Which Statement Best Describes Compensating Balances

question 43

Multiple Choice

Which statement best describes compensating balances?

• A)Compensating balance requirements apply only to businesses, not to individuals.
• B)Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
• C)If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.
• D)Banks are prohibited from earning interest on the compensating balances they hold.

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Definitions:

Non-Controlling Interest

A portion of equity ownership in a subsidiary not owned by the parent company, which is reflected in the balance sheet.

Consolidated Financial Statements

Financial statements that present the assets, liabilities, equity, income, and expenses of a parent company and its subsidiaries as a single entity.

Estimated Useful Life

The period over which a depreciable asset is expected to be used by an organization, influencing the depreciation method applied.

Equipment Account

An account on a company's balance sheet that reports the value of the company's ownership in equipment, adjusted for depreciation.