Pros And Cons Of Foreign Direct Investment

Pros And Cons Of Foreign Direct Investment The unprecedented growth of multinationals is due to the concept of globalisation which has no boundaries or limits. Usually within countrys economy there are flows of goods, capital and technology. This leads to high competition in the industry and naturally companies tend to expand their business in order to survive in the global arena. The countries use Foreign Direct Investment as a key to internationalise their business. In order to understand the full meaning of FDI, let us see the definition. FDI is defined as the acquisition abroad of physical assets, such as plant and equipment, with operational control ultimately residing with the parent company in the home country (Buckley, p.35, 1996).In the past 25 years, FDI is growing at a much faster rate than trade and both of these have grown faster than world output (Kozul-Wright and Rowthorn, 1998). There are many factors contributing to the development of FDI. Some of them are Internet, technological advancement, flexible rules a nd regulations of the country and lesser communication costs. FDI stimulates competition, capital, technological and managerial skills which has a positive effect on both host and home countrys economic growth. The importance given to FDI by other country is astounding. One such example is US which has a separate department called Bureau of Economic Analysis. The department monitors FDI inflows and outflows and introduce FDI attraction schemes for successful results. (Graham Spaulding, 2005).This essay analyses various costs and benefits to home country and host country with suitable evidences. Costs and Benefits Let us discuss the costs and benefits of FDI to both home countries and host countries. Benefits of FDI to the host country Hill (2005) suggested that there are three main benefits to the host country derived out of FDI. They are resource transfer effects, employment effects and balance of payment effects. Whenever a company invests in a foreign firm, the resources are capital, technology and managerial skills. In terms of capital, the host country will have a higher financial status than the home country. The change in technology and managerial skills will have a drastic effect on the operations carried out by the company. In the host country due to FDI, it creates many employment opportunities through which the citizens of that particular country would be benefited. The balance of payments keeps tracks of FDI inflow and outflows through two types of accounts, current account and capital account. The current account is a record of a countrys export and import of goods (Hill, 2005) and the capital account maintain purchase or sale details of assets by the country. By using FDI, the country can achieve a c urrent account surplus (where exports are greater than imports) and reduce current account deficit (where imports are greater than exports). (Hill, 2005) Costs of FDI to the host country The negative effects are termed as costs. There are also significant effects which affects the host country. When a foreign firm establishes with the superior technological skills which can produce quality items at cheaper rates, it adversely affects the domestic producers. Balance of payments are also affected by inward FDI by two sources. When there is a initial capital inflow there must be subsequent capital outflow and this will be recorded as debits on capital account. The second source is due to import of goods from other countries which will be recorded as debits in current account. The foreign firm can alter the economic stability of a country as they will be focussing only on the profit. Eventually all the inhabitants of the country will have an emotional outbreak to apparent loss of national sovereignty. (Hill, 2005) Benefits of FDI to the home country The benefit to the home country also includes the factors similar to that of host country. In terms of balance of payments, what is debit to host country is credit to home country. The outward FDI also leads to creation of new job market with great expertise and necessary skills. Reverse resource transfer effect takes place whenever resources like managerial skills are transferred back to the home country. The profit of the foreign firm goes back to the home country unlike domestic producers which contributes to their country. The home country is exposed to create new market share and it is liable to create many in the future. (Hill, 2005) Costs of FDI to the home country Due to FDI, the home country is mainly affected by capital and employment. Suppose a country A decides to invest in country B, using its capital and technology there will be an addition of financial position to the host country than home country. Even in future, if the country A wants to make any advancement, much focus will be given to the company in country B and implement changes. As a result the production in home country decreases and it sometimes result in shutting down all its operations and completely concentrate on the host country. This badly affects the home countrys economy and employment. (Hill, 2005) Summary of costs and benefits To conclude the discussion of the benefits and costs of FDI, points are tabulated in Table 1 Table 1 Benefits and costs of FDI Benefits Costs Host country Financial resources of MNEs Access to new technology Training of local managers Job creation Capital inflows BOP credits from exports BOP credits from local production of parts Competition of local producers BOP debits on repatriated earnings BOP debits on MNE imports on components Perception of loss of national identity Home country BOP credits from earnings Creation of jobs in higher skill categories Exposure to new markets, managerial expertise and technology Protects market share in competition with other MNEs Initial investment a capital outflow BOP debits from input of low-cost goods Loss of exports for which FDI is a substitute Job losses in low skill areas Source: Hill (2005) The benefit of home country is the cost of host country and vice-versa. After researching for many years, economists have come to a conclusion that host country has more benefits than home country. This is because of three main reasons. The first one is that they own assets like technology and brand name. Second it is very easier to produce in a country where it is going to be marketed than producing in the home country and exporting as it save costs on transportation. It also rules out the problem of licensing and handling unnecessary pressures on production from the government. (World Trade Organization, 1996) The following sections are illustration of FDI costs and benefits. Renault-Nissan Alliance The Renault-Nissan alliance in 1999 is the first business-related and industrial partnership between France and Japan (www.renault.com). The alliance received a great attention as they created a very big impact on the Japanese car industry. Before the association, Nissan was about to bankrupt and incurred a dramatic loss of  ¥700 billion. When it was taken over by Renault with a new management team headed by Carlos Ghosn, a complete restructuring was done. The global work force was reduced by 10 percent, five factories were closed and Nissans shareholdings were sold. These were very high according to Japanese standards (Paprzycki, 2006). The outcomes were astonishing as they recorded consecutive profit in the following years with high operating margins and it was due to combined expertise and technology sharing (www.renault.com). The stealing of market share from its rivals Honda, Mazda and Mitsubishi was a clear indication of its accelerated development (Paprzycki, 2006). From thi s, it is very clear that transfer of managerial skills will have a huge impact in the success of the industry. Mexican Maquiladores Maquiladores refers to an American company on the Mexican side of US-Mexico border. They are owned by US, Japanese and European countries. The reason for these companies to go to Mexico is due to inexpensive labour and low tax (www.about.com). Many US companies including GE, RCA, IBM, Coca-cola and Ford were the first to initiate production in Mexico. Japanese and Korean firms also became major investors in 1982. As a result, it had a positive reflection on employment. It rose from 100,000 in 1982 to 500,000 in 1992. The NAFTA implementation further boosted up to 1.3 million and the region reported for 40 percent of total Mexican exports. The amount of goods exported to US increased from $42 billion in 1993 to $166 billion in 2000. Fords plant in Mexico became the third largest foreign owned manufacturing operation in Latin America. (Jones, 2005) US -Malaysia FDI relationship The economy of Malaysia was badly affected by several recessions like worldwide oil crisis and Asian economic crisis. Its economy again rebounded in 1999. FDI became a key factor in countrys development. Anderson (1993) suggested few factors that attract FDI in Malaysia were undervalued currency, low cost of labour and fairly low inflation rate. Though there are many foreign investors, U.S. companies ranks first in FDI in Malaysia. The companies like Boeing, General Electric, R.J. Reynolds and