for companies in different countries?
A) accounting diversity
B) varying business traditions
C) unique terminology
D) all of the above
26. Because differences in business traditions and practices could make cross-country ratio
analysis difficult, what should an analyst do to overcome this problem?
A) Learn more about the business environment in relevant countries.
B) Make all decisions using nominal monetary differences rather than ratios.
C) Translate all ratios to a common currency.
D) Avoid recommending investments in foreign companies.
27. Foreign companies listed on U.S. stock exchanges must reconcile their net income and
stockholders' equity to U.S. GAAP. Which ratios can be calculated with the information
provided in this reconciliation?
A) operating profit margin
B) asset turnover
C) return on equity
D) current ratio
28. What U.S. term was equivalent to “inventories” as it was used in financial statements of
companies located in the United Kingdom, prior to adoption of IFRS in 2005?
A) operating assets
B) consumables
C) stocks
D) merchandise
10-7
29. If an analyst saw a “Monetary Position Loss” in a company’s annual report, where would
that company be located?
A) The Netherlands
B) Mexico
C) China
D) Sweden
Answer: B Level: Hard LO: 2
30. Imperial Chemical Industries, a U.K. corporation, recorded interest incurred in

constructing fixed assets as an expense of £128,000,000. When reconciling ICI's
financial statements to U.S. GAAP, what should be done with this interest?
A) It should be subtracted from the fixed asset account balance.
B) It should be added to the fixed asset account balance.
C) £128,000,000 should be deducted from retained earnings.
D) This amount should be charged to accumulated depreciation.
31. What would be a logical first step that should be taken to restate foreign financial
statements to conform to U.S. GAAP, assuming a four-column worksheet will be used to
post debit and credit adjustments and reclassifications to arrive at U.S. GAAP
statements?
A) Convert the foreign currency amounts to U.S. dollars.
B) Restate historical costs to current cost basis.
C) Re-order foreign financial statements to U.S. format.
D) Determine the amount of foreign exchange gains or losses.
Answer: C Level: Hard LO: 4
32. What is the basis for Morgan Stanley Dean Witter's “Apples to Apples” system for
financial statement analysis?
A) adjustments needed to compare companies within a single country
B) adjustments needed to compare international companies within specific industries
C) adjustments needed to compare companies in specific countries to U.S. companies
D) adjustments needed to compare the performance of international brokerage firms
10-8
33. During the 1990's, a major problem in evaluating the financial statements of Eastern
European companies that had been under the control of the Soviet Union was:
A) that the statements had been used for government planning rather than for private
investors.
B) that few people spoke the languages in which the financial statements were written.
C) that East European currencies had been greatly devalued relative to the U.S. dollar.
D) that financial reporting had not been done since the Bolshevik Revolution.
34. How would a company decide which foreign languages will be used to present its
A) Determine which language is closest to the local language so that translation is less
costly.
B) Choose the language based on which countries provide the greatest potential source
of funds.
C) Follow the language requirements of its local accounting regulatory agency.
D) Select the language of the most populous country in its region of the world.
35. Which of the following statements is true about convenience translations?

