Financial Statements of Banks Chapter 5

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Questions and Answers

Why do banks strive to keep their cash balance low?

Because cash balance is not a liquid asset

Because cash balance earn little or no interest income (correct)

Because cash balance earn high interest income

Because cash balance is not a secure asset

What is the primary purpose of holding Investment Securities?

To provide short-term profits from price movements

To generate interest income (correct)

To meet demands for cash

To support loan requests

What is the second line of defense to meet demands for cash?

Cash balance

Secondary reserves (correct)

Loan accounts

Investment Securities

What type of securities are used to provide short-term profits from price movements?

Trading Account Assets Signup and view all the answers

What is the primary source of funds for a bank's temporary loans to other depository institutions?

Reserves on deposit with the Federal Reserve Bank Signup and view all the answers

What is the largest asset item on a bank's balance sheet?

Loan accounts Signup and view all the answers

What is the purpose of holding Commercial Paper?

To meet demands for cash Signup and view all the answers

How are 'held-to-maturity' securities recorded on a bank's books?

At their original cost or market value, whichever is lower Signup and view all the answers

What do financial statements of banks and their principal competitors reflect?

The services each financial firm chooses to offer and the overall size of each financial-service organization Signup and view all the answers

What is the purpose of financial statements?

To show where a financial firm has been, is, and is headed in the future Signup and view all the answers

What are the two main financial statements that managers, customers, and regulatory authorities rely upon?

Balance sheet and income statement Signup and view all the answers

What does the Report of Condition show?

The amount and composition of funds sources and how much has been allocated to loans, securities, and other funds uses Signup and view all the answers

What does the Report of Income show?

How much it has cost to acquire funds and to generate revenues from the uses the financial firm has made of those funds Signup and view all the answers

What is the net earnings in the Report of Income?

The total revenues minus total costs Signup and view all the answers

What happens to some of the net earnings in the Report of Income?

Some of it is reinvested in the financial firm for future growth and some of it flows to stockholders as dividends Signup and view all the answers

What is the purpose of financial statements according to the text?

To show the financial position and performance of a financial firm Signup and view all the answers

What percentage of the total value of all bank assets do loans usually account for?

Half to three-quarters Signup and view all the answers

What is an example of a loan categorized by purpose for borrowing money?

Commercial and industrial loan Signup and view all the answers

How can loans be categorized by maturity?

By short-term and long-term loans Signup and view all the answers

What is an example of a loan categorized by collateral?

Secured loan Signup and view all the answers

What is the purpose of the allowance for loan losses (ALL)?

To build up a reserve for future loan losses Signup and view all the answers

What is the difference between specific reserves and general reserves?

Specific reserves are set aside to cover a particular loan, while general reserves are the remaining reserves Signup and view all the answers

What is unearned income?

Interest income on loans received from customers Signup and view all the answers

What is the purpose of deducting loan losses from the amount of gross loans?

To get a more accurate picture of the bank's assets Signup and view all the answers

What is the primary source of funding for banks?

Deposits Signup and view all the answers

What is the purpose of nondeposit borrowings?

To supplement deposits and provide additional liquidity Signup and view all the answers

What is the role of equity capital in a financial firm?

To supply the long-term, relatively stable base of financial support Signup and view all the answers

What do liabilities and equity capital represent?

Accumulated sources of funds Signup and view all the answers

What is the purpose of a bank's assets?

To generate income for stockholders Signup and view all the answers

What is included in the 'Cash Assets' account?

Vault Cash, Deposits with Other Banks, and Cash Items in Process of Collection Signup and view all the answers

What is the purpose of primary reserves?

To serve as the first line of defense against customer deposits withdrawal Signup and view all the answers

What is another name for the 'Cash and Deposits Due from Bank' account?

Cash Assets Signup and view all the answers

What does the income statement report?

The revenues and expenses of a bank over a specific period of time Signup and view all the answers

What is the principal source of revenue for a bank?

Interest income generated by earning assets Signup and view all the answers

What is a major component of expenses for a bank?

Interest paid out to depositors Signup and view all the answers

What is the difference between revenues and expenses called?

Net income Signup and view all the answers

How can a bank increase its net earnings?

By increasing the net yield on each asset held Signup and view all the answers

What is another way to increase net earnings for a bank?

By redistributing earning assets toward those assets with higher yields Signup and view all the answers

What is not a source of revenue for a bank?

Salaries and wages paid to employees Signup and view all the answers

What does an income statement show?