Bechtel were major American investors. The government provided perfect climatic conditions for American firms to operate in Malaysia. The following factors attracted U.S. firms to invest in Malaysia. The government set up an Anti corruption Agency to prevent corruption in any form. It has the same legal structure so the investors had great convenience in handling their business following the rules and regulations enacted by the government. Moreover there was not any language issue as Malaysia i s an English speaking country. The investors got attracted towards the incentives provided through tax treatment and generous equity ownership. There were also some issues faced by foreign investors. Any foreign investor who wants to start industry must get proper approval from Malaysian Investment Development Authority (MIDA). The approval depends on various conditions which will be frustrating for investors. The other problem faced by investors was that they have to get work permit for foreign workers, which was a time consuming process. The government has several restrictions on total number of foreign workers on their land as it will have a direct effect on countrys employment opportunities (Prempeh Abenna, 2003). FDI has also negative impacts on home country. In case of Malaysia, the American investors violated both Human rights and Workers right. Malaysia faced a severe violation of human rights as pay was very much less than the minimum wage. The working conditions were also not employee friendly because of which workers faced several types of health problems. The company was against in forming labour union and when protested by the government, they complained that forming unions was a violation according to U.S. Generalized System of Preferences (GSP) requirement (Prempeh Abenna, 2003). McDonalds-a worlds largest chain of quick service restaurants McDonalds was started in a suburb of Chicago in 1955. It became the largest fast food restaurant and held one third of US market in 1990. McDonalds opened its branch in Canada in 1967 and later began to open in Europe by making joint ventures. McDonalds influenced the needs of locals and all other local fast food outlets in Germany and Netherlands faced a very tough competition. The local restaurants had to change their style to McDonalds in order to meet customer demands. After that, every step ahead was a success to the company. They had joint ventured with Japanese and very soon became countrys largest restaurant chain. (Jones, 2005) McDonalds operation in Russia, China and India was a clear indication of International expansion. They had 30,000 outlets in 120 countries and employed 250,000 people outside the United States. They established in all major cities and helped students to manage their living by providing part time jobs. Their international operations reported one half of McDonaldss revenues. As time changes, customer needs also changes. Now customers prefer to have a nutritious meal, so McDonalds used their marketing nuances to satisfy their customers. For example, in France items like salads, fresh fruits and Evian mineral water are included in the menu. (Jones, 2005) Conclusion In this essay, we have seen several factors that affect both home country and host country. Every company in the market sees to maximise the benefits and minimise the costs. The goal of achieving maximum profit influences every other decision while investing in a country. So far, we have seen the costs and benefits of home countries and host countries and real time examples are also cited. The primary factors that affect both home country and host country are employment, competition, economic development, technology and management. A success of an industry can be determined by how well these factors are managed by the country practising all rules and regulations adopted by the country in which operations are carried out. The governments also play an active role in framing rules and regulations to derive maximum benefit out of both FDI inflow and outflow. The negotiations are done on every agreement. Only if it is beneficial the operations are performed otherwise they are rejected at the initial phase itself. FDI is also used for improving the infrastructure of economically backward countries. The funding is done by world level organisations like World Health Organisation, World Bank and International Monetary Fund. The infrastructure is provided even in terms of upgrading medical facilities. For example, in Africa money and medicines are provided to eradicate diseases and in India several awareness programmes are being conducted about HIV prevention. The money invested in the country can also be used for constructing roads to remote areas which will help in transportation of medicines and in situations like floods and other natural disasters. It can also be effectively used for training unskilled labour by conducting educational programmes that would benefit them to get into any industry (www.economywatch.com). The extent to which a country can be benefited out of FDI is solely decided by the government and foreign firms. Many foreign firms involve actively in promoting social and enviro nmental factors. The government can give tax exemptions and other incentives for the companies that benefit their country.

Hofstede’s Model Of Organisational Culture

ABSTRACT Organizational culture has become the buzzword in popular management with many experts suggesting it as an important determinant for organizational success. Management researchers have been quick to point out the impact that organizational culture may have on the effectiveness of the organization and have called for an increase in the attention paid to organizational culture. With more emphasis being placed on organizational culture, it becomes important to understand the appeal of this concept and examine its impact on management within the organization This paper thus explores on the concept of â€Å"organizational culture† and examines its impact on behaviours and management of the organization. This will involve identifying one associated mode or theory and evaluating or determining the extent to which the chosen model plays a part in defining the style of management. A case study of Sony Ericsson will also be employed to help illustrate the application of hofstede’s model of organizational culture. The study will also identify limitations of this model and the strengths that have enabled it to be used as a basis for most research analyses. INTRODUCTION Organizational culture has become the buzzword in popular management with many experts suggesting it as an important determinant for organizational success (Schein 1999). While the association between organizational culture and organizational success is far from certain, it is obvious that each organization has its own unique social structure which drives much of the individual behavior within that organization. Management researchers have been quick to point out the impact that organizational culture may have on the effectiveness of the organization and have called for an increase in the attention paid to organizational culture (Siehl & Martin 1998). With more emphasis being placed on organizational culture, it is important to understand the appeal of this concept and examine its impact on management within the organization. This study thus explores on the concept of organizational culture and examines its impact on management style. This will involve identifying one associated mode or theory and evaluating or determining the extent to which the chosen model plays a part in defining the style of management. In this regard, Hofstede’s ideas will form the basis of our analysis of organizational culture. WHAT IS..â€Å"CULTURE†? The term culture has been given varied set of definitions by various scholars. Kroeber & Kluckholn (1952), for example, defined culture as consisting of patterns of behaviour acquired and transmitted through symbols, and which constitute distinctive achievement of human groups including their embodiment in artifacts. Hofstede (1980), on the other hand, defined culture as the collective programming of the mind which differentiates members of one human group in the society from the rest. While Symington (1983) defined it as a complex whole which include belief, knowledge, morals, art, customs, capabilities and habits acquired in the society. These definitions suggest culture to consist of a set of value systems that are shared equally by members in the society and which binds people together. With the above conceptualization of culture, we can now define what we mean by organizational culture. ORGANIZAITONAL CULTURE Organizational culture can simply be defined as a set of values, assumptions and beliefs that define the behaviours and style of management in an organization (O’Reilly et.al, 1991). There are three main sources of influence believed to interact to create organizational culture. These are the beliefs and values held by the leaders of the organization, the characteristics of the industry in which the organization is within, and the broader society in which the organization operates (O’Reilly et.al, 1991). The most influential model used by management researchers