Answer to Question #165343 in Finance for Bishem

Question

(a)Explain the five (5) main solutions to the challenges of the barter system.

(b)Briefly explain the difference between an asset and a liability on a bank’s balance sheet. How does net worth relate to each? Why must a balance sheet always balance?

(c)List and briefly explain the major assets and claims on a commercial bank’s balance sheet.

Answer 1

(a)

(i) Money as medium exchange solves problem of lack of double coincidence.

(ii) Money as measure of value solves problem of absence of common measure.

(iii) Money as store of value solves problem of storing wealth.

(iv) Money as standard of deferred payment solves difficulty of borrowing and lending.

(v) When there was no money, it was difficult to give common unit of value to goods or commodities, but when money was evolved, it gave a common unit of value to every goods and services.

(b) The assets are items that the bank owns. This includes loans, securities, and reserves. Liabilities are items that the bank owes to someone else, including deposits and bank borrowing from other institutions.

The net worth is the asset value minus how much is owed (the liability). A bank's balance sheet operates in much the same way. A bank's net worth is also referred to as bank capital.The net worth, or equity, of the bank is the total assets minus total liabilities. Net worth is included on the liabilities side to have the T account balance to zero.

c)ASSETS

Liquidity and Profitability:

In order to be able to meet demands for cash as and when they are made a bank must not only arrange to have sufficient cash available but it must also distribute its assets in such a way that some of them can be readily converted into cash.

Cash-in-Hand

It represents a bank’s holding of notes and coins to meet the immediate requirements of its customers.

Cash at the Central Bank

It represents the commercial banks’ accounts with the central bank.

CLAIMS

Share Capital

Share capital is the money a company raises by issuing common or preferred stock.

Reserve Fund

A reserve fund is a savings account or other highly liquid asset that a person or company has set aside to cover any potential costs or financial obligations, especially those that occur unexpectedly.

Borrowings

It presents a maximum cap on how much asset-based debt a business can obtain.