Extra Learning Li, Jialong

Contents Banking System Financial Policy Financial Control International Settlement Financial Markets Official Record of International Business

Banking System 1. Functions of Central Bank (the Bank of England) (1A) 1) Central bank 2) Bankers’ bank 3) Lender of last resort 4) Market intervention 5) International role 6) Domestic supervisory responsibilities

Banking System 2. The Federal Reserve System (U.S.) The three benefits of member-banks in the Federal Reserve System (1B) 1) Check clearance 2) Electronic Fund Transfer 3) Borrowing Ability

Financial Policy 1. FISCAL POLICY Government revenue ---- Tax and tariff (income, change tax’s rate) Government expenditure ---- Government Budget (budget deficit) Government borrowing ---- Government Bonds

Financial Policy 2. MONETARY POLICY (1) Discount Rate (Interest Rate) (2C): The equation or formula: Simple interest: I = P x R x T (Principal amount, interest rate and time usually year) Less than a year: I = P x R x Days/360 Compound interest: FT = P (1+R)T ( F—the future total repayment value of the loan) (2) Reserve Rate (2A) : the multiplier theory (Total $ = Initial $ x 1/Fractional Reserve Rate or Requirement) (3) Money Creation (Direct Money Supply) (2B)

Monetary Aggregates (The Three Ms) M1M2M3 Main ItemsCurrency, Coin Demand deposit (Checking account) Besides M1 Savings and small time deposits, MMDA, MMMF Short-term money market assets Besides M1 and M2 Financial assets and instruments Jumbo certificates of deposit Main PurposeTransaction or Medium of exchange Mainly saving Secondly transaction Investment Cashing AbilityImmediatelyShort-termLong-term

Review Questions How do the government budget deficit, and the adjustment of discount rate, reserve rate and money supply influence respectively the inflation, unemployment and general economic activity?

Financial Control Financial Statements Income Statement Balance Sheet Cash Flow Statement Statement of Changes in Equity The Bookkeeping Bank Deposits

Summary of Financial Statements ItemsWhat to tell? Time description Metaphor Investment ways Balance sheet Lists of assets, liabilities, and owner’s equity Specific date (end of a month or a year) A snapshot A pool with some water Entrepreneur Income statement Summary of the revenues and expenses Specific period (a month or a year) A moving picture Change of water amount in the pool Shareholder or stockholder Statement of cash flows State of inflow and outflow of cash Specific period (a month or a year) Intake and outlet of the water Loaner or lender Statement of owner’s equity Summary of changes in owner’s equity Specific period (a month or a year) The money get or made from the water Opportunistic stockholder

EXAMPLE OF CHART OF ACCOUNTS (Accounts List)

Chart of Accounts

The Classification of Ledge Accounts

Double Entry Principle Assets ( 资产 ), Cost ( 成本 ) Debit ( ＋ ) Cash Credit ( － ) Beginning: ( ＋ ) Total: ( － ) Total: 600 End: 500

Double Entry Principle Liabilities & Owners Equity ( 负债与所有者权益 ) Debit ( － ) Accounts Payable Credit ( ＋ ) Beginning: Total: Total: 3000 End: 2500

Double Entry Principle Revenue ( 收入 ) Debit ( － ) Sales Credit ( ＋ ) Total: 500Total: 2000

Double Entry Principle Expenses ( 费用 ) Debit ( ＋ ) Administration Credit ( － ) Total: 2000Total: 500

Double Entry Principle

Judgement of Debit & Credit Assets Costs Expenses Debit ( ＋ ) Credit ( － ) CASH Liabilities Owners Equity Revenue Credit ( ＋ ) Debit ( － )

Double Entry Cases

Ledger Entries & Proper Journal

Trial Balance

International Settlement I. The Means Of Payment Mainly: cash and bills A. Cash Or Currency 1. Three kinds of currencies for payments 1) Home currency 2) The currency of the other country concerned 3) Foreign currencies: hard currency, soft currency 2. Main foreign currencies used in our foreign trade

International Settlement I. The Means Of Payment Mainly: cash and bills B. Bills 1. Bill of Exchange (or Draft) 1) Variety: a. Commercial bill (draft) and Banker’s Bill (Draft) b. Clean Bill and Documentary Bill c. Sight Bill and Time Bill Commercial Acceptance Bill and Banker’s Acceptance Bill 2) Circulation of draft a. To draw (issue) b. Presentation c. Acceptance d. Payment e. Endorsement f. Dishonor: protest

Sample Draft

International Settlement I. The Means Of Payment Mainly: cash and bills B. Bills 2. Promissory note 1) General promissory note 2) Banker’s promissory note (cashier’s order) 3. Cheque (check) 1) Guaranteed check 2) Crossed check

International Settlement II. Payment Ways A. Remittance 1. Four parties concerned: Remitter (Payer), Payee (Beneficiary), Remitting Bank, Paying Bank 2. Two relationship: Contractual relation between Remitter and Payer, Agent relation between Remitting Bank and Paying Bank 3. Variety: 1) M/T ---- Mail Transfer 2) T/T ---- Telegraphic Transfer 3) D/D ---- Demand draft (or clear payment, or simple payment)

International Settlement II. Payment Ways B. Collection 1. Variety: 1) Draft-collection (clean collection): a. at sight; b. after sight 2) Documentary collection a. D/P ---- Documents against payment a) D/P at sight vs. CAD ---- Cash against documents b) D/P after sight & T/R ---- Trust Receipt D/P, T/R b. D/A ---- Document against Acceptance 2. Collection Procedure 3. Four parties concerned and four relations 1) Principal 2) Remitting Bank 3) Collecting Bank 4) Drawee (Payer)

Procedure Of A Documentary Collection

International Settlement II. Payment Ways C. L/C ---- Letter of Credit 1. The six concerned parties and their relations 1) Applicant or opener 2) Opening Bank or Issuing Bank 3) Advising Bank or Notifying Bank 4) Beneficiary 5) Negotiating Bank 6) Paying bank, Drawee Bank 2. Payment procedure

Procedure Of Settlement For Letter Of Credit

International Settlement C. L/C ---- Letter of Credit 3. Variety Revocable L/C and Irrevocable L/C Confirmed L/C and Unconfirmed L/C Sight L/C and Usance L/C T/T Reimbursement Clause Banker’s Acceptance L/C vs. Deferred Payment L/C Usance Credit Payable at sight (Buyer’s Usance L/C) Negotiation L/C and Sight Payment L/C Transferable L/C and Non-transferable L/C Revolving L/C Reciprocal L/C Back to Back L/C Anticipatory L/C or Red Clause L/C Documentary L/C and Standby L/C Vs. L/G ---- Letter of Guarantee, or Bank Guarantee

International Settlement Question: Why will the seller take more risks by using COLLECTION than by using LETTER OF CREDIT?

Financial Markets Currency Exchange

Official Record of International Business Balance of Payments

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