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INTRODUCTION
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1.1 Introduction:
A bank is a financial institution that accepts deposits from the public and
creates credit. Lending activities can be performed either directly or indirectly
through capital markets. Due to their importance in the financial stability of a
country, banks are highly regulated in most countries. Most nations have
institutionalized a system known as fractional reserve banking under which
banks hold liquid assets equal to only a portion of their current liabilities.
The particular services each financial firm chooses to offer and the overall
size of each financial services organization are reflected in its financial
statements. Financial statements are literally a “road map” telling us where
a financial firm has been in the past, where it is now, and perhaps, where it
is headed in the future. They are invaluable guideposts that can, if properly
constructed and interpreted, signal success or disaster. Unfortunately, much
the same problems with faulty and misleading financial statements that
placed Enron and Lehman Brothers in the headlines not long ago have also
visited some financial service provider, teaching us to be cautious in reading
and interpreting the financial statements financial service providers routinely
publish.
Data has been collected from secondary sources. Necessary data has been
collected by the following sources:
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1.4 Limitation of the Study
The main limitation for conducting this report is time limitation and
resources. The given time was not enough to understand all the
activities of a bank and how they handle their clients.
Lack of experience has also acted a constraint for the exploration of
the topic.
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CHAPTER-2
THE FINANCIAL STATEMENTS OF
BANKS
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2.1 Financial Statement of Bank
Financial statements provide the information about the financial condition of
a bank. The two most important financial statements for a bank firm is
balance sheet and income statement. The balance sheet shows the amount
and composition of funds sources drawn upon to finance lending and
investing activities and how much has been allocated to loans, securities and
other funds uses at any point in time.
In contrast, the financial inputs and outputs on 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. Income statement also
shows the revenues generate by selling services to the public, including
making loans and servicing customer deposits. Finally, income statement
shows net earnings after all costs are deducted from the sum of all revenues,
some of which will be reinvested in the financial firm for future growth and
some of which will flow to stockholder as dividend.
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2.2.1.2 Investment Securities: The Liquidity Portion
A second line of defense to meet demands for cash is liquid security
holdings, often called secondary reserves or referenced on regulatory
reports as “investment securities available for sale.”
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Formula of calculating Allowance for Loan Losses
Beginning balance in the allowance for loan loss account (ALL) *********
+ This year’s provision for loan losses (PLL) *********
= Adjusted allowance for loan losses (ALL) *********
- Actual change offs of worthless loans *********
= Net allowance for loan losses (ALL) *********
+ Recoveries from previously charged off loans
*********
= Ending balance in the allowance for loan loss account (ALL) *********
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2.2.2 Liabilities of the Banking Firm
The components of the liabilities side are discussed below
2.2.2.1 Deposits
The principal liability of any bank is its deposits, representing financial claims
held by business, households and governments against the banking firm.
There are five major types of deposits:
Noninterest-bearing demand deposits
Saving deposits
Now accounts
Money market deposit accounts
Time deposits
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employees; overhead expenses associated with the physical plant. Now
discuss about the components of income statement.
2.3.1 Interest Income
Interest earned from loans and security investments accounts for the
majority of revenues for most depository institutions and for many other
lenders as well.
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CHAPTER-3
CONCLUSION
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3.1 Conclusion
In this term paper presents an overview of the content of bank financial
statements, which provides us with vital information that managers, investors
regulators and other interested parties can use to assess each financial
firm’s performance. Several key points emerge in the course of the term
paper:
The two most important financial statements issued by depository
institution are the balance sheet and income statement.
Bank balance sheet report the value of assets held (usually broken
down into such categories as cash assets, investment securities,
loans and miscellaneous assets), liabilities outstanding (including
deposits and nondeposit borrowings) and capital equity. The values
recoded on the balance sheet are measured at a single moment in
time.
The income statement includes key sources of revenue and operating
expenses. Revenue sources for most financial firms typically include
loan and investment income and revenue from the sale of fee
generating services. Major sources of operating expense include
interest payments on borrowed funds, employee wages, salaries and
benefits and taxes.
By carefully reading the financial statements of banks and their
competitors we learn more about the services these institutions
provide and how their financial condition changes time. These
statements when accurately prepared provide indispensable
information to managers, owners, creditors and regulators of financial
service providers. Unfortunately, some financial institutions engage in
window dressing and other forms of data manipulation, which can
send out misleading information.
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