Chapter 5The Financial Statements of Banks and Their Principal CompetitorsFill in the Blank Questions1. Fed funds purchased is an example of _______________________ along with Eurodollarborrowings.Answer: nondeposit borrowings2. The short term securities of the bank, including T-Bills and commercial paper, areoften called __________________________ because they are the second line of defense to meet demands for cash.Answer: secondary reserves3. __________________________ is a noncash expense on the bank's income statementwhich allows the bank to account for future bad loans.Answer: Provision for loan losses4. __________________________ is the difference between interest income and interestexpenses for a financial institution.Answer: Net interest income5. __________________________ are the primary long term liabilities of the bank. Theseliabilities are paid only after deposits have been paid in the event of bankruptcy.Answer: Subordinated notes and debentures6. A(n)__________________________ is where the financial institution agrees toguarantee repayment of a customer's loan received from a third party.Answer: standby credit agreement7. A(n)__________________________ is a short term collateralized loan. The collateralthat is used generally consists of T-Bills.Answer: repurchase agreement8. A(n)__________________________ is a deposit account which pays an interest ratecompetitive with money market mutual funds and which generally has limited check writing ability.Answer: money market deposit account9. _____________________ is the sum of all outstanding IOU's owed to the bank in theform of consumer, real estate, commercial and agriculture loans as well as other types of credit extensions.Answer: gross loans10. A financial institution often records the value of its assets and liabilities at_______________ which is the original or historical cost of the asset.Answer: book value11. The principal types of__________________________ include fee income, income fromfiduciary activities and services charges on deposits.Answer: noninterest income12. The__________________________ shows the amount of revenues received and expensesincurred over a specific time period.Answer: Report of Income (income statement)13. The__________________________ lists the assets, liabilities and equity capitalheld by the bank on a given date.Answer: Report of Condition (balance sheet)14. ______________ is labeled "Accounting for Derivative Instruments and HedgingActivities."Answer: FASB 13315. ________________ labeled “Accounting for Derivative Instruments and HedgingActivities” and its recent amendments, FASB 138, are designed to make de rivatives more publicly visible on corporate financial statements.Answer: FASB 13316. Under _____________ banks must account for the expected loss of interest incomeon nonperforming loans when calculating their loan-loss provision.Answer: FASB 11417. Temporarily buying and selling securities by a securities firm in a thinly tradedmarket so as to influence the price is known as _________________.Answer: painting the tape18. The activity of manipulating the financial statements to artificially enhance thebanks financial strength is known as ___________________.Answer: window dressing or ‘creative accounting’19. is direct and indirectinvestment in real estate. These are properties obtained for compensations for nonperforming loans.Answer: Other Real Estate Owned (OREO)20. consists of interest incomereceived on loans from customers that has not yet been earned by the bank under accrual accounting methods.Answer: Unearned discount income21. can be held by individuals andnonprofit institutions, bear interest and permit drafts from being written against the account to pay third parties.Answer: Now accounts22.In the worldwide banking system, representtransferable time deposits in a variety of currencies and are often the principal source of short term borrows by banks.Answer: Eurocurrency Borrowings23.One part of arises from fees chargedfor ATM and POS transactions.Answer: Other Noninterest Income24.Fees that arise from a financial firm’s trust activities, fees for managing acorp orations’ interest and dividend payments and fees for managing corporate or individual retirement plans are all included in the category of fees arisingfrom .Answer: fiduciary activities25.Checking account maintenance fees and overdraft fees are included in the noninterestincome account under .Answer: service charges on deposit accountsTrue/False QuestionsT F 26. On a bank's income statement (Report of Income) deposit costs are financial inputs.Answer: TrueT F 27. Loans and leases are financial outputs on a financial institution's balance sheet or Report of Condition.Answer: TrueT F 28. Nondeposit borrowings are a financial input on a bank's balance sheet or Report of Condition.Answer: TrueT F 29. The cost of nondeposit borrowings is a financial input on a bank's income statement or Report of Income.Answer: TrueT F 30. Securities income is a financial output listed on a financial institution's Report of Condition.Answer: FalseT F 31. Net loans on a bank's balance sheet are derived by deducting the allowance for loan losses and unearned discounts from gross loans.Answer: TrueT F 32. When a loan is classified as nonperforming any accrued interest recorded on the bank's books, but not actually received, must be deducted from a bank'sloan revenues.Answer: TrueT F 33. In U.S. banking, securities gains are treated as ordinary income.Answer: TrueT F 34. Most banks report securities gains as a component of their total noninterest income.Answer: FalseT F 35. A bank displaying trading account securities on its balance sheet is serving as a security dealer and plans to sell those securities before they reachmaturity.Answer: TrueT F 36. Bad loans normally do not affect a bank's current income.Answer: TrueT F 37. The expensing of a worthless loan usually must occur in the year that loan become worthless.Answer: TrueT F 38. Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL) account on a bank's income statement.Answer: FalseT F 39. Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or present the bank with above-average risk are known asspecific reserves.Answer: TrueT F 40. U.S. banks (especially those with $500 million or more in total assets) are required to file financial statements audited by an independent publicaccountant with their principal federal regulatory agency.Answer: TrueT F 41. Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their balance sheet.Answer: TrueT F 42. The experience method of accounting for future loan loss reserves allows a bank to deduct from their income statement up to .6 percent of their eligibleloans.Answer: FalseT F 43. After the Tax Reform Act of 1986, large banks (>$500 million in assets) were required to use the reserve method of accounting for future loan lossreserves.Answer: FalseT F 44. The number one source of revenue for a bank based on dollar volume is loan income.Answer: TrueT F 45. In looking at comparative balance sheets, it can be seen that large banks rely more heavily on nondeposit borrowings while small banks rely moreheavily on deposits.Answer: TrueT F 46. The Pension Fund industry is now larger than the Mutual Fund industry.Answer: FalseT F 47. Off-balance-sheet items for banks have declined in recent years.Answer: FalseT F 48. Except for banks, Savings & Loans and Savings Banks hold the most deposits.Answer: TrueT F 49. "Painting the tape" refers to the practice whereby banks understate their nonperforming loans.Answer: FalseT F 50. Financial statements issued by banks and nonblank financial service firms are looking increasingly similar today.Answer: TrueMultiple Choice Questions51.Bank assets fall into each of the following categories except:A)Loans.B)Investment securities.C)Demand deposits.D)Noninterest cash and due from banks.E)Other assets.Answer: C52.Banks generate their largest portion of income from:A)Loans.B)Short-term investment.C)Demand deposits.D)Long-term investments.E)Certificates of deposit.Answer: A53.Loans typically fall into each of the following categories except:A)Real estate.B)Consumer.C)Commercial and Industrial (business).D)Agricultural.E)Municipal.Answer: E54.Which of the following adjustments are made to gross loans and leases to obtainnet loans and leasesA)The loan and lease loss allowance is subtracted from gross loansB)Unearned income is subtracted from gross interest receivedC)Investment income is added to gross interest receivedD) A and B.E) A. and C.Answer: D55.An example of a contra-asset account is:A)The loan and lease loss allowance.B)Unearned income.C)Buildings and equipment.D)Revenue bonds.E)The provision for loan loss.Answer: A56.The noncash expense item on a bank's Report of Income designed to shelter a bank'scurrent earnings from taxes and to help prepare for bad loans is called:A) Short-term debt interestB) Noninterest expenseC) Provision for taxesD) Provision for possible loan lossesE) None of the above.Answer: D57. A financial institution's bad-debt reserve, as reported on its balance sheet,is called:A) Unearned income or discountB) Allowance for possible loan lossesC) Intangible assetsD) Customer liability on acceptancesE) None of the aboveAnswer: B58.When a bank serves as a security dealer for certain kinds of securities(mainly federal, state, and local government obligations) the value of these securities is usually recorded in what account on a bank's Report of ConditionA) Investment SecuritiesB) Taxable and Tax-Exempt SecuritiesC) Trading Account SecuritiesD) Secondary ReservesE) None of the aboveAnswer: C59.The difference between noninterest income and noninterest expenses on a bank'sReport of Income is called:A) Net Profit MarginB) Net Interest IncomeC) Net Income After Provision for Possible Loan LossesD) Income or Loss Before Income TaxesE) Net Noninterest IncomeAnswer: E60.The account that is built up by annual noncash expense deductions and issubtracted from Gross Loans on the Report of Condition is:A) Unearned incomeB) Nonperforming loansC) Allocated loan risk deductionsD) Allowance for possible loan lossesE) None of the above.Answer: D61.Nonperforming loans are credits on which any scheduled loan repayments andinterest payments are past due for more than:A) 30 daysB) 60 daysC) 90 daysD) 180 daysE) None of the above.Answer: C62.One-time only transactions that often involve financial assets or real propertypledged as collateral behind a loan and upon which the bank has foreclosed affecta bank's account known as:A) Allowance for loan lossesB) Nonrecurring sales of assetsC) Asset gains or lossesD) Provision for loan and security lossesE) None of the above.Answer: