Final answer:
Paying the principal on a line of credit is recorded as a cash outflow under the Financing Activities section of a statement of cash flows, making the initial statement false. On the balance sheet, not all bank assets are in liquid form because banks use deposits for loans and other investments, operating as financial intermediaries. The value of loans in the secondary market changes based on borrower reliability and shifts in interest rates.
Step-by-step explanation:
Paying the principal on a line of credit would be listed as a cash outflow in the Financing Activities section on a statement of cash flows. Therefore, the statement is False. On the statement of cash flows, financing activities include transactions involving long-term liabilities, owner's equity, and changes to short-term borrowings. When principal on a line of credit is repaid, it is considered a reduction in the company's liabilities, which means the cash used to pay the principal would be recorded as an outflow of cash under the section of financing activities. The statement of cash flows is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company, helping to assess its liquidity, solvency, and financial flexibility.
Regarding balance sheets and secondary markets:
- Money listed under assets on a bank balance sheet may not actually be in the bank because banks use a portion of deposits to provide loans and make investments. This practice reflects the role of banks as financial intermediaries, where they facilitate the use of money for transactions and create financial capital by lending out deposits while maintaining sufficient reserves to meet withdrawal demands.
- The value of loans in the secondary market can fluctuate based on several factors:
- If a borrower has been late on loan payments, the perceived risk of the loan increases, which can lead to a decrease in its value or price a buyer would be willing to pay.
- If interest rates have risen since the loan was made, a loan with a lower interest rate becomes less attractive, leading to a lower price.
- For a borrower firm that has just declared high profits, their increased ability to repay the loan can increase the value of the loan, making buyers willing to pay more.
- When interest rates have fallen since the loan was made, existing loans with higher rates become more valuable, and buyers may be willing to pay more for such loans.