Question

Below is the company's cash t-account. The $5,200 amount could represent which of the following?

1) $5,200 in cash
2) $5,200 in accounts payable
3) $5,200 in accounts receivable
4) $5,200 in inventory

Answer 1

The $5,200 in the cash T-account likely represents $5,200 in cash. M1 and M2 classify the liquidity of different forms of money; the provided items fit into M1 or M2 as described. The bank's net worth in the example is calculated as $220 by subtracting its liabilities from its total assets.

Step-by-step explanation:

The amounts in a company's cash T-account can represent various types of transactions related to cash, but not items such as accounts payable, accounts receivable, or inventory. A cash T-account typically reflects the amount of cash that a business has on hand or in a bank account. Thus, the $5,200 on the cash T-account is most plausibly item (1) $5,200 in cash.

M1 and M2 Money Supply Components

The money supply is categorized into M1 and M2. Here's how the given items fit into these categories:

1. Line of credit is not included in M1 or M2 as it is a form of potential borrowing, not actual money.
2. Traveler's checks that have not been used yet are part of M1 since they are considered as money that can be readily used for transactions.
3. Coins in your pocket are considered part of M1 because they are currency in circulation.
4. Checking accounts are included in M1 due to their liquidity or ease of access for transactions.
5. Money market accounts are included in M2 since they are not as liquid as checking accounts but can still be easily converted into cash.

Bank T-Account Example

For the bank scenario provided, a T-account can be created:

• Assets:
  Including reserves ($50), government bonds ($70), and loans made ($500) Total assets = $620.
• Liabilities:
  The bank has deposits from customers amounting to $400.

To calculate the bank's net worth: Net Worth = Assets - Liabilities, which equals to $620 - $400 = $220.