Question

Down payments received reduce the total of which of the following entities?

1) Payables
2) Bank balance
3) Receivables
4) Inventory

Answer 1

Down payments reduce the total receivables for a company. Bank balance sheets may include assets that are not physical cash but are easily liquidated. The value of loans in the secondary market varies depending on the risk of default, interest rate changes, and the borrower's profitability.

Step-by-step explanation:

Down payments received by a business typically reduce the total of receivables (3). Accounts receivable represent the money owed to a company by its customers for goods or services delivered on credit. The down payment is a portion of the purchase price that the buyer pays upfront, and once it is received, it decreases the outstanding amount that the buyer owes, thus reducing the seller's receivables.

Moving on to the role of banks and understanding their balance sheets:

Assets on a bank balance sheet may not actually be in the bank because they include loans made to customers, investments in bonds, and reserves held at the Federal Reserve Bank, in addition to the actual cash in the vault. This misconception is because some of the assets can be quickly converted into cash (liquidated) but are not physical cash on hand at the bank.

Factors affecting the valuation of loans in the secondary market:

1. If a borrower has been late on a number of loan payments, the risk of default increases, making the loan less valuable and leading a potential buyer to pay less for it.
2. When interest rates in the economy rise after a loan has been made, the loan's fixed interest rate might become lower than current market rates, which could decrease the loan's attractiveness, and therefore the buyer might pay less for this loan.
3. If a borrower, which is a firm, has declared a high level of profits, it becomes more creditworthy, increasing the value of the loan. A buyer might be willing to pay more for this loan as it reduces the risk of default.
4. Conversely, if interest rates in the economy have fallen since the bank made the loan, the existing loan's higher interest rate relative to the market can make it more valuable, and a buyer might pay more for it.