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Q7I.

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Essentials Of Investments
Found in: Page 23
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

For each transaction, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction?

a. Toyota takes out a bank loan to finance the construction of a new factory.

b. Toyota pays off its loan.

c. Toyota uses $10 million of cash on hand to purchase additional inventory of spare auto parts.

a. Real asset – Factory, Financial Asset – Liquid such as loan for construction.

b. Financial asset destroyed while real asset continued to exist

c. The cash on hand is a financial asset

See the step by step solution

Step by Step Solution

Definition

Land, buildings usually owned by or leased to companies for carrying out operations are called real assets while the liquid asset such as stock which can be easily converted to cash is called as financial asset.

Solution for ‘a’

a. Since ‘real asset’ such as land, building etc. are required by companies for carrying out operations, the constructed factory is the real asset. On the other hand, financial assets are liquid assets which can be easily converted into cash, therefore the loan to finance the construction is the financial asset.

Solution for ‘b’

b. On repaying the loan by Toyota, the financial asset is destroyed but the real asset continued to exist.

Solution for ‘c’

c. The cash on hand is a financial asset which is used to purchase the real asset i.e. additional inventory of spare auto parts.

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