Exercise 1.1: Balance of Payments Accounting Describe how each of the following transactions affects the U.S. Balance of Pay- ments. (Recall that each transaction gives rise to two entries in the Balance-of-Payments Accounts.) [Note: these questions are slightly different to the most recent version of the S-GUW text- book. You can look at both. More questions are also available in Appleyard and Field] 1. An American university buys several park benches from Spain and pays with a $120 000 check. 2. Floyd Townsend, of Tampa Florida, buys 5,000.00 dollars worth of British Airlines stock from Citibank New York, paying with U.S. dollars. 3. A French consumer imports American blue jeans (US$ 100.00) and pays with a check drawn on a U.S. bank in New York. 4. An American company sells a subsidiary in the United States and with the proceeds buys a French company (both worth US$ 1.00). 5. A group of American friends travels to Costa Rica and rents a vacation home for $2,500. They pay with a U.S. credit card. 6. The United States sends medicine, blankets, tents, and non-perishable food worth 400 dollars to victims of an earthquake in a foreign country. The following two transactions involve a component of the balance of payments that we have ignored because it is quantitatively insignificant (for the U.S.). 1 7. A billionaire from Russia enters the United States on immigrant visa (that is, upon entering the United States she becomes a permanent resident of the United States.) Her wealth in Russia is estimated to be about 200 U.S. dollars. 8. The United States forgives debt of $500 to Nicaragua.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![Exercise 1.1: Balance of Payments Accounting
Describe how each of the following transactions affects the U.S. Balance of Pay-
ments.
(Recall that each transaction gives rise to two entries in the Balance-of-Payments Accounts.)
[Note: these questions are slightly different to the most recent version of the S-GUW text-
book. You can look at both. More questions are also available in Appleyard and Field]
1. An American university buys several park benches from Spain and pays with a $120
000 check.
2. Floyd Townsend, of Tampa Florida, buys 5,000.00 dollars worth of British Airlines
stock from Citibank New York, paying with U.S. dollars.
3. A French consumer imports American blue jeans (US$ 100.00) and pays with a check
drawn on a U.S. bank in New York.
4. An American company sells a subsidiary in the United States and with the proceeds
buys a French company (both worth US$ 1.00).
5. A group of American friends travels to Costa Rica and rents a vacation home for $2,500.
They pay with a U.S. credit card.
6. The United States sends medicine, blankets, tents, and non-perishable food worth 400
dollars to victims of an earthquake in a foreign country.
The following two transactions involve a component of the balance of payments that we
have ignored because it is quantitatively insignificant (for the U.S.).
1
7. A billionaire from Russia enters the United States on an immigrant visa (that is, upon
entering the United States she becomes a permanent resident of the United States.)
Her wealth in Russia is estimated to be about 200 U.S. dollars.
8. The United States forgives debt of $500 to Nicaragua.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F87b53351-2067-4a4d-a81c-a5cf0ffaa5a8%2F89f8fa5b-b6f3-433c-a5f7-b5553bb32f5e%2Fg5v6aw_processed.jpeg&w=3840&q=75)
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