International Relations Essay Sample on Case Study 7 and International Business

Case Study 7 and International Business

Part One:

The general accounting concepts require the double-entry systems of recording transactions, where assets (Soenen, 2010), debts and purchase are recorded on the debit side of the book entry while liabilities, sales or revenues earned and creditor’s information recorded on the credit side of the book entry. For a balance of payment transaction, the same guidelines are followed but now with reference to cash inflows and cash outflows. In this relation, any transaction that leads to cash receipt is recorded on the credit side of the journal entry while a transaction any transaction leading to cash outflow is recorded on the debit side of the journal entry (Soenen, 2010). In our case, we are presented with the following items to be recorded in the BOP journal.

  • US resident purchases Mercedes Benz C230- the Mercedes Benz Company is a US based car manufacturing company and therefore the purchase by a US resident is considered domestic consumption of a local product. The transaction cannot be recorded in the in the BOP purchase journal.
  • US resident Purchases Chevelot Impala- the Chevelot Impala is a US modelled racer car and therefore the purchase by a US resident is considered domestic consumption of a local product. The transaction cannot be recorded in the in the BOP purchase journal
  • Foreigner Purchase GE dryer- the purchase of GE dryer by a foreigner results into cash receipt (Sales) on the side of US. This is a BOP transaction entry on the credit side of the journal.
  • US resident purchase UK stock- the purchase of UK stock by a US resident results in cash outflows (purchases) from US. This is a BOP transaction entry on the debit side of the journal.
  • US resident borrows funds from British broker to purchase stock- A US resident borrowing funds from British Broker to purchase stock makes the country liable in which case the cash receipt is recorded on the credit side of the BOP journal.

Part Two:

Question 19-3

            GAAP outlines the globally accepted accounting principles that businesses can use to prepare standardized financial statements. An investor comparing the financial results of the Gap, Inditex and H&M expects no difference in those financial statements even if the reporting is done according to different GAAP (Broll, 2003).  This is because, even though the recording is done at on different guidelines, the GAAP principles will only recognize those statements developed within the time framework of the accounting cycle and its impact on the financial statement like the period within which the transaction was recorded (Broll, 2003). According to the disclosure principles, the GAAP outlines the specific number and type of information that is to be presented in the financial statement and this means that there would be no wide gap in the information setting for the company’s safe for the arrangement of the items contained in the financial statement (Daniels, Radebaugh & Sullivan, 2015).

However, there would be a big differences between the US GAAP as used by the Gap and IFRS as used by the H&M and Inditex. When comparing the GAAP to IFRS, the first difference is that the US GAAP provides more detailed rules than the IFRS, which also has limited industry specific guidance (Daniels, Radebaugh & Sullivan, 2015). Even though there have been noticeable differences between the US GAAP and the IFRS, the longstanding projects developed between the IASB and the FASB has been reducing such differences. The existing differences have significant effect on the company’s reporting results following the facts and financial circumstances surrounding the company’s industry (Daniels, Radebaugh & Sullivan, 2015). Other than the mentioned differences it also good to note that IFRS does not permit the concepts of LIFO, which are important when establishing stock of inventories in the company. Also noted is the fact that the IFRS uses a single step rather than the two step write-downs followed in US GAAP, and this makes the write-downs more likely. The final important difference is that the IFRS requires capitalization of establishment costs once the company has met certain qualifying procedures while the US GAAP requires the establishment costs to be expensed once incurred safe for the costs relating to developing computers software.   

Question 19-4

The sources of influence on accounting standards and practices are the groups of stakeholders such as consumers, government, investors, private stakeholders and related companies who continuously demand details about the company’s financial systems, sources of deliveries and detailed accounts on financial performances. According to the case provided, the quality, safety, ethics and environmental concerns are all factors to keep the stakeholders worried about the company’s future operations, and therefore the needs to keep proper records of business operations is just one of the precautions towards making the company’s activities over the past years traceable in case of a tragedy.  

 Even though the company’s accounting standards are closely monitored by the internal and external users who require a single set of high-quality (Giddy & Dufey, 2009), understandable and enforceable global accounting standards, it is quite common that the accounting practices must correspond to the business culture. H & M cultural values of secrecy and transparency defines the degree of information disclosure, and in this context the company’s culture allows H & M accountants to value assets and recognize them in income in response to economic situations (Giddy & Dufey, 2009). At times, the company can undervalue its assets and income in order to meet specific economic targets, or may overvalue the assets and income to meet the expectations of financers for continued investment. In general, the company’s accounting standards and practices are influenced by general factors like the business culture, changes in capital markets, changes in regional and global accounting standards, business management practices and level of experience on the side of accountants (Giddy & Dufey, 2009).

  • The type of exposure

The CFO of the company in the US could be subjected to economic exposure since there could be unexpected currency fluctuations on H & M future cash flows, rather alteration in market values (Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). The fact that the is based in Sweden and its financial statements prepared according to IFRS affects its competitive position in global markets. One important factor is that the company’s financial reporting does not correspond to the US GAAP systems, meaning that the statements are considered lesser detailed and not responsive to the US economic climate (Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014).

  • The operational hedging strategies that may offset exposure  

The operational hedging strategies that can be used to offset exposure for the case of payments or liabilities diversifying the production facilities and market segments for the range of products or finances in case of an exchange market (Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). The diversification process is known mitigate all the risks associated with production facilities or sales that could be concentrated in one or specific markets. This requires the participants to forgo their economies of scale and concentrate on those factors that will offset the extreme economic imbalance in respective markets (Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). The second offsetting condition require the market participants to have alternative sources of key input in case the market exchange rates move in way that raises the cost of inputs. This process of offsetting exposure is known as sourcing flexibility and allows the market participants to match inputs and input costs (Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). There is also need to diversify the financing process win which case the ability to access capital markets in different nations will give the trading company the flexibility to increase capital in that foreign market at the cheapest cost of borrowing.


Broll, U. (Eds.). (2003). Foreign production and international hedging in a multinational firm. Open economies review, 4(4), 425-432.

Burgi-Schmelz, A., Ducharme, L. M., Heath, R. M., & International Monetary Fund. (2014). BPM6 compilation guide: Companion document to the sixth edition of the Balance of payments and international investment position manual. Washington, D.C.: International Monetary Fund.

Daniels, J.D., Radebaugh, L.H., & Sullivan, D.P. (2015) international business: Environments and operations (15th ed.). Upper Saddle River, NJ: Pearson Education.

Giddy, I. H., & Dufey, G. (Eds.). (2009). The management of foreign exchange risk. New York.

Soenen, L. A. (Eds.). (2010). Efficient market implications for foreign exchange exposure management. De Economist, 127(2), 330-339.