Company MHF Operates Subsidiaries in Two Countries

question 74

Multiple Choice

Company MHF operates subsidiaries in two countries.One of the subsidiaries consumes the output of the other in the production of a good for sale to the public.The company could increase cash flows by:

• A)Using a transfer price based on full cost.
• B)Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
• C)Using a transfer price based on market value.
• D)Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

Calculate and analyze residual income.

Understand the concept of minimum required rate of return.

Evaluate investment opportunities in terms of residual income and ROI.

Assess the impact of new investments on overall company performance.

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Definitions:

Retained Earnings

Retained Earnings represent the cumulative amount of net income earned by a company that has not been distributed to shareholders as dividends.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a fixed asset since it was acquired and placed into service.

Debited

An accounting term describing the recording of an increase in assets or a decrease in liabilities and equity.

Liabilities

Financial obligations or debts a company owes to others, which must be settled over time through the transfer of assets, provision of services, or other economic benefits.