Question

The valuation of short-term marketable securities on the balance sheet is likely to be for an amount that is approximately equal to the cost of these investments because?

1) the market value of short-term marketable securities does not fluctuate from cost.
2) the high quality and close maturity date of the securities cause their market values to be relatively stable.
3) generally accepted accounting principles require that short-term marketable securities be reported at cost.
4) the question statement is false; the valuation of short-term marketable securities on the balance sheet is not likely to be for an amount that is approximately equal to the cost of these investments.

Answer 1

The valuation of short-term marketable securities is approximately at cost because their values are relatively stable due to their high quality and close maturity. Money may not be present in the bank due to the practice of fractional reserve banking. Loan valuations in the secondary market fluctuate based on the borrower's creditworthiness, changes in interest rates, and the borrower's profitability.

Step-by-step explanation:

The valuation of short-term marketable securities on the balance sheet is likely to be for an amount that is approximately equal to the cost of these investments primarily because the high quality and close maturity date of the securities cause their market values to be relatively stable.

This is in line with Generally Accepted Accounting Principles (GAAP), which typically require such securities to be reported at fair value, which often approximates cost due to the short-term nature of these investments. Market value and cost might diverge significantly in cases of longer-term investments where market conditions can change more drastically.

To address part 5 of the question, the money listed under assets on a bank balance sheet may not actually be in the bank because banks operate under a fractional reserve system where they lend out most of the money deposited with them. This can lead to an asset-liability time mismatch, where the liabilities (customer deposits) are more liquid than the assets (loans given out).

Regarding part 6, secondary market valuations of loans are impacted by:

• The borrower's creditworthiness: If the borrower has been late on loan payments, the loan is riskier and would be purchased for less.
• Changes in interest rates: If the general interest rates have risen since the loan was made, the loan is less attractive since new loans reflect higher interest rates, and it would sell for less. Conversely, if rates have fallen, the loan pays a comparatively higher interest rate and would be purchased for more.
• Borrower's profitability: If the borrower is a firm that has just declared high profits, their ability to repay the loan is more assured, increasing the loan's value.