Question

If a company's balance sheet shows $400 in cash, $100 in inventory, and $200 in current liabilities, its cash ratio is ______.

A) 0.5
B) 1
C) 2
D) 4

Answer 1

The question involves setting up a T-account balance sheet for a bank with given assets and liabilities, and calculating the bank's net worth, which is found to be $220.

Step-by-step explanation:

The subject of this question is the calculation of a bank's cash ratio and the creation of a balance sheet with T-accounts. When assessing a bank's liquidity, the cash ratio is particularly important.

Assets:
Cash (reserves): $50
Government Bonds: $70
Loans: $500
Total Assets: $620

Liabilities:
Deposits: $400
Total Liabilities: $400

To find the bank's net worth, we subtract the total liabilities from the total assets:

Net Worth = Total Assets - Total Liabilities
Net Worth = $620 - $400

The bank's net worth is therefore $220.