Final answer:
The statement is True; the statement of cash flows details why there is a difference between net income and changes in cash. It adjusts for non-cash transactions and changes in working capital. Moreover, the value of loans in the secondary market varies based on borrower reliability and shifts in market interest rates.
Step-by-step explanation:
The statement that the statement of cash flows explains why net income as reported on the income statement does not equal the change in the cash balance is True.
This financial statement provides insights into all cash inflows and outflows within a company during a specific period. It reconciles the net income by adjusting for non-cash transactions, changes in working capital, and cash spent on capital expenditures. This reconciliation helps explain differences between the net income and actual cash flow.
Money listed under assets on a bank balance sheet may not actually be in the bank because these assets can include loans made by the bank and securities purchased, which represent money owed to the bank but are not physically present as cash.
In the secondary market, the value of a loan can fluctuate based on the borrower's creditworthiness and changes in market interest rates. For example, a loan may be worth less if:
- The borrower has been late on a number of loan payments, indicating increased risk.
- Interest rates in the economy have risen since the loan was made, making the fixed-rate loan less attractive compared to new loans with higher rates.
Conversely, the loan may be worth more if:
- The borrower is a firm that has just declared a high level of profits, suggesting improved creditworthiness and lower risk.
- Interest rates have fallen since the loan was made, making the fixed-rate loan more valuable compared to new loans with lower rates.