B63.The use of fixed assets, rather than financial assets, in order to increase earningsflowing to a bank's stockholders is known as:A) Plant and equipment investmentB) Financial leverageC) Operating leverageD) Nondeposit capitalE) None of the above.Answer: C64.Banks depend heavily upon borrowed funds supplied by customers with little owners'capital invested. This means that banks make heavy use of:A) Financial leverageB) Capital restructuringC) Operating LeverageD) Margin borrowingE) None of the above.Answer: A65.When a loan is considered uncollectible, the bank's accounting department will write(charge) it off the books by reducing the ______ and the accounts.Which choice below correctly fills in the blank in the preceding sentenceA) PLL and Gross LoansB) ALL and Net LoansC) ALL and Gross LoansD) PLL and Net LoansE) None of the above.Answer: C66.The common banking practice of selling those investment securities that haveappreciated in order to reap a capital gain and holding onto those securities whose prices have declined is known as:A) Gains tradingB) Performance bankingC) Loss control tradingD) Selective portfolio managementE) None of the above.Answer: A67.Noninterest revenue sources for a bank are called:A) Commitment fees on loansB) Fee incomeC) Supplemental incomeD) Noninterest marginE) None of the above.Answer: Brge U.S. banks must use which of the methods listed below to determine theirprovision for loan loss expenseA) Experience methodB) Reserve methodC) Specific charge-off methodD) Historical cost methodE) None of the above.Answer: C69.A bank's temporary lending of excess reserves to other banks is labeled on thebalance sheet as:A) Fed Funds PurchasedB) Fed Funds SoldC) Money Market DepositsD) Securities Purchased for ResaleE) None of the aboveAnswer: B70.A bank sells shares of its common stock with a par value of $100 for $200 in themarket. Which two accounts on the bank's balance sheet are going to be affectedA) Retained earnings and capital surplus accountsB) Subordinated notes and debentures and commons stock outstanding accountsC) Retained earnings and common stock outstanding accountsD) Common stock outstanding and capital surplus accountsE) Only the common stock outstanding account is affectedAnswer: D71.A type of letter of credit which is widely used in international trade is knownas:A) Banker's acceptanceB) Commercial paperC) Repurchase agreementD) Fed funds purchasedE) None of the aboveAnswer: A72.A bank which starts with ALL of $ million at the beginning of the year, chargesoff worthless loans of $.94 million during the year, recovers $.12 million on loans previously charged off and charges current income for a $ million provision for loan losses will have an ALL at the end of the year of:A) $.66 millionB) $ millionC) $ millionD) $ millionE) The same amount as at the beginning of the yearAnswer: C73.A bank that has total interest income of $67 million and total noninterest incomeof $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net interest incomeA) $7B) -$14C) $18D) $32E) None of the aboveAnswer: D74.A bank that has total interest income of $67 million and total noninterest incomeof $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net noninterest incomeA) $7B) -$14C) $18D) $32E) None of the aboveAnswer: B75.A bank that has total interest income of $67 million and total noninterest incomeof $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net incomeA) $7B) -$14C) $18D) $32E) None of the aboveAnswer: A76.Which of the following financial statements shows the revenues and expense of abank over a set period of timeA) The statement of stockholders equityB) The funds-flow statementC) The report of financial conditionD) The report of incomeE) None of the aboveAnswer: D77.Which of the following accounts is sometimes called the bank's primary reservesA) Cash and deposits due from bankB) Investment securitiesC) Trading account securitiesD) Fed funds soldE) None of the aboveAnswer: A78.Which of the following assets is the largest asset item on the bank's balance sheetA) SecuritiesB) CashC) LoansD) Bank PremisesE) None of the aboveAnswer: C79.What financial service industry category is second to the banking industry in totalassets held:A) Mutual fundsB) ThriftsC) Investment banksD) Insurance companiesE) Pension fundsAnswer: A80.FASB Rule 115 focuses primarily on bank:A) Deposit sourcesB) Investments in marketable securitiesC) Derivatives tradingD) Loan-loss reservesE) Federal fundsAnswer: B81.Which of the following most accurately describes the principal type(s) of banknoninterest income:A) Fees from fiduciary transactionsB) Fees from deposit transactionsC) Fees from securities transactionsD) Fees from additional noninterest incomeE) All of the aboveAnswer: E82.Fee income arising from fiduciary transactions include all of the following except:A) Checking account maintenance feesB) F ees for managing and protecting a customer’s propertyC) Fees for recordkeeping for corporate securityD) Fees for dispersing interest and dividend payments for a corporationE) Fees for managing corporate and individual retirement plansAnswer: A83.You know the following information about the Miller State Bank:Gross Loans $300Miscellaneous Assets $50Deposits $390Total Equity $50Common Stock Par $5Non-Deposit Borrowings $60Investment Securities $150Net Premises $40Surplus $5Allowance for Loan Losses $50Deposits $390Total Assets $500Gross Premises $70Given this information, what is this firm’s Net LoansA) $250B) $350C) $500D) $50E) $150Answer: A84.You know the following information about the Miller State BankGross Loans $300Miscellaneous Assets $50Deposits $390Total Equity $50Common Stock Par $5Non-Deposit Borrowings $60Investment Securities $150Net Premises $40Surplus $5Allowance for Loan Losses $50Deposits $390Total Assets $500Gross Premises $70Given this information, what is this firm’s DepreciationA) $250B) $30C) $70D) $40E) $110Answer: B85.You know the following information about the Miller State BankGross Loans $300Miscellaneous Assets $50Deposits $390Total Equity $50Common Stock Par $5Non-Deposit Borrowings $60Investment Securities $150Net Premises $40Surplus $5Allowance for Loan Losses $50Deposits $390Total Assets $500Gross Premises $70Given this information, what is this firm’s Total LiabilitiesA) $390B) $60C) $450D) $500E) $50Answer: C86.You know the following information about the Miller State BankGross Loans $300Miscellaneous Assets $50Deposits $390Total Equity $50Common Stock Par $5Non-Deposit Borrowings $60Investment Securities $150Net Premises $40Surplus $5Allowance for Loan Losses $50Deposits $390Total Assets $500Gross Premises $70Given this information, what is this firm’s Undivided ProfitsA) $50B) $5C) $10D) $40E) $450Answer: D87.You know the following information about the Miller State BankGross Loans $300Miscellaneous Assets $50Deposits $390Total Equity $50Common Stock Par $5Non-Deposit Borrowings $60Investment Securities $150Net Premises $40Surplus $5Allowance for Loan Losses $50Deposits $390Total Assets $500Gross Premises $70Given this information, what is this firm’s Total Liabilities Plus EquityA) $250B) $450C) $150D) $50E) $500Answer: E88.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is this firm’s Net Interest IncomeA) $300B) $150C) ($50)D) $120E) $80Answer: A89.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is this firm’s Net No n Interest IncomeA) $300B) $150C) ($50)D) $120E) $80Answer: C90.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is this firm’s Pretax Net Operating Income (or Net Income before Extraordinary Items)A) $300B) $150C) ($50)D) $120E) $80Answer: B91.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is this firm’s Net IncomeA) $300B) $150C) ($50)D) $120E) $80Answer: D92.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is this firm’s Increase in Undivided ProfitsA) $300B) $150C) ($50)D) $120E) $80Answer: E93.You know the following information about the Davis National BankTotal Interest Expenses ($500)Total Non Interest Income $100Securities Gains (Losses) $ 50Income Taxes ($ 80)Dividends to Stockholders ($ 40)Total Interest Income $800Total Non Interest Expenses ($150)Provision for Loan Losses ($100)Given this information, what is thi s firm’s Total RevenuesA) $800B) $850C) $150D) $950Answer: D94.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700Given this information, what is this firm’s Allowance for Loan LossesA) $1300B) $1000C) $50D) $200E) $100Answer: E95.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700 Given this information, what is this firm’s Net PremisesA) $130B) $1000C) $50D) $200E) $100Answer: C96.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700Given this information, what is this firm’s Total Non Deposit Borr owingsA) $1000B) $300C) $800D) $200E) $500Answer: B97.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700 Given this information, what is this firm’s Total LiabilitiesA) $1000B) $300C) $800D) $200E) $500Answer: C98.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700 Given this information, what is this firm’s Total EquityA) $1000B) $300C) $800D) $200E) $500Answer: D99.You know the following information about the Webb State BankAccumulated Depreciation $40Net Loans $600Fed Funds Purchased and Repurchase Agreements $200Cash and Due from Banks $50Trading Account Securities $40Miscellaneous Assets $100Deposits $500Undivided Profits $140Gross Premises $90Surplus $40Subordinated Debt $100Investment Securities $160Common Stock Par $20Gross Loans $700 Given this information, what is this firm’s Total AssetsA) $1000B) $300C) $800D) $200E) $500Answer: A100.Y ou know the following information about the Taylor National Bank Provision for Loan Losses ($100)Income Taxes ($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is this firm’s Net Interest IncomeA) $150B) $210C) $400D) ($250)E) $750Answer: E101.Y ou know the following information about the Taylor National Bank Provision for Loan Losses ($100)Income Taxes ($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is t his firm’s Net Non Interest IncomeA) $150B) $210C) $400D) ($250)E) $750Answer: D102.Y ou know the following information about the Taylor National BankProvision for Loan Losses ($100)Income Taxes ($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500Non Interest Expense $750Interest Expenses $750Given this information, what is this firm’s Net Operating Income or Net Income Before Extraordinary IncomeA) $150B) $210C) $400D) ($250)E) $750Answer: C103.Y ou know the following information about the Taylor National BankProvision for Loan Losses ($100)Income Taxes ($140)Non Interest Income $500Dividends ($60)Securities Gains (Losses) ($50)Interest Income $1500。