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_________ records all international transactions that involve creation of assets andliabilities in foreign currencies.

_________ records all international transactions that involve creation of assets and liabilities in foreign currencies.

Looking for the answer to the question below related to Financial Management ?

_________ records all international transactions that involve creation of assets and liabilities in foreign currencies.

 Options:

A. Capital Account
B. Reserve Account
C. Current Accountant
D. Saving Account

The Correct Answer Is:

  • A. Capital Account

The correct answer is option A. Capital Account when it comes to recording all international transactions that involve the creation of assets and liabilities in foreign currencies. The Capital Account is an essential component of a country’s Balance of Payments (BoP) that focuses on capital transactions, including the acquisition and disposal of foreign assets and liabilities.

Let’s explain why this is the correct option and then explore why the other options are not accurate representations of this concept.

Correct Answer: A. Capital Account

The Capital Account is a key component of a country’s Balance of Payments (BoP), alongside the Current Account and the Financial Account. It specifically records international transactions that involve the creation of assets and liabilities in foreign currencies. Here’s why the Capital Account is the correct option:

1. Capital Transactions:

The Capital Account deals with various capital transactions, including:

    • Foreign Direct Investment (FDI): When individuals, businesses, or governments in one country acquire or establish businesses or assets in foreign countries, it involves the creation of assets and liabilities in foreign currencies. The Capital Account records these transactions.
    • Portfolio Investment: Investments in foreign financial assets, such as stocks and bonds, also result in the creation of assets and liabilities in foreign currencies. The Capital Account captures these financial flows.
    • Changes in Reserves: Movements in a country’s foreign exchange reserves, which include holdings of foreign currencies and assets like gold and SDRs (Special Drawing Rights), are recorded in the Capital Account.

2. Creation of Assets and Liabilities:

Many capital transactions involve the creation of assets and liabilities denominated in foreign currencies. For example, when a foreign investor acquires shares in a domestic company, they hold an asset (equity) denominated in the domestic currency, while the domestic company may have a liability (ownership stake) in foreign currency terms. These assets and liabilities are recorded in the Capital Account.

3. Balance of Payments Completeness:

The Capital Account, along with the Current Account and the Financial Account, ensures the completeness of the Balance of Payments. Together, these three accounts account for all economic transactions between a country and the rest of the world, ensuring that credits equal debits in the BoP.

Now, let’s explore why the other options are not correct:

B. Reserve Account:

The term “Reserve Account” is not a recognized component of the Balance of Payments. Instead, changes in a country’s foreign exchange reserves are typically recorded in the Capital Account. Reserves represent assets held by a country’s central bank and are part of the Capital Account.

C. Current Accountant:

“Current Accountant” appears to be a typographical error or a term unrelated to the Balance of Payments. The correct term is “Current Account,” which records trade in goods and services, income from investments, and unilateral transfers.

D. Saving Account:

A “Saving Account” is a financial account held by individuals or entities at a bank or financial institution to save money and earn interest. It is not a component of the Balance of Payments and does not relate to international transactions involving foreign currencies.

In conclusion, option A (Capital Account) is the correct term to describe the component of the Balance of Payments that records all international transactions involving the creation of assets and liabilities in foreign currencies.

The Capital Account is crucial for tracking capital movements, foreign investments, and changes in foreign exchange reserves, providing insights into a country’s financial interactions with the rest of the world. Understanding the Capital Account is essential for policymakers, economists, and businesses to assess a nation’s capital flows and their impact on its economy.

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