and which has formed the basis of most analyses of organizational culture is Hofstede’s model. While most noted for his groundbreaking work on dimensions of national culture, Hofstede also identified six dimensions of organizational culture which can be used in defining the style of management in an organization.Process oriented vs goal orientedThe process oriented vs result oriented dimension is concerned with the effectiveness of the organization. A key feature of a process oriented culture is the means or rather the way in which work has to be conducted. While in a result oriented culture, emphasis is placed on the goals of the organization. That is, employees are primarily out to achieve specific organizational goals even if the risks involved are substantial (Hofstede 2001).Parochial vs professionalThis dimension reflects the internal and external frame of the organization (Hofstede 2001). In a local culture the id entity of the employees is with the immediate manager. Hence employees within this culture are internally focused and directed and there is also a strong social control. The converse is true in a professional culture where the identity of the employees is largely determined by the profession and content of the job.Open system vs closed systemThe open system vs closed system dimension reflects the communication climate of the organization (Hofstede 2001). For an open system, new employees are welcomed and there is the belief that everyone fits well in the organization. While for a closed system, it is difficult to join and it is believed that only a certain kind of individuals may fit in the organization.Employee oriented vs job orientedThis dimension relates to the management philosophy in the organization. In an employee oriented organizational culture, concern is mainly on employee satisfaction. The staff members feel that their own personal problems and welfare is taken into acco unt by the organization. While for a job oriented organizational culture, work is characterized by heavy pressure to perform the specific task at the expense of the employee (Hofstede 2001).Tighter control vs loose controlThis dimension relates to structuring, control and discipline in the organization. A tight control culture is characterized by seriousness and punctuality while the features of a loose control culture are casual and improvisation (Hofstede 2001). Examples of organizations that are often found within tighter controls are banks and pharmaceutical companies while those found in loose control are research laboratories and advertising agencies (Hofstede 2001).Normative vs pragmaticThis dimension reflects on the methods employed by organizations when dealing with the environment in general and customers in particular. It describes the level of â€Å"customer oreintation†. Pragmatic cultures are flexible and more market driven while normative cultures are rigid and often emphasize on following applicable laws and rules (Hofstede 2001). Hofstede labeled organizations involved in the sale of services as pragmatic while those engaged in application of laws and rules as normative. CRITICISMS OF HOFSTEDE’S MODEL Hofstede’s ground breaking work on culture has indeed provided valuable insights into the management styles and dynamics of cross cultural relationships. However, his highly influential findings have not been without criticisms. A number of academics have discredited his work in part or whole. Critics have argued that survey was not an important instrument that could be used in accurately determining and measuring the culture of organizations (Jones 2007). A survey of a set of limited questions certainly cannot adequately and comprehensively provide an in-depth understanding of culture of an organization. In response to this criticism, Hofstede argued that survey was one method and certainly not the only method that was used. Hofstede’s model has also been criticized on the basis that the five or six dimensions did not provide sufficient information about cultural differences (Jones 2007). In this regard, Hofstede agreed that his analysis was too narrow to credibly argue for the universal validity and sufficiency of the six dimensions of organizational culture that he identified. And in fact, suggested for additional dimensions to his original work. He also noted that some of the six dimensions that he identified may be less useful when analyzing other types of organizations in other countries (Jones 2007). A third criticism is that Hofstede’s work is seen as outdated, especially with the rapid changes in the global environment (Jones 2007). This critique has further been put forward by Holden (2002) who points out that the data used by Hofstede in his dimensions of organizational culture seem to have been gathered over 30 years ago and is therefore no longer applicable to the modern day world. In response to this criticism, Hofstede (1998) pointed out that a number of recent replications had confirmed his findings. Hofstede’s model is also criticized on grounds of his one company approach. Hofstede’s analysis supposed that a single IBM organizational culture could be used to make inferences about the entire world wide organizational cultures (Jones 2007). A study fixated on one company certainly cannot be used to make inferences about the entire world wide organizational cultures. The validity of his dimensions of organizational culture has thus been questioned and his model considered to be non-comprehensive as the study was based on data collected from a single company using questionnaires that lacked academic foundation. Critics have also argued that Hofstede failed to recognize the diversity in his analysis of IBM culture (Jones 2007). He ignored extensive literature which suggested that there were multiple, dissenting and emergent cultures in an organization. If we are to ignore the assumption of a single culture in IBM and acknowledge the diversity in culture at IBM, then his analysis is likely to collapse. After years of publication of his analysis on organizational culture based on the IBM survey data, Hofstede begun to acknowledge the presence of cultural diversity within and between units in the same organization. However, despite recognizing flaws in his work, Hofstede fails to admit error or weakness in his analysis. Accepting that organizations had multiple cultures as opposed to his assumption of a single culture would seem to undermine a crucial part of his analysis. ARGUMENTS IN FAVOUR OF HOFSTEDE’S MODEL Despite these criticisms, Hofstedes work is widely acknowledged and used by many scholars and practictioners due to its mainly appealing attributes. Sondergaard (1994) noted that hofstede’s analysis on corporate culture received 1,036 citations in comparison with another highly regarded study by Miles & Snow (1978) which only received 200 citations. Moreover, a number of researchers have replicated Hofstede’s study including Trompenaars & Hampden-Turner (1997). Some of the strengths that have enabled it to be used as the basis of most research analyses include: Relevance: – Hofstede’s discoveries came at a time when there was very little known about culture and businesses were just globalizing and were in need of advice (Jones 2007). Hofstede’s framework exceeded this demand and became widely accepted by many scholars and practitioners. His work offered guidance to managers who were expanding their businesses as cultures were clashing and creating difficulties (Jones 2007). Rigour – Hofstede model is based on a rigorous research design with systematic data and is built on a coherent theory (Jones 2007). Simplicity: – Knudsen & Loloma (2007) argues that hofstede’s model has remained influential and successful due to its simplicity of appliance. His analysis of culture offered a simple way of understanding organizational culture. The six dimensions that define organizational culture put forth by Hofstede made it easier for managers and researchers to understand corporate culture without the need of ex pert knowledge. Relative accuracy: – strength of Hofstede’s model is also reflected in its level of accuracy. Majority of the replications conducted by other researchers have confirmed Hofstede’s findings. Four replications have concurred fully with Hofstede’s findings while fifteen showed partial confirmation (Jones 2007). Moreover, Hofstede’s framework has become very influential in management studies and is most widely cited in social sciences. His work remains instrumental in the implementation of various business systems in organizations including entrepreneurial behaviour, workgroup performance and dynamics, leadership styles, participative management and management control systems among many others (Jones 2007). A CASE STUDY OF SONY ERICSSON In order to explore on the extent to which hofstede model plays a part in defining management style, we will conduct a case study of Sony Ericsson, a joint venture between Sony and Ericsson. Sony Ericsson has its headquarters and all of its management based in the UK. The firm aims at becoming the most innovative and attractive mobile brand globally (Cooper & Ross 2007). ORGANIZATIONAL CULTURE IN SONY ERICSSON Organizational culture has long been acknowledged