Deck 5: The Financial Statements of Banks and Their Principal Competitors

Question 1

A(n)__________________________ is a deposit account which pays an interest rate competitive with money market mutual funds and which generally has limited check writing ability.

Answer 1

money market deposit account

Question 2

The principal types of __________________________ include fee income,income from fiduciary activities,and service charges on deposits.

Answer 2

noninterest income

Question 3

The activity of manipulating the financial statements to artificially enhance the banks financial strength is known as __________________.

Answer 3

"window dressing" or "creative accounting"

Question 4

A(n)__________________________ is where the financial institution agrees to guarantee repayment of a customer's loan,which the customer has received from a third party.

Question 5

__________________________ are the primary long-term liabilities of the bank.

Question 6

__________ can be held by individuals and nonprofit institutions,bear interest and permit drafts to be written against the account to pay third parties.

Question 7

________________ is an asset category which includes direct and indirect investment in real estate.These are properties obtained for compensations for nonperforming loans.

Question 8

The short-term securities of the bank,including T-Bills and commercial paper,are often called __________________________ because they are the second line of defense to meet demands for cash.

Question 9

The __________________________ shows the amount of revenues received and expenses incurred over a specific time period.

Question 10

______________ is labeled "Accounting for Derivative Instruments and Hedging Activities".

Question 11

A(n)__________________________ is a short term collateralized loan.The collateral that is used generally consists of T-Bills.

Question 12

__________ consists of interest income received on loans from customers that has not yet been earned by the bank under accrual accounting methods.

Question 13

A financial institution often records the value of its assets and liabilities at ____________ which is the historical cost of the asset.

Question 14

________________ labeled "Accounting for Derivative Instruments and Hedging Activities" and its recent amendments,__________,are designed to make derivatives more publicly visible on corporate financial statements.

Question 15

Temporarily buying and selling securities by a securities firm in a thinly traded market so as to influence the price is known as ________________.

Question 16

Fed funds purchased is an example of _______________________ along with Eurodollar borrowings.

Question 17

_____________________ is the sum of all outstanding IOUs owed to the bank in the form of