40 Questions
Why do banks strive to keep their cash balance low?
Because cash balance earn little or no interest income
What is the primary purpose of holding Investment Securities?
To generate interest income
What is the second line of defense to meet demands for cash?
Secondary reserves
What type of securities are used to provide short-term profits from price movements?
Trading Account Assets
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
What is the largest asset item on a bank's balance sheet?
Loan accounts
What is the purpose of holding Commercial Paper?
To meet demands for cash
How are 'held-to-maturity' securities recorded on a bank's books?
At their original cost or market value, whichever is lower
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
What is the purpose of financial statements?
To show where a financial firm has been, is, and is headed in the future
What are the two main financial statements that managers, customers, and regulatory authorities rely upon?
Balance sheet and income statement
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
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
What is the net earnings in the Report of Income?
The total revenues minus total costs
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
What is the purpose of financial statements according to the text?
To show the financial position and performance of a financial firm
What percentage of the total value of all bank assets do loans usually account for?
Half to three-quarters
What is an example of a loan categorized by purpose for borrowing money?
Commercial and industrial loan
How can loans be categorized by maturity?
By short-term and long-term loans
What is an example of a loan categorized by collateral?
Secured loan
What is the purpose of the allowance for loan losses (ALL)?
To build up a reserve for future loan losses
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
What is unearned income?
Interest income on loans received from customers
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
What is the primary source of funding for banks?
Deposits
What is the purpose of nondeposit borrowings?
To supplement deposits and provide additional liquidity
What is the role of equity capital in a financial firm?
To supply the long-term, relatively stable base of financial support
What do liabilities and equity capital represent?
Accumulated sources of funds
What is the purpose of a bank's assets?
To generate income for stockholders
What is included in the 'Cash Assets' account?
Vault Cash, Deposits with Other Banks, and Cash Items in Process of Collection
What is the purpose of primary reserves?
To serve as the first line of defense against customer deposits withdrawal
What is another name for the 'Cash and Deposits Due from Bank' account?
Cash Assets
What does the income statement report?
The revenues and expenses of a bank over a specific period of time
What is the principal source of revenue for a bank?
Interest income generated by earning assets
What is a major component of expenses for a bank?
Interest paid out to depositors
What is the difference between revenues and expenses called?
Net income
How can a bank increase its net earnings?
By increasing the net yield on each asset held
What is another way to increase net earnings for a bank?
By redistributing earning assets toward those assets with higher yields
What is not a source of revenue for a bank?
Salaries and wages paid to employees
What does an income statement show?
The revenues and expenses of a bank over a specific period of time
Study Notes
Financial Statements of Banks and Their Principal Competitors
- Financial statements reflect the services each financial firm chooses to offer and the overall size of each financial-service organization.
- Financial statements can be viewed as a "road map" that tells us where a financial firm has been in the past, where it is now, and possibly where it is headed in the future.
Balance Sheets and Income Statements
- The two main financial statements are the balance sheet (Report of Condition) and the income statement (Report of Income).
- The balance sheet shows the amount and composition of funds sources and how much has been allocated to loans, securities, and other funds uses at any given point in time.
- The income statement shows how much it has cost to acquire funds and to generate revenues from the uses of funds in the Report of Condition.
Balance Sheet Components
- Deposits (D) are typically the main source of funding for banks.
- Nondeposit borrowings (NDB) are carried out mainly to supplement deposits and provide the additional liquidity that cash assets and securities cannot provide.
- Equity capital (EC) supplies the long-term, relatively stable base of financial support upon which the financial firm will rely to grow and to cover any extraordinary losses it incurs.
- Cash assets include:
- Vault Cash
- Deposits with Other Banks (Correspondent Deposits)
- Cash Items in Process of Collection
- Reserve Account with the Federal Reserve
- Investment securities can be divided into:
- Liquid Portion (short-term government securities, privately issued money market securities, interest-bearing time deposits, and commercial paper)
- Income-Generating Portion (all the securities held for their rate of return)
- Trading account assets are securities purchased to provide short-term profits from short-term price movements.
- Federal Funds are temporary loans made to other depository institutions, often with funds from reserves on deposit with the Federal Reserve Bank.
- Loan accounts are the major asset item, usually accounting for half to three-quarters of the total value of all bank assets, and can be divided by:
- Purpose for borrowing money
- Maturity
- Collateral
- Pricing terms
Income Statement
- Indicates the amounts of revenues and expenses over a specific period of time.
- Shows how much it has cost to acquire funds and to generate revenues from the uses of funds in the Report of Condition.
- Shows the revenues (cash flow) generated by selling services to the public.
- Shows net earnings after all costs are deducted from the sum of all revenues.
- Major source of revenues:
- Interest income generated by earning assets (loans and investments)
- Fees charged for specific services
- Major components of expenses:
- Interest paid out to depositors
- Interest owed on non-deposit borrowings
- Cost of equity capital
- Salaries and wages
- Benefits paid to employees
- Overhead expenses associated with the physical plant
- Funds set aside for possible loan losses
- Taxes owed
This quiz is about financial statements of banks and their competitors, specifically focusing on Chapter Five of a finance textbook.
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
