Final answer:
A balance sheet identity shows total assets equal to the sum of liabilities and equity. Liquidity is important for meeting short-term obligations, while financial leverage refers to increasing potential returns using borrowed money. Book value differs from market value, which represents the trade value in the market.
Step-by-step explanation:
The balance sheet identity states that a company's total assets are equal to the sum of its liabilities and shareholders' equity. This identity emphasizes that what the firm owns (assets) is purchased by either what it owes (liabilities) or by what the owners invest (equity).
Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss of value. It is important because it allows individuals and businesses to meet their short-term obligations. High liquidity is essential for financial stability and operations.
Financial leverage is the use of borrowed money to amplify potential returns of an investment. However, it also increases the potential risk if the investments do not perform well.
The difference between book value and market value is that book value is the value of an asset according to its balance sheet account balance, while market value is the value at which an asset can be bought or sold in the market.
A bank can end up with negative net worth if its liabilities exceed its assets. This condition can potentially lead to bank failure. Banks face an asset-liability time mismatch because their liabilities, such as depositors' savings, can often be withdrawn in the short term, while their assets, such as loans, are repaid over a longer term.