Final answer:
Cash can be manipulated to inflate reported cash flows; thus, it could be overstated in financial statement fraud to showcase false financial health. Banks may not have the full amount of deposits as cash due to fractional reserve banking. The value of loans in the secondary market is influenced by payment history, changes in interest rates, and borrower's financial health.
Step-by-step explanation:
The question is asking whether cash is an asset that is frequently overstated when committing financial statement fraud. Cash can be manipulated in financial statement fraud, typically to inflate reported cash flows, and thus the correct answer is 'Yes, to inflate reported cash flows' (option c). Companies may overstate cash to make the company look more financially stable and attractive to investors, though directly manipulating cash balances is challenging and risky due to the straightforward nature of reconciling bank accounts.
Money listed under assets on a bank balance sheet may not actually be in the bank because banks operate on a fractional reserve basis. They lend out most of the money deposited with them, keeping only a fraction of the deposits as reserves.
If you are buying loans in the secondary market for a bank or financial services company, you would consider:
- The borrower's payment history: Late payments may reduce the value of the loan.
- Current interest rates: If rates have risen since the loan was issued, the older loan's lower interest rate becomes less attractive, leading to a lower value. Conversely, if rates have fallen, a higher-rate loan is more valuable.
- The borrower's profitability: A firm with high declared profits may imply a reduced risk of default, increasing the loan's value.