as an important factor for driving behaviour, decision making and shaping management style at Sony Ericsson. With regard to the rules and procedures, Sony Ericson follows a certain procedure laid down by the firm (Cooper & Ross 2007). While it is not a requirement for employees to follow strict dress code and office timings, it is mandatory for employees at Sony Ericsson to abide by the business ethics and code of conduct (Cooper & Ross 2007). Since the firm does not follow a strict dress code and office timings, it can be concluded that the organization employs a loose control culture. With regard to employee evaluation and performance, the staffs at Sony Ericsson are not differentiated on their individual performance and are allowed to participate in decision making except at the higher level which requires the executive management team only (Cooper & Ross 2007). Sony Ericsson’s corporate culture is also more employee oriented with managers more concerned on the welfare and employee satisfaction. Sony Ericson’s organizational culture is also very professional as employees are subjected to scrutiny checks prior to their appointment to ensure that individuals hired are competent and have a certain level of experience deemed necessary for the position (Tayeb 2001). With regard to normative and pragmatic approach, the firm is seen in between, as its organizational culture is both normative and pragmatic oriented. While Sony Ericsson focuses on meeting customer and market needs, the firm also adheres to certain rules and guidelines in meeting these needs (Tayeb 2001). Clearly, Hofstede’s model plays a significant part in defining the management style and organizational behaviour at Sony Ericsson. CONCLUSION There is no doubt that Hofstede’s model is one of the most widely acknowledged and used piece of research. His ground breaking work on culture has indeed provided valuable insights into the management styles and dynamics of cross cultural relationships as evident in Sony Ericsson. A number of academics have however discredited his work in part or whole. Although Hofstede’s work on culture has been heavily criticized on grounds of his one company approach, survey methodological approach, and for fewer dimensions and his assumption of a single organizational culture; majority of his findings have had remarkable effect on practitioners and researchers and continue to guide multi-national practitioners into the â€Å"global† future. While there is a high level of controversy in his analysis of culture, there is no doubt that his study is one of the most influential in the analysis of organizational culture. REFERENCE Hofstede, G., 2001. Culture’s consequences. 2nd edition. Thousand Oaks, CA: Sage publications Hofstede, G., 1998. â€Å"Attitudes, Values and Organizational Culture: Disentangling the concepts.† Organization Studies 19(3): 477. Hofstede, G., 1980. Culture’s Consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications. Hofstede, G., Neuijen, B., Ohayv, D. D., and G. Sanders, 1990. â€Å"Measuring Organizational Cultures: A Qualitative and Quantitative Study across Twenty Cases†. Administrative Science Quarterly, 35(2), 286-316. Holden, N., 2002. Cross-Cultural Management – A Knowledge Management Perspective. Harlow: Prentice Hall. Jones, M.L., 2007. Hofstede – culturally questionableOxford, UK. Kroeber, A. L. and C. Kluckhohn, 1952. Culture: A critical review of concepts and definitions. Cambridge, MA: Harvard University press Knudsen & Loloma, 2007. The consequences of â€Å"culture’s consequences†. A critical approach to culture as collective programming applied to cross-cultural crews. Journal of Maritime Affairs. Vol . 8 (2), pp.105 -121 Miles, R and C. Snow, 1978. Organizational Strategy, Structure, and Process. New York, NY: McGraw-Hill. O’Reilly, C., Chatman, J., and D. Caldwell, 1991. â€Å"People and organizational culture: A profile comparison approach to assessing person-organization fit†. Academy of Management Journal, 34:487-516. Rose, R., 2008. Organizational culture as a root of performance improvement: research and recommendations. Contemporary management research. Vol.4, p. 43-46 Schein, E., 1999. The corporate culture survival guide. San Francisco: Jossey Bass. Schwartz, S.H., 1994. â€Å"Beyond individualism/collectivism†. In: Kim, U., Triandis, H.C. et al. (eds) Individualism and Collectivism: Theory, Method, and Applications: Vol. 18, Thousand Oaks, CA, Sage Siehl, C. & J. Martin, 1998. â€Å"Measuring Organizational Culture: Mixing Qualitative and Quantitative Methods†. In: Jones, M.O, et al. (eds), Inside Organizations: Understanding the Human Dimension, Newbury Park, CA, Sage Publications, pp.79-103. Sinha, 2000. Patterns of work culture. Sage publications Sondergaard, M., 1994. â€Å"Hofstede’s consequences: A study of reviews, citations and replications.† Organization Studies 15(3): 447. Symington, J. W., 1983. Learn Latin America’s Culture. New York Times. Tayeb, M. H., 2001. International Business Partnership. New York: Palgrave. Trompenaars, F. and C. Hampden-Turner, 1997. Riding the waves of culture: understanding cultural diversity in business. London, Nicholas Brearley.

Final Exam

Answer four of the following seven essay questions. Essay answers should be in paragraph form using complete sentences. (No bullet points) Use PAPA style for citations as needed. Exams may be subject to student submission using Turning at the professor's discretion. Your answers should be submitted as a Word file attached to an email sent to me by the start of class on March 5th. While brevity Is the soul of wit, essay answers should err on the side of completeness versus brevity.That said, I don't want to see the answer to any question go beyond two single-spaced hypocrites pages using a font size of 10-12 points. 1. Congratulations! You have Just been elected ruler off small OLD. What steps will you take to manage the country's balance of trade, and Its currency? Name and use an actual country don't make one up. Sierra Leone is a country that is rich in agricultural and mining resources, yet the great majority (over 70%) of the country still lives in poverty. Economic growth is hin dered by disadvantageous exchange rates and government budget deficits.As the recently elected President of Sierra Leone, I will take any and all necessary steps o bring this beautiful country out of poverty (www. Henbane. Org, 2014). Sierra Leone Is currently working with the International Monetary Fund (MIFF) to implement changes and improvements in our country's economic system. Sierra Leone has made important strides in economic reconstruction and macroeconomic as well as political stability since the end of the civil conflict in 2002. Economic growth has strengthened in the last two years with a stream of iron ore production and increased Infrastructure Investment.As the new president, I will continue working with the MIFF to manage the balance of trade and stabilize our currency (www. MFC. Org, 2013). In regards to Sierra Lens's currency, the exchange rate system is classified as floating, with the value of the Leone (currency) determined by the market. Currently, the central banks interventions are limited and aimed at smoothing volatility in the market. In order to stabilize the currency, I will diligently work with the Bank of Sierra Leone (BOSS) and with the MIFF to Introduce a stringent stabilization policy and reduce our country's debt.This policy will be aimed at first and foremost at tightening monetary regulations and reducing government borrowing. I will encourage the BOSS o move from a wholesale foreign exchange auction system to a retail auction system available to importers. This will enhance the currency's stability in the market as well as improve competitiveness. I will also work with the BOSS to improve monetary policy signaling, address remaining gaps In banking supervision, monetary and foreign exchange operations. I initiatives to encourage the development of micromanage in rural areas.Lastly, and perhaps most importantly, I will continue to work with the MIFF and the BOSS to develop a financial literacy campaign that will help to spr ead knowledge and titivation to continue efforts to stabilize the currency (www. Miff. Org, 2013) As president, I have also been charged with stabilizing trade in Sierra Leone. One of the biggest challenges in trade in Sierra Leone is that of smuggling and illicit trading activities. Sierra Leone is known for mining, especially diamonds, but poor regulation and policy enforcement, and high levels of corruption that lead to considerable levels of money laundering activities.As president, I will establish stricter controls and taxes around the mining trade, and crack down on corrupt government officials. I will continue to work with the government-created mining community development fund (DACCA), created to raise local communities' stake in the legal diamond trade, which returns a portion of diamond export taxes to diamond mining communities (www. Heritage. Org, 2014). Throughout my term as president, I hope to create a great economic turnaround for Sierra Leone, not only through bal ancing the currency and trade in the country, but through many more positive changes.I hope that by reducing budget deficits and improving the fiscal position of the government, I will be able to rehabilitate our social and economic infrastructure, stabilize the economy and provide a better life for Sierra Lens's people. 