A) Translation eliminates the problems associated with comparing financial statements
in the same language.
B) Convenience translation means that a company converts both the language and the
currency of its financial statements for the convenience of potential investors.
C) Convenience translations require reconciliation to U.S. GAAP, U.S. format, as well
as conversion to English.
D) None of the above statements is true.
36. Lack of information about accounting methods used, operating segments, and interim
financial results is a problem of:
A) disclosure.
B) relevance.
C) comparability.
D) format.
Answer: A Level: Easy LO: 2
10-9
37. Footnote disclosures in foreign financial statements are particularly helpful in:
A) overcoming differences in statement format among countries.
B) reconciling statements from one country's GAAP to another country's GAAP.
C) learning relevant information not required to be presented in the accounts.
D) all of the above
38. In order to address accounting diversity, financial analysts have adopted which of the
following strategies?
A) limiting the geographic spread of their investments
B) taking a diversification strategy within a foreign country
C) investing only in foreign government bonds
D) all of the above
39. Why should financial analysts endorse the adoption of IFRS worldwide?
A) It would eliminate differences in the financial statements of international companies.
B) It would increase the comparability of financial statements across countries.
C) It would increase the demand for the services of international financial analysts.
D) The services of financial analysts would become more valuable to investors.
40. Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.
The current exchange rate is ¥120 = $1. What is Dynasty Industries' debt ratio?
A) ¥0.75
B) 133%
C) 75%
D) 6.25%
Answer: C Level: Easy LO: 3
10-10
41. Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.
If the exchange rate changes to ¥110 = $1, what will be the change in the debt ratio
assuming the account balances remain constant?
A) decrease 8.3%
B) increase 8.3%
C) decrease 9.1%
D) no change
42. On what SEC form must foreign corporations with shares listed on U.S. stock exchanges
present a reconciliation of net income and stockholders' equity to U.S. GAAP?
A) Form 1040
B) Form 10-K
C) Form 20-F
D) Form 8-Q
43. The debt ratio of Dynasty Industries, a Japanese corporation, is 62%. Why might this be
difficult to compare to the debt ratio of a U.S. manufacturing corporation?
A) U.S. companies generally have debt ratios greater than 62%.
B) U.S. companies generally have debt ratios less than 62%.
C) Japanese financing preferences may be different from American preferences.
D) Japanese companies report assets and liabilities in yen, whereas U.S. companies
report in dollars.
44. The Morgan Stanley Dean Witter “Apples to Apples” analysis relies on:
A) converting financial statements to U.S. GAAP to compare international investment
opportunities.
B) identifying the most significant factors affecting stock value and considering the
effect of accounting diversity on these factors.
C) the superiority of U.S. GAAP for determining the true value of international capital
investments.
D) converting all the accounts in foreign financial statements to a common set of
accounting standards.
10-11
45. What is the advantage of Morgan Stanley Dean Witter's “Apples to Apples” approach to
comparing international financial statement data?
A) It provides complete conversion of foreign financial statements to U.S. GAAP, which
may not be available from the reporting entities themselves.
B) It focuses only on the industry-specific factors MSDW believes are most important to
stock valuation, which eliminates the need for converting complete financial
statements.
C) It is not affected by differences in GAAP across countries.
D) The same measures are used for all industries in all countries, which eliminate
comparability issues.
Answer: B Level: Hard LO: 3
46. In order to appropriately analyze the trends in foreign financial statement data, which
exchange rates should be used?
A) historical exchange rates
B) beginning of year exchange rates
C) current exchange rates
D) average exchange rates
47. Which of the following statements is true relative to accounting for leases
internationally?
A) Operating lease disclosure for IFRS and U.S. GAAP is identical.
B) Some analysts believe that all leases must be restated as if they were operating leases.
C) Current rules under IFRS, U.S. GAAP and other national accounting standards
require leases to be capitalized under certain circumstances.
D) U.S. GAAP requires that future minimum lease payment disclosures be made for
each of the next ten years and for all years thereafter.
48. Some European companies do not report cost of goods sold as a separate expense item.
What affect does this have on financial statement analysis?
A) It would not be possible to determine the company's total expenses.
B) Any measure that relies on knowing gross profit cannot be calculated.
C) Income cannot be accurately calculated.
D) There is inadequate aggregation of financial information.
10-12
49. For U.S. companies whose shares are publicly traded on U.S. stock exchanges, how long
after year-end must annual reports be filed with the Securities and Exchange Commission
(SEC)?
A) 6 months
B) 90 days
C) 60 days
D) 30 days
50. British companies whose shares are publicly traded on exchanges in the United Kingdom
have how long after year-end to file financial statements with regulators in the U.K.?
A) 6 months
B) 90 days
C) 60 days
D) 30 days
51. Which of the following has the least frequent reporting requirements for publicly traded
corporations?
A) United States of America
B) United Kingdom
C) European Union
D) Canada
52. According to European Union directives, how frequently must its publicly traded
corporations publish financial reports?
A) annually
B) semi-annually
C) quarterly
D) monthly
10-13
53. Which of the following is true about reconciling foreign financial statements to U.S.
GAAP?
A) A 10% increase in income when converting to U.S. GAAP means that stockholder's
equity will increase by 10% after converting to U.S. GAAP.
B) A 10% increase in income when converting to U.S. GAAP means that stockholder's
equity will increase by 20% after converting to U.S. GAAP.
C) A 10% increase in income when converting to U.S. GAAP means that stockholder's
equity will decrease by 10% after converting to U.S. GAAP.
D) None of the above statements is true.
Answer: D Level: Hard LO: 3
54. Which is NOT one of the common sources of distortions in financial statements?
A) accounting standards that are inconsistent with economic reality
B) management estimation errors
C) miscalculation of foreign currency translation
D) management of earnings
55. Which is NOT one of the basic steps in financial statement analysis?
A) prospective analysis
B) accounting analysis
C) translation analysis.
D) financial analysis
Answer: C Level: Easy LO: 1
56. Evaluating liquidity and solvency to assess a company’s ability to meet its obligations is
an example of:
A) cash flow analysis
B) risk analysis
C) ROI analysis
D) accounting analysis
10-14

