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Mar 28, 2024 · Off-balance sheet financing (OBSF) is an accounting strategy that enables companies to keep certain assets and liabilities off their balance sheets. This practice helps maintain lower debt-to-equity ratios, attract investors, and secure favorable financing rates.
Jun 13, 2024 · A favorable balance of trade was an essential way of financing a country's purchase of foreign commodities and maintaining its export trade, according to the economic theory of mercantilism, which reigned in Europe from the 16th through the 18th centuries.
- Overview
- Lesson Summary
- The current account (CA) and capital and financial account (CFA) records transfers and purchases between countries
- Trade deficits and surpluses in the balance of payments
- Key equation: The balance of payments
- Common misperceptions
- Questions for review
In this lesson summary review and remind yourself of the key terms and calculations related to the balance of payments. Topics include the current account (CA) and the capital and financial account (CFA, sometimes called simply the capital account), and how the movement of goods, services, assets, and remittances appear in the BOP.
Lesson Summary
The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments (“BOP”). When funds leave a country, a deduction is made. For example, when a country exports 20 shiny red convertibles to another country, a credit is made in the balance of payments.
Key terms
The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments (“BOP”). When funds leave a country, a deduction is made. For example, when a country exports 20 shiny red convertibles to another country, a credit is made in the balance of payments.
The balance of payments is a system of recording transactions that happen between countries. Any movement of money into, or out of, a country has to be accounted for. We can use this flowchart to figure out where a transaction should go:
There are two categories in the BOP: the current account (CA) and the capital and financial account (CFA). If a transaction creates a liability, like selling a bond to another country, that gets counted in the capital and financial account. But if a transaction doesn’t create a liability (like the fancy red cars), the transaction gets counted in the current account.
Anything that occurs in one account is offset by the opposite happening in the other account. For example, if the current account increases by $100 , the capital and financial account must decrease by $100 . The fact that an entry in the current account is offset by an entry in the capital and financial account creates the mathematical identity:
CA=−CFA
A trade surplus exists if a country exports more than it imports. A trade deficit exists if a country exports less than it imports. To see how each of these situations impacts the balance of payments, let’s start with a simplified example of Panem’s balance sheet.
Amount (in billions) & Category+$200 Exports−$200― Imports$0 Current account balance+$0 Financial assets received from other countries−$0― Financial assets sent to other countries$0 Capital and Financial account balanceCA+FA=$0+$0=$0
What happens if Panem starts to run a trade deficit? Suppose Panem’s imports increase to $230 :
Amount (in billions) & Category+$200 Exports−$230― Imports−$30 CA balance
But how will Panem pay for this trade deficit? It will have to borrow money from other countries. Whenever an economy experiences a trade deficit, this will result in foreign financial assets entering the country. For example, Panem sells a bond to the nation of Hamsterville for $30 . Panem paid for the trade deficit, but it needs to account for this new obligation in its balance of payments. The $30 coming into the country is counted in the capital and financial account, and once again CA+CFA=0 :
Amount (in billions) & Category+$200 Exports−$230― Imports−$30 CA balance+$30 Financial inflows$0― Financial outflows+$30 CFA balanceCA+FA=−$30+$30=$0
The current account (CA) and the capital and financial account (CFA) must sum to zero.
CA+CFA=0
Note that this equation can be rearranged to read
CA=−CFA
•Students new to the concept of balance of payments sometimes get confused about the “money” that is moving around in the capital and financial account. Changes in the capital and financial account impact the market for loanable funds, not the money market. When a country sends its financial assets to another country, it is really sending its savings. Recall that the supply of loanable funds is the sum of private savings, public savings, and net capital inflows. The capital and financial account tells you how much net capital inflow (or outflow) there is.
•The capital that is being sent to and from countries in the capital and financial account is financial capital, not physical capital. Whenever you use the word capital, it’s good practice to specify the kind of capital you are talking about. If you are talking about the stock of physical equipment that can lead to economic growth, say “physical capital.” If you are talking about the flow of financial assets between countries, say “financial capital.”
1.The nation of Panem ran a budget deficit. As a result, it increased borrowing in the market for loanable funds.
a. Show the effect of an increase in government borrowing on interest rate using the market for loanable funds.
b. Assume that a country’s current account and financial account were both balanced before the increase in borrowing. What will happen to the current account (CA) and financial account (CFA) as a result of the change in the interest rate you indicated in part A? Explain.
[I've tried my best. Can I check my work?]
May 26, 2021 · Off-balance sheet financing means a company does not include a liability on its balance sheet. It impacts a company’s level of debt and liability.
- Kristina Zucchi
Apr 26, 2021 · Financing activity in a cash flow statement focuses on how a firm raises capital and pays it back to investors through capital markets.
According to the economic theory of mercantilism, which prevailed in Europe from the 16th to the 18th century, a favourable balance of trade was a necessary means of financing a country’s purchase of foreign goods and maintaining its export trade.
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Jul 15, 2022 · Off-balance sheet financing is an accounting strategy that companies use to move certain assets, liabilities, or transactions away from their balance sheets.
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