2. Compare and contrast the different methods of hedging transaction exposure. Include both derivative and non-derivative solutions. Transaction exposure is one of three types of foreign currency exposure. It is a type of risk that companies involved in international trade will face when entering fixed-price financial contracts.The risk occurs after the financial contract is made, and the subsequent fluctuations in currency exchange rates occur randomly and unpredictably. Although transaction exposure is considered short-term economic exposure, these changes in exchange rates can still affect the contract negatively, resulting in significant losses for the firm. The refore, companies participate in various hedging activities to avoid losses from transaction exposure (Nun & Arsenic, 2012). In transaction hedging, there are both derivative as well as non-derivative solutions. Derivatives are simply a contract between two parties.One of the ways which firms hedge transaction exposure is through the use of derivatives such as options contacts. Options are contracts used to reduce the risk of transactions by sing calls (sell) or puts (buy) on a financial asset at an agreed-upon price at some time in the future, which is known as exercising the option. Options also have a maturity or expiration date. In Europe, options can only be exercised at their maturity date, whereas in the United States, options can be exercised any time during the contract (Nun & Arsenic, 2012). Another derivative solution is a futures contract.Futures contracts are an agreement to buy or sell an asset at an agreed-upon price in the future. Unlike options, futures contracts ar e standardized for an amount of the asset, and are usually transacted to exit the market. Hedgers avoid price variation in the market by and pass off risk to a speculator who will take a long or short position in the futures contract. The speculator is considered to be more willing to take on the price risk variation. Futures contracts are short-term and profits and losses are realized on a daily basis (Nun & Arsenic, 2012).Somewhat similar to a futures contract is a forward contract. Forwards are also a contract to buy or sell an asset at an agreed-upon price in the future, however, forward contracts have a specific maturity date unlike the daily settlements used in uterus contracts. Rather than being a standardized contract, forwards are tailor made to the needs of the participants. Also different than futures is that when trading forwards, forwards are often settled through the delivery of goods or cash (Nun & Arsenic, 2012).There are numerous other types of derivatives used to m itigate foreign exchange risk, but the most common are forward and futures contracts, futures options, and swaps which will be discussed later in this exam (Nun & Arsenic, 2012). Many Macs also participate in non-derivative methods for hedging transaction risk. These are often used if a firm has positions in less liquid currencies. In order to mitigate risk in these cases, cross-hedging is a common technique in which a firm will hedge a position in one asset by taking a position in another asset.Effectiveness of cross-hedging is highly dependable on the strength of the relationship between the commodity futures prices and the exchange rate (Nun & Arsenic, 2012). Another non-derivative method to avoid transaction exposure is hedging via lead and lag. A company can lead, to pay or collect on an invoice early, or lag, which means to pay or collect late. By timing the lead and lag strategy correctly, the firm can protect themselves against depreciation or appreciation of the foreign cur rency they are dealing in (Nun & Arsenic, 2012).Hedging through invoice currency can help firms diversify exchange exposure by using currency basket units. A currency basket is a selected group of currencies in which the weighted average is used as a measure of the value of a contract or obligation. It functions as a benchmark for regional currency movements. Because it is a portfolio of currencies, its value is more stable and can be useful as a hedging LOL, especially for long-term contracts where there are no forward or options contracts available (Nun & Arsenic, 2012).The last non-derivative form of transaction hedging that we will discuss is that of exposure netting. Exposure netting helps to centralize a firm's exchange exposure management function in one location, typically in a reinforce center. All invoices from nitrating transactions are sent here, where overall exposure is analyzed and determined. Foreign exchange experts can then determine the optimal hedging methods for the portfolio of transactions and move forward to implement them (Nun Arsenic, 2012). Overall, we have seen that there are numerous options to hedge transaction exposure.There are some similarities among them, but they differ from each other and are applicable to different needs. Derivative forms of hedging are typically contractual, relatively short term solutions to transaction exposure, whereas non- lifestyle. No matter what the case, however, it is prudent for any NC to determine a strategy for transaction hedging before going into significant overseas contracts. 3. Compare and contrast a plain vanilla currency swap with a plain vanilla interest rate swap. Describe and Justify a situation where a NC would use each type of swap.As discussed briefly above, swap transactions are a type of derivative used to mitigate currency exposure in forward trades. A swap is an agreement between two parties to exchange a sequence of cash flows over a period of time- a simultaneous sale of spot foreign exchange against a forward purchase of an equal amount of foreign currency (Nun & Arsenic, 2012). A plain vanilla interest rate swap is the most common and simplest type of swap. They are customized contracts that can be paid monthly, quarterly, yearly, or on a basis decided on by the firms involved.In a plain vanilla interest rate swap, one part agrees to pay the contract at a fixed interest rate, while the other party agrees to pay at a floating interest rate, and the two cash flows are paid in the same currency. The swap typically has a set date of maturity set at some point in the future (MacAfee, 2012). A plain vanilla currency swap, unlike the plain vanilla interest swap, interest and principal payments on a loan are exchanged in 2 currencies. In the plain vanilla currency swap, the two parties exchange payments at the beginning and end of the swap, which also differs from interest rate swaps (MacAfee, 2012).In the case of plain vanilla interest rate swaps, Macs or Mi ff would use these when they are paying a floating rate of interest on liabilities and earning a fixed rate of interest on assets. It can be highly risky for a firm to have such a mismatch between assets and liabilities. Therefore, the firm could use a plain vanilla interest rate swap to rectify the imbalance in their interest payments (MacAfee, 2012). For the case of the plain vanilla currency swap, a firm would be interested in conducting this type of swap when the firm wants to expand operations into another country, but has comparative advantage in its home country.The firm will likely have more favorable financing in its home country, and therefore could perform a currency swap with the country it is expanding into, and gain the necessary funds in the new currency to finance its startup and operations (MacAfee, 2012). 4. Discuss the issues and potential solutions for a NC contemplating foreign direct investment in a OLD. By definition, a NC or Multinational Corporation, is regi stered and/or has operations in more than one country. These types of firms engage in FED, or Foreign Direct Investment.FED is an investment made by a company based in one country onto a company or entity based in another country. Macs making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies (www. Investigated. Com, 2014). FED can have numerous risks and obstacles for the NC involved. Olds, or Less Foreign direct investment can be an important source of employment opportunities for developing countries.However, anti-corporate advocates criticize Macs for entering Olds that have low human rights or environmental standards. They claim that multinationals give rise to large merged conglomerations that reduce competition and free enterprise, ra ise capital in host countries but export the profits, exploit countries for their natural resources, limit workers' wages, erode traditional cultures, and challenge national sovereignty. However, they remain attractive to investors due to low costs of labor, poorly enforced environmental and economic regulations, and inexpensive resources (www. Investigated. Com, 2014). Economic risk depends on the foreign country's financial state. A country with stable finances and a sound economy will be more attractive to foreign investors than one that has currency fluctuations and difficulty paying debt. Trade barriers and shareholder diversification issues can all be part of the economic risks taken on by a NC that is contemplating FED (Nun & Arsenic, 2012). Trade barriers can often be overcome by moving trade through other countries without trade restrictions.In the case of physical trade barriers, such as poor transportation, FED can be put into place to improve infrastructure and reduce tr ansportation costs (Nun & Arsenic, 2012). Political risk emerges when the political climate in a foreign country becomes unfriendly to investors. Political risk can be classified into three types: transfer risk, operational risk, and control risk. Transfer risk arises from uncertainty about cross border flows of capital and payments. Operational risk arises when the host country's policies affect the NC.Lastly, control risk is caused by uncertainty about the host country's policies regarding ownership and control of local operations (Nun & Arsenic, 2012). When contemplating investing in a OLD, the NC should take care to meticulously search and define the level of risk for doing business with the OLD they are considering, and also outline possible solutions in case of risk exposure. For example, those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, comprehensive country information are the Economist Intelligence Unit and the Centr al Intelligence Agency World Fastback.Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country. The Ell-J also provides ratings for most of the world's countries. These ratings can supplement those issued by Moody's, S and the other â€Å"traditional† ratings agencies (www. Investigated. Com, 2014). After completing the country analysis, the investing NC will have to decide on a sound investment approach. One of the recommended approaches is for the NC to invest in a broad international portfolio.Diversification is a fundamental principle of domestic investing, and is even more important when investing internationally. Even in a more concentrated portfolio, investments should be spread among several countries to maximize diversification and minimize risk (www. Investigated. Com, 2014). After deciding where to invest, an investor must decide which type of investment to enter. The choice of inve stment vehicle depends on each investor's individual knowledge, experience, risk profile and return objectives. When in doubt, it may make later.In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate. As in the U. S. , economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging r frontier markets. Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates (www. Investigated. Com, 2014). Final Exam Answer four of the following seven essay questions. Essay answers should be in paragraph form using complete sentences. (No bullet points) Use PAPA style for citations as needed. Exams may be subject to student submission using Turning at the professor's discretion. Your answers should be submitted as a Word file attached to an email sent to me by the start of class on March 5th. While brevity Is the soul of wit, essay answers should err on the side of completeness versus brevity.That said, I don't want to see the answer to any question go beyond two single-spaced hypocrites pages using a font size of 10-12 points. 1. Congratulations! You have Just been elected ruler off small OLD. What steps will you take to manage the country's balance of trade, and Its currency? Name and use an actual country don't make one up. Sierra Leone is a country that is rich in agricultural and mining resources, yet the great majority (over 70%) of the country still lives in poverty. Economic growth is hin dered by disadvantageous exchange rates and government budget deficits.As the recently elected President of Sierra Leone, I will take any and all necessary steps o bring this beautiful country out of poverty (www. Henbane. Org, 2014). Sierra Leone Is currently working with the International Monetary Fund (MIFF) to implement changes and improvements in our country's economic system. Sierra Leone has made important strides in economic reconstruction and macroeconomic as well as political stability since the end of the civil conflict in 2002. Economic growth has strengthened in the last two years with a stream of iron ore production and increased Infrastructure Investment.As the new president, I will continue working with the MIFF to manage the balance of trade and stabilize our currency (www. MFC. Org, 2013). In regards to Sierra Lens's currency, the exchange rate system is classified as floating, with the value of the Leone (currency) determined by the market. Currently, the central banks interventions are limited and aimed at smoothing volatility in the market. In order to stabilize the currency, I will diligently work with the Bank of Sierra Leone (BOSS) and with the MIFF to Introduce a stringent stabilization policy and reduce our country's debt.This policy will be aimed at first and foremost at tightening monetary regulations and reducing government borrowing. I will encourage the BOSS o move from a wholesale foreign exchange auction system to a retail auction system available to importers. This will enhance the currency's stability in the market as well as improve competitiveness. I will also work with the BOSS to improve monetary policy signaling, address remaining gaps In banking supervision, monetary and foreign exchange operations. I initiatives to encourage the development of micromanage in rural areas.Lastly, and perhaps most importantly, I will continue to work with the MIFF and the BOSS to develop a financial literacy campaign that will help to spr ead knowledge and titivation to continue efforts to stabilize the currency (www. Miff. Org, 2013) As president, I have also been charged with stabilizing trade in Sierra Leone. One of the biggest challenges in trade in Sierra Leone is that of smuggling and illicit trading activities. Sierra Leone is known for mining, especially diamonds, but poor regulation and policy enforcement, and high levels of corruption that lead to considerable levels of money laundering activities.As president, I will establish stricter controls and taxes around the mining trade, and crack down on corrupt government officials. I will continue to work with the government-created mining community development fund (DACCA), created to raise local communities' stake in the legal diamond trade, which returns a portion of diamond export taxes to diamond mining communities (www. Heritage. Org, 2014). Throughout my term as president, I hope to create a great economic turnaround for Sierra Leone, not only through bal ancing the currency and trade in the country, but through many more positive changes.I hope that by reducing budget deficits and improving the fiscal position of the government, I will be able to rehabilitate our social and economic infrastructure, stabilize the economy and provide a better life for Sierra Lens's people. 2. Compare and contrast the different methods of hedging transaction exposure. Include both derivative and non-derivative solutions. Transaction exposure is one of three types of foreign currency exposure. It is a type of risk that companies involved in international trade will face when entering fixed-price financial contracts.The risk occurs after the financial contract is made, and the subsequent fluctuations in currency exchange rates occur randomly and unpredictably. Although transaction exposure is considered short-term economic exposure, these changes in exchange rates can still affect the contract negatively, resulting in significant losses for the firm. The refore, companies participate in various hedging activities to avoid losses from transaction exposure (Nun & Arsenic, 2012). In transaction hedging, there are both derivative as well as non-derivative solutions. Derivatives are simply a contract between two parties.One of the ways which firms hedge transaction exposure is through the use of derivatives such as options contacts. Options are contracts used to reduce the risk of transactions by sing calls (sell) or puts (buy) on a financial asset at an agreed-upon price at some time in the future, which is known as exercising the option. Options also have a maturity or expiration date. In Europe, options can only be exercised at their maturity date, whereas in the United States, options can be exercised any time during the contract (Nun & Arsenic, 2012). Another derivative solution is a futures contract.Futures contracts are an agreement to buy or sell an asset at an agreed-upon price in the future. Unlike options, futures contracts ar e standardized for an amount of the asset, and are usually transacted to exit the market. Hedgers avoid price variation in the market by and pass off risk to a speculator who will take a long or short position in the futures contract. The speculator is considered to be more willing to take on the price risk variation. Futures contracts are short-term and profits and losses are realized on a daily basis (Nun & Arsenic, 2012).Somewhat similar to a futures contract is a forward contract. Forwards are also a contract to buy or sell an asset at an agreed-upon price in the future, however, forward contracts have a specific maturity date unlike the daily settlements used in uterus contracts. Rather than being