Question

Net Income:

a. Decreases equity.
b. Represents the amount of assets owners put into a business.
c. Equals assets minus liabilities.
d. Occurs when revenues exceed expenses.
e. Represents creditor claims against assets.

Answer 1

A bank's balance sheet includes assets, liabilities, and net worth, which is assets minus liabilities. A T-account is used to display this balance, where total assets must equal liabilities plus net worth to indicate a healthy bank.

Step-by-step explanation:

When assessing a bank's financial health, we look at its balance sheet, which lists assets and liabilities. Net worth, also known as bank capital, is a crucial component of the balance sheet, calculated as the difference between total assets and total liabilities. Notably, a bank's assets might include cash reserves, loans made to customers, and investments such as U.S. Treasury bonds, while its liabilities include customer deposits and any other debts.

In a T-account, a tool used to visualize a bank's financial statements, the left side represents assets and the right side represents liabilities plus net worth. For a bank to have a balanced T-account, its assets must equal its liabilities plus net worth. Therefore, a positive net worth indicates a healthy bank, whereas a negative net worth could indicate bankruptcy.