Question

Which of the following would be deducted from the balance sheet book on a bank reconciliation?

1) Outstanding checks
2) Deposit in transit
3) NSF check
4) Collection of note by bank
5) All of the above

Answer 1

Outstanding checks and NSF checks would be deducted from the balance per bank on a bank reconciliation. Items like cash, traveler's checks, and checking account balances are part of M1; money market account balances are in M2. A bank's balance sheet might not show actual cash due to loans made under fractional reserve banking.

Thus, the correct option is 1.

Step-by-step explanation:

Bank Reconciliation and Money Supply

Regarding bank reconciliation, the items that would typically be deducted from the balance per bank are outstanding checks and NSF checks (non-sufficient funds checks). An outstanding check is a check that has been written by a company but has not yet been cleared by the bank, hence reducing the bank's cash balance. An NSF check is a check that has been returned due to insufficient funds in the issuer's account and needs to be removed from the recipient's bank balance upon reconciliation. Deposits in transit are not deducted but added to the balance per bank as they represent funds that have been received and recorded by the company but not yet processed by the bank. The collection of a note by a bank would actually increase the bank balance since it's money collected on behalf of the company.

Concerning the list of items related to M1 and M2 money supply categories:

1. Your $5,000 line of credit on your Bank of America card is neither in M1 nor M2 as it represents potential borrowing, not actual money.
2. $50 dollars' worth of traveler's checks you have not used yet is considered part of M1, as they are a form of checkable deposit.
3. $1 in quarters in your pocket is part of M1 because it's physical currency.
4. $1200 in your checking account is part of M1, as it is a checkable deposit and hence can be used for transactions directly.
5. $2000 you have in a money market account falls under M2 as it includes all of M1 plus savings deposits, money market mutual funds, and other near monies.

The balance sheet may not reflect actual cash in the bank due to the principle of fractional reserve banking, where banks lend out a portion of their deposits. As for the loan buying scenario, various factors affect the value of a loan on the secondary market. A loan to a borrower who has been late on payments is worth less due to higher risk, while loans made before a rise in interest rates are less valuable as they have lower returns compared to the current market. Conversely, loans to highly profitable firms or made before interest rates fell could be worth more.