a standardized contract, forwards are tailor made to the needs of the participants. Also different than futures is that when trading forwards, forwards are often settled through the delivery of goods or cash (Nun & Arsenic, 2012).There are numerous other types of derivatives used to m itigate foreign exchange risk, but the most common are forward and futures contracts, futures options, and swaps which will be discussed later in this exam (Nun & Arsenic, 2012). Many Macs also participate in non-derivative methods for hedging transaction risk. These are often used if a firm has positions in less liquid currencies. In order to mitigate risk in these cases, cross-hedging is a common technique in which a firm will hedge a position in one asset by taking a position in another asset.Effectiveness of cross-hedging is highly dependable on the strength of the relationship between the commodity futures prices and the exchange rate (Nun & Arsenic, 2012). Another non-derivative method to avoid transaction exposure is hedging via lead and lag. A company can lead, to pay or collect on an invoice early, or lag, which means to pay or collect late. By timing the lead and lag strategy correctly, the firm can protect themselves against depreciation or appreciation of the foreign cur rency they are dealing in (Nun & Arsenic, 2012).Hedging through invoice currency can help firms diversify exchange exposure by using currency basket units. A currency basket is a selected group of currencies in which the weighted average is used as a measure of the value of a contract or obligation. It functions as a benchmark for regional currency movements. Because it is a portfolio of currencies, its value is more stable and can be useful as a hedging LOL, especially for long-term contracts where there are no forward or options contracts available (Nun & Arsenic, 2012).The last non-derivative form of transaction hedging that we will discuss is that of exposure netting. Exposure netting helps to centralize a firm's exchange exposure management function in one location, typically in a reinforce center. All invoices from nitrating transactions are sent here, where overall exposure is analyzed and determined. Foreign exchange experts can then determine the optimal hedging methods for the portfolio of transactions and move forward to implement them (Nun Arsenic, 2012). Overall, we have seen that there are numerous options to hedge transaction exposure.There are some similarities among them, but they differ from each other and are applicable to different needs. Derivative forms of hedging are typically contractual, relatively short term solutions to transaction exposure, whereas non- lifestyle. No matter what the case, however, it is prudent for any NC to determine a strategy for transaction hedging before going into significant overseas contracts. 3. Compare and contrast a plain vanilla currency swap with a plain vanilla interest rate swap. Describe and Justify a situation where a NC would use each type of swap.As discussed briefly above, swap transactions are a type of derivative used to mitigate currency exposure in forward trades. A swap is an agreement between two parties to exchange a sequence of cash flows over a period of time- a simultaneous sale of spot foreign exchange against a forward purchase of an equal amount of foreign currency (Nun & Arsenic, 2012). A plain vanilla interest rate swap is the most common and simplest type of swap. They are customized contracts that can be paid monthly, quarterly, yearly, or on a basis decided on by the firms involved.In a plain vanilla interest rate swap, one part agrees to pay the contract at a fixed interest rate, while the other party agrees to pay at a floating interest rate, and the two cash flows are paid in the same currency. The swap typically has a set date of maturity set at some point in the future (MacAfee, 2012). A plain vanilla currency swap, unlike the plain vanilla interest swap, interest and principal payments on a loan are exchanged in 2 currencies. In the plain vanilla currency swap, the two parties exchange payments at the beginning and end of the swap, which also differs from interest rate swaps (MacAfee, 2012).In the case of plain vanilla interest rate swaps, Macs or Mi ff would use these when they are paying a floating rate of interest on liabilities and earning a fixed rate of interest on assets. It can be highly risky for a firm to have such a mismatch between assets and liabilities. Therefore, the firm could use a plain vanilla interest rate swap to rectify the imbalance in their interest payments (MacAfee, 2012). For the case of the plain vanilla currency swap, a firm would be interested in conducting this type of swap when the firm wants to expand operations into another country, but has comparative advantage in its home country.The firm will likely have more favorable financing in its home country, and therefore could perform a currency swap with the country it is expanding into, and gain the necessary funds in the new currency to finance its startup and operations (MacAfee, 2012). 4. Discuss the issues and potential solutions for a NC contemplating foreign direct investment in a OLD. By definition, a NC or Multinational Corporation, is regi stered and/or has operations in more than one country. These types of firms engage in FED, or Foreign Direct Investment.FED is an investment made by a company based in one country onto a company or entity based in another country. Macs making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies (www. Investigated. Com, 2014). FED can have numerous risks and obstacles for the NC involved. Olds, or Less Foreign direct investment can be an important source of employment opportunities for developing countries.However, anti-corporate advocates criticize Macs for entering Olds that have low human rights or environmental standards. They claim that multinationals give rise to large merged conglomerations that reduce competition and free enterprise, ra ise capital in host countries but export the profits, exploit countries for their natural resources, limit workers' wages, erode traditional cultures, and challenge national sovereignty. However, they remain attractive to investors due to low costs of labor, poorly enforced environmental and economic regulations, and inexpensive resources (www. Investigated. Com, 2014). Economic risk depends on the foreign country's financial state. A country with stable finances and a sound economy will be more attractive to foreign investors than one that has currency fluctuations and difficulty paying debt. Trade barriers and shareholder diversification issues can all be part of the economic risks taken on by a NC that is contemplating FED (Nun & Arsenic, 2012). Trade barriers can often be overcome by moving trade through other countries without trade restrictions.In the case of physical trade barriers, such as poor transportation, FED can be put into place to improve infrastructure and reduce tr ansportation costs (Nun & Arsenic, 2012). Political risk emerges when the political climate in a foreign country becomes unfriendly to investors. Political risk can be classified into three types: transfer risk, operational risk, and control risk. Transfer risk arises from uncertainty about cross border flows of capital and payments. Operational risk arises when the host country's policies affect the NC.Lastly, control risk is caused by uncertainty about the host country's policies regarding ownership and control of local operations (Nun & Arsenic, 2012). When contemplating investing in a OLD, the NC should take care to meticulously search and define the level of risk for doing business with the OLD they are considering, and also outline possible solutions in case of risk exposure. For example, those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, comprehensive country information are the Economist Intelligence Unit and the Centr al Intelligence Agency World Fastback.Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country. The Ell-J also provides ratings for most of the world's countries. These ratings can supplement those issued by Moody's, S and the other â€Å"traditional† ratings agencies (www. Investigated. Com, 2014). After completing the country analysis, the investing NC will have to decide on a sound investment approach. One of the recommended approaches is for the NC to invest in a broad international portfolio.Diversification is a fundamental principle of domestic investing, and is even more important when investing internationally. Even in a more concentrated portfolio, investments should be spread among several countries to maximize diversification and minimize risk (www. Investigated. Com, 2014). After deciding where to invest, an investor must decide which type of investment to enter. The choice of inve stment vehicle depends on each investor's individual knowledge, experience, risk profile and return objectives. When in doubt, it may make later.In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate. As in the U. S. , economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging r frontier markets. Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates (www. Investigated. Com, 2014). Final Exam The response to each question or statement is either True or False. 