Final answer:
Depreciation changes in the Statement of Cash Flows because it is a non-cash expense that is added back to net income to reflect cash transactions accurately. Bank balance sheets include loans and other financial assets, explaining why all money listed as assets might not be present as cash in the bank. The value of loans in the secondary market is affected by the borrower's payment history, changes in economy-wide interest rates, and the borrower's profitability.
Step-by-step explanation:
Why Depreciation Changes in the Statement of Cash Flow
Depreciation is a non-cash expense that reduces the value of an asset over time due to wear and tear or obsolescence. In the Statement of Cash Flows, depreciation is added back to the net income in the operating activities section because it does not result in an outflow of cash. Companies use various methods to account for depreciation, which can lead to changes in the amount reported. The purpose of adjusting for depreciation in the cash flow statement is to present a clearer view of the company’s cash transactions during the period.
Understanding a Bank Balance Sheet
The money listed under assets on a bank balance sheet may not be physically in the bank because banks operate on a fractional reserve system. They loan out a significant portion of the deposits they receive, keeping only a fraction as reserves. This results in an asset structure where reserves are just a small piece, with the rest being in loans receivable, investments, and other financial assets. Moreover, banks sell financial assets to manage liquidity and credit risks and to comply with regulatory capital requirements
Regarding purchasing loans in the secondary market, variables such as borrower reliability, changes in the economic interest rates, and the borrower’s financial condition alter the value of loans
The dynamic nature of financial markets and assets contribute to economic cycles of boom and bust reflecting changes in economic conditions, market sentiment, and cash flows.