Final answer:
An item cannot be classified as an asset if it does not meet all necessary conditions: ownership, control, potential future economic benefit, and measurable value. The balance sheet lists assets and liabilities, and money may not be present due to the inherent asset-liability mismatches in banking. The value of loans in the secondary market is influenced by borrower reliability, changes in profit levels, and fluctuating interest rates.
Step-by-step explanation:
To determine whether an item can be classified as an asset, it must meet specific criteria: It must be an item of value that the firm or individual owns and has control over, it should be expected to provide future economic benefits, and its value must be measurable. If any of these conditions are missing, then the item cannot be considered an asset.
For instance, commodity money like gold coins or goods used for barter could be considered assets because they have intrinsic value and can be traded or sold for other items of value. Tangible assets, like a house, land, or art, can also be considered assets as they are owned and can potentially be sold at a higher price than they were purchased for, providing an economic benefit in the future.
The balance sheet of a bank is an accounting tool that lists both assets and liabilities, showcasing the bank's financial position at a given point in time. The money listed under assets may not actually be in the bank because of the asset-liability time mismatch. Banks lend out most of the deposited funds to borrowers, expecting that not all depositors will withdraw their funds at the same time.
Regarding the secondary market for loans, the price one might be willing to pay for a loan depends on various factors. If the borrower has been late on several loan payments, the risk of default increases, leading to a potential decrease in the loan's value. If the economy's interest rates have risen since the loan was made, new loans would offer a better return than the existing loan, thus decreasing its value.
Conversely, if the borrower is a firm that has just reported high profits, the likelihood of timely loan payments increases, bolstering the value of the loan. Likewise, if overall interest rates have fallen, an existing loan with a higher rate becomes more valuable, as it offers a better return compared to new loans at current lower rates.