CHAPTER 1: INVESTMENTS: BACKGROUND AND ISSUES
a. Cash is a financial asset because it is the liability of the federal government.
The cash does not directly add to the productive capacity of the
Society as a whole is worse off, since taxpayers, as a group will make up for
The bank loan is a financial liability for Lanni.
(Lanni's IOU is the bank's
The cash Lanni receives is a financial asset.
financial asset created is Lanni's promissory note (that is, Lanni’s IOU to the
Lanni transfers financial assets (cash) to the software developers.
Lanni gets a real asset, the completed software.
No financial assets are
created or destroyed; cash is simply transferred from one party to another.
Lanni gives the real asset (the software) to Microsoft in exchange for a
financial asset, 1,500 shares of stock in Microsoft.
If Microsoft issues new
shares in order to pay Lanni, then this would represent the creation of new
Lanni exchanges one financial asset (1,500 shares of stock) for another
Lanni gives a financial asset ($50,000 cash) to the bank and gets
back another financial asset (its IOU).
The loan is "destroyed" in the transaction,
since it is retired when paid off and no longer exists.
Ratio of real to total assets = $30,000/$100,000 = 0.30