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Chapter 10 - Analysis of Foreign Financial Statements

1. Why is investing in foreign companies an effective way to diversity an individual's

Answer: D Level: Medium LO: 1

Answer: A Level: Easy LO: 1

Answer: D Level: Easy LO: 1

Answer: B Level: Medium LO: 1

5. Which of the following is a limitation of using commercial databases to access foreign

Answer: D Level: Medium LO: 3

6. Which of the following is a potential problem in analyzing foreign financial statements?

Answer: D Level: Easy LO: 2

Answer: C Level: Medium LO: 3

Answer: C Level: Medium LO: 3

Answer: A Level: Medium LO: 2

Answer: B Level: Medium LO: 3

Answer: B Level: Medium LO: 3

Answer: C Level: Medium LO: 3

Answer: A Level: Medium LO: 3

14. Translating foreign financial statements into a convenience language:

Answer: B Level: Medium LO: 3

Answer: C Level: Medium LO: 3

Answer: C Level: Medium LO: 3

17. Which of the following is true about financial statement disclosure?

Answer: B Level: Medium LO: 2

Answer: C Level: Medium LO: 2

Answer: D Level: Medium LO: 3

20. What is OIBD?

Answer: B Level: Medium LO: 4

Answer: A Level: Medium LO: 4

Answer: C Level: Medium LO: 4

Answer: D Level: Medium LO: 3

Answer: C Level: Medium LO: 2

Answer: D Level: Medium LO: 2

Answer: A Level: Medium LO: 3

Answer: C Level: Medium LO: 2

Answer: C Level: Medium LO: 2

Answer: B Level: Hard LO: 2

30. Imperial Chemical Industries, a U.K. corporation, recorded interest incurred in

Answer: B Level: Medium LO: 4

Answer: C Level: Hard LO: 4

Answer: B Level: Medium LO: 4

Answer: A Level: Medium LO: 2

Answer: B Level: Medium LO: 3

35. Which of the following statements is true about convenience translations?

Answer: D Level: Medium LO: 3

Answer: A Level: Easy LO: 2

Answer: D Level: Medium LO: 3

Answer: D Level: Medium LO: 3

Answer: B Level: Medium LO: 3

Answer: C Level: Easy LO: 3

Answer: D Level: Medium LO: 3

Answer: C Level: Medium LO: 3

Answer: C Level: Medium LO: 2

Answer: B Level: Medium LO: 3

Answer: B Level: Hard LO: 3

Answer: C Level: Medium LO: 3

Answer: C Level: Medium LO: 2

Answer: B Level: Medium LO: 2

Answer: C Level: Medium LO: 3

Answer: A Level: Medium LO: 3

Answer: C Level: Medium LO: 2

Answer: B Level: Medium LO: 2

Answer: D Level: Hard LO: 3

Answer: C Level: Medium LO: 1