Question

The statement of cash flows for Baldwin Company shows what happens in the Cash account during the year. It can be seen as a summary of the sources and uses of cash (sources of cash are added, uses of cash are subtracted). ... It is a use of cash, and will be shown in the financing section as a subtraction.

Answer 1

The statement of cash flows reports the changes in a company's cash balance, with dividends paid shown as a subtracted use of cash in financing activities. A bank's balance sheet lists assets and liabilities, with the bank's net worth being the difference between the two.

Step-by-step explanation:

The statement of cash flows is a financial report that shows the changes in a company's cash balance over a particular period. It outlines the sources and uses of cash, categorizing cash flow into activities such as operating, investing, and financing. When a company pays a dividend, it represents a use of cash and is recorded in the financing section as a subtraction.

A bank's balance sheet, on the other hand, is an accounting tool that itemizes a bank's assets and liabilities. Assets include cash held in vaults, loans made to customers, and bonds owned. Liabilities are principally the deposits held by the bank. The difference between assets and liabilities is the bank's net worth, also referred to as bank capital. Understanding both the statement of cash flows and the balance sheet is essential for analyzing a bank's financial stability and its role as a financial intermediary in the economy.

Answer 2

A bank's balance sheet lists its assets, liabilities, and net worth, with banks serving as intermediaries for economic transactions. Banks manage financial risks through diversification and reserve holdings, and they are integral in money creation within the economy.

Step-by-step explanation:

The Role of Banks and Their Balance Sheets

A bank's balance sheet is a financial statement that details the bank's assets, liabilities, and net worth, also known as bank capital. Assets include cash in vaults, reserves at the Federal Reserve, loans made to customers, and bonds.

Liabilities primarily consist of customer deposits. The bank earns revenue through the difference in interest rates between the money it lends and the interest it pays on deposits. Net worth is determined by subtracting the bank's liabilities from its assets.

Banks are crucial as financial intermediaries in the economy, facilitating transactions and offering services such as accounts for deposits and withdrawals, payment processing, and loans. They manage risks such as loan defaults and interest rate changes which can affect their asset values.

To mitigate these risks, banks may diversify loans, hold a substantial amount of reserves and bonds, or maintain a certain reserve ratio to ensure liquidity.

The creation of money in the economy is partly facilitated by the banking process, where loans issued become deposits and can be loaned out again, multiplying the amount of money in circulation. However, banks must manage the risk of negative net worth, where the asset value decline exceeds their capital, potentially leading to bank insolvency.