Challenges of Global Expansion and Balance of Payment Transaction

Balance of Payment Transaction and Challenges of Global Expansion

The BoP (Balance of Payments) refers to all transactions across a country border. Under the balance of payments transactions, all the payments coming into the country is denoted as a plus sign while the transactions going out of the country is a denoted as a minus sign. When an Australian consumer imports American goods, the transaction enters the American balance of payments as credit or positive sign into the U.S. current account. On the other hand, when Americans import goods and services from another country, the transactions enter the U.S. BoP as a debit or negative sign. (Chan, 2012).

Objective of this paper is explore the concept of the U.S. balance of payments.

U.S. resident purchases a German Mercedes Benz

When an American resident purchases a German Mercedes Benz C230, the transaction is a debit under the CA (Current Account). The current account tracks the good and services flow in and out of the United States. The Mercedes Benz C230 is a German car and when an American resident purchases this car, the transaction will be recorded in the debit under the current account. When U.S. resident purchases foreign goods and services, the transaction increases a capital outflow as being revealed in the table below:

U.S. Current Account

Credit

Debit

An American resident purchases a Mercedes Benz C230

-$35,000

2. U.S. Resident Purchases an American Chevelot Impala

When an American resident purchases the Chevelot Impala, there is no entry to the American BOP statement because the Chevelot Impala is an American car, and the transaction is domestic and no international transaction involves.

3. Foreigner purchases GE (General Electric) Dryer

When a foreigner purchases a GE (General Electric) dryer, the transaction is credit or positive under the U.S. current account in the balance of payment statements. Thus, a foreigner purchasing an American product increases a capital inflow as being revealed in the table below:

U.S. Current Account

Credit

Debit

Foreigner purchases a General Electric dryer

+$100

4. U.S. resident purchases the UK stock

Stocks are assets under the balance of payments transactions. When an American resident purchases the UK stock, the transaction is recorded as a debit under the balance of payment statement in the KA (Capital Account) since the foreign stock's purchase increases the capital outflows as being revealed in the table below:

U.S. Capital Account

Credit

Debit

An American resident purchases the UK stock

-$10,000

5. U.S. Resident has Borrows funds from a British Broker to Purchase the Stock.

When an American resident borrows money from a British broker to purchase stocks, the transaction is a debit under the capital account in the U.S. balance of payment because it increases the capital outflow. (Wolf, 2009).

Part Two

Difference between the U.S. GAAP used by the GAP and IFRS used by Inditex and H&M

GAAP is an accounting principle adopted by the U.S. SEC (security and exchange commission), and used to prepare the standardized financial statements. The standards assist creditors and investors to compare the financial health of companies. However, the Gap, Inditex and H&M (Hennes & Mauritz) use different financial accounting rules to list their financial statements. The H&M lists its stocks in the Stockholm Stock Exchange in Sweden, and Indetex is Spanish company. Both the companies use the IFRS for the financial reporting. On the other hand, the Gap is a U.S. based company that uses the U.S. GAAP for the financial reporting. If an investor decides to compare the H&M, Gap, and Inditex, the difference in their financial statements will be reflected in the way the three companies display their financial statement format. Since the Sweden has become the member of the European Union, the H & M has prepared its financial statements in accordance to the Swedish GAAP that aligns to the IFRS. Moreover, Inditex is a Spanish company that uses the IFRS to present its financial statements. Since the H&M and Inditex adopt the IFRS for their financial statements, and the Gap uses the U.S. GAAP to present their financial statements, the difference in the format in presenting the U.S. GAAP and IFRS financial statements is the difference that investors need to identify. For example, the format of the U.S. GAAP balance sheet is presented in a way that total assets are equal to the total liabilities and shareholder equity. However, the IFRS financial format presents the current and noncurrent assets as well as current and noncurrent liabilities in its balance sheet. The variation in the income statement preparation is another difference between the U.S. GAAP and IFRS. For example, the IFRS income statements does not follow a specific format. However, the U.S. GAAP allows the input of the extraordinary items in the income statements.

The CFO (Chief Financial Officer) of the H & M in the United States will need to abide to U.S. GAAP reporting rules despite being based in Sweden and its financial statements are prepared in accordance to the IFRS financial statements format. Thus, the CFO of the H & M should respect the U.S. GAAP in preparing the financial statements.