1. A business organized as a separate legal entity owned by stockholders is a partnership. 2. External users of accounting information are managers who plan, organize, and run a business. 3. Two primary external users of accounting information are investors and creditors. 4. Financing activities for corporations include borrowing money and selling shares of their own stock. 5.Income will always be greater under the cash basis of accounting than under the accrual basis of accounting. 6. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded. 7. Cash is a temporary account. 8. Bonding means insuring a company against theft by employees. 9. The treasurer should prepare and sign a check only after authorization to issue a check has been provided. 10. Using borrowed money to increase the rate of return on common stockholders' equity is called â€Å"trading on the equity.The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit. 11. A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records. 12. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting Journal entries to the Cash account. 13. Cash equivalents include money market accounts, commercial paper, and U. S. Treasury bills held for ninety days or less. 14. A basic principle of cash management is to increase the speed of paying liabilities. 5.A cash budget contributes to more effective cash management. 16. A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year. 17. If a company has sales of $110 in 2007 and $154 in 2006, the percentage decrease in sales from 2006 to 2007 i s 140%. 18. In a common size income statement, each item is expressed as a percentage of net income. 19. Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness 20. Inventory turnover is a measure of equity that focuses on efficient use of inventory. 1 . The current ratio is a measure of all the ratios calculated for the current year. 22. From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations. 23. Alternative accounting methods affect the quality of earnings 24. Because pro formal earnings are based on specific rules, these amounts are highly reliable. Section II: Multiple Choice Choose your response from one of the possible answers provided. 26. A business organized as a corporation ). Is not a separate legal entity in most states. ). Requires that stockholders be personally liable for the debts of the business. C). Is owned by its stoc kholders. D). Has tax advantages over a proprietorship or partnership. 27. Which of the following is not one of the three forms of business organization? A). Corporations. B). Partnerships. C). Proprietorships. D). Investors. 28. An advantage of the corporate form of business is that a). It has limited life. B). Its owner's personal resources are at stake. C). Its ownership is easily transferable via the sale of shares of stock. ). It is simple to establish. 29.The group of users of accounting information charged with achieving the goals of the business is its a). Auditors. B). Investors. C). Managers. D). Creditors. 30. Which of the following is a primary user of accounting information with a direct financial interest in the business? A). Taxing authority b). Creditor c). Regulatory agency d). Labor union 31 . An income statement a). Summarizes the changes in retained earnings for a specific period of time. B). Reports the changes in assets, liabilities, and stockholders' equity ov er a period of time. C). Ports the assets, liabilities, and stockholders' equity at a specific date. ). Presents the revenues and expenses for a specific period of time. 32. Which financial statement is prepared first? A). Balance sheet b). Lonesome statement c). Retained earnings statement d). Statement of cash flows 33. Which one of the following is not a Justification for adjusting entries? A). AdJusting entries are necessary to ensure that revenue recognition principles are followed. B). AdJusting entries are necessary to ensure that the matching principle is followed. C). AdJusting entries are necessary to enable financial statements to be in conformity tit GAP. D).AdJusting entries are necessary to bring the general ledger accounts in line with the budget. 34. If a resource has been consumed but a bill has not been received at the end of the accounting period, then a). An expense should be recorded when the bill is received. B). An expense should be recorded when the cash is p aid out. C). An adjusting entry should be made recognizing the expense. D). It is optional whether to record the expense before the bill is received. 35. An adjusting entry would not include which of the following accounts? A). Cash b). Lintiest Receivable ).Property Tax Payable d). Unearned Revenue 36. At December 31, 2007, before any year-end adjustments, Boils Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a). $l ,500. 0. $2,700. D). $1,900. 37. Which one of the following is not an objective of a system of internal controls? A). Safeguard company assets b). Overstate liabilities in order to be conservative c). Enhance the accuracy and reliability of accounting records d).Reduce the risks of errors 38. Which one of the following would be considered a long-term solvency ratio? A). Receivables turnover b). Return on total assets c). Curre nt cash debt coverage ratio.

Notes On Bonds And Bonds - 873 Words

a) What are bonds? What are their features and how are they traded? Bonds are instrument of indebtedness of the bond issuer to the holder. A bond is can also be defined as a debt security under which conditions the issuer owes the holder debt which comes with conditions and there is an obligation to pay interest and repay the principal at a later date when the bond matures. Sometimes interest, maybe payable at fixed intervals, for example semiannual, monthly, annually. Bonds usually are negotiable and this simply means that ownership of the instrument can be transferred in the secondary market. Features †¢ Set Maturity Dates — maturity dates for bonds are set and can range from one to 30 years. Short-term bonds can mature in 3 years or less while intermediate bonds matures in 10 years or less and long-term bonds mature in 10 years and more. †¢ Interest Payments — Depending on the bond structure, they can offer interest. Therefore fixed rate bonds offers fixed interest payments on a regular schedule for the life of the bond; Floating rate bonds have variable interest rates which are adjusted periodically; and, Zero coupon bonds which can be purchased a discounted price of face value at maturity. However this type of arrangement does not offer periodical interest rates. †¢ Principal Investment Repayment — when the bond reaches maturity the issuers are obligated to repay the full principal amount of a bond in a lump sum. †¢ Credit Ratings — One can access the default risk byShow MoreRelatedBond Note On Bond And Bond844 Words   |  4 PagesAfter completing the table of bond valuations I noticed some definite trends. Consider the AAA rated bond I chose in my valuation, yielding a 3.13% to maturity. As the remaining two bonds are BB and CCC, both have noticeably high yield to maturity percentages. In my observation, As the bond credit rating decreases, the yield to maturity percentage increases. 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Bikers are brothers, and it does not take much to create this bond. Strangers can become friends overnight with the sole commonality of riding. Your background, your history, your beliefs, none of it matters to them. What truly matters to them is whether or not you ride. Obviously, I do not mean oneRead MoreNotes On Redeeming Savings Bonds Essay1662 Words   |  7 Pagessavings bonds that are property of the estate, reporting rules from the IRS can make the transaction complex. As depicted in the article Redeeming Series E Savings Bonds of the Decedent, redeeming savings bonds is not a difficult process. However, reporting the interest income earned on the savings bonds is where the complexities exist. As a result, imp lications may result for the estate if the executor is not aware of the rules the IRS set forth for reporting interest income on the savings bonds. 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Generally when interest rates decrease, people are more likely to invest since it will be cheaper than when the interest rates are higher. 12. No, since people whoRead MoreNotes On Bonds And Debt Investment957 Words   |  4 Pages Bonds are financial instruments that are used as debt investment. Bonds are a means for an investor to lend or loan money to an entity or organisation or the government. Time of maturity is usually predetermined (Bodie, Zvi, Kane, and Alan 12). The interest rate for this transaction however might or might not be fixed or be variable, otherwise known as the spot rate. The bonds are very powerful instruments in the market nowadays. T-bills, which are government issued are instrumentsRead MoreAcc 545 Restructuring Debt1376 Words   |  6 Pagesrecent financial troubles. Even though the company is in the process of reorganizing one believes this information will help a company in reporting the restructuring of debt. 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