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Balance of Payments

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The other significant indicator in international trade is the balance of payments. Summarize your understanding of micro- and macroeconomic theory in a discussion of the balance of payments and its effects on national and global economic systems.

How do the balance of trade and the balance of payments affect one another? Together how do they affect global commerce?

How do they impact the domestic economies of nations?

How do they affect individual business decisions?

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Meaning of Balance of payments

BALANCE OF PAYMENT MAY BE DEFINED AS SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN A RESIDENT OF THE COUNTRY AND THE REST OF THE WORLD DURING THE GIVEN PERIOD. Thus the Balance of Payments 'BOP' is an account of all transactions between one country and all other countries--transactions that are measured in terms of receipts and payments. From the U.S. perspective, a receipt represents any dollars flowing into the country or any transaction that require the exchange of foreign currency into dollars. A payment represents dollars flowing out of the country or any transaction that requires the conversion of dollars into some other currency. The three main components of the Balance of Payments are:

1. The Current Account including Merchandise (Exports Imports), Investment income (rents, profits, interest)
2. The Capital Account measuring Foreign investment in the U.S. and U.S.investment abroad, and
3. The Balancing Account allowing for changes in official reserve assets (SDR's, Gold, other payments)
How do the balance of trade and the balance of payments affect one another? Together how do ...

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Prepare and submit an estimated balance sheet and income statement for December 31, 2000, for Crown Electrical Supply...

Part II
Prepare and submit an estimated balance sheet and income statement for December 31, 2000, for Crown Electrical Supply based on the estimates provided in the discussion material for this lesson and previous lessons. Keep the total bank loan at $75,000 (remember this is a "what if" analysis) and use cash as the plug figure. After the liabilities/net worth and all the assets except for cash have been estimated, subtract the total of all the assets, other than cash, from total liabilities and net worth to obtain the estimated cash balance.
How much must Crown 1) reduce inventory (below $365,000) or 2) increase accounts payable (above the currently planned figure) in order to pay $25,000 to the bank by December 31, 2000-and still be able to keep a minimum of $30,000 cash balance in the bank? What would the resulting inventory figure represent in terms of an inventory turnover? What would the resulting accounts payable figure be in terms of days payable?


For part II of your instructor-graded assignment, assume that sales for the second half of 2000 will be $1,350,000-$225,000 each month-making a total of $2,655,000 for the year. Accounts receivable will consist of two-thirds of December's sales. The other one-third of each month's sales will be collected by the end of the month. Inventory will climb to $365,000 by the end of December. Gross plant and equipment will remain the same (no equipment purchases are included in the budget). Thus, net plant and equipment will be lower than the end of last year by the amount of the depreciation, estimated at $7,200 for the year .

Accounts payable will consist of December purchases, since purchases are being paid with a thirty-day lag. December purchases will be December cost of goods sold plus one-sixth of the increase in inventory between June 30 and December 31. Assume that "prepaid expenses" and "miscellaneous accruals" will stay the same. Income tax payable will be the December 31, 1999, income tax payable plus taxes accrued during the year 2000, less the tax payments to be made during the year, which will be $50,000. (This figure includes the $25,000 tax payments made during the first six months of the year.) Similarly, retained earnings will be beginning retained earnings plus net income during the period less the $75,000 dividends to be paid during the year. (Thus, in order to prepare a pro forma balance sheet, it is also necessary to prepare a pro forma income statement to obtain estimated net income and accrued taxes.) Remember, in preparing the pro forma income statement there will be depreciation expense for the full year of $7,200 ($3,600 for each six months) in addition to the cash operating expenses of 20.2 percent of sales, and selling and administrative expenses of 8.2 percent of sales. Cost of goods sold will be 65 percent of sales. Common stock will remain the same unless additional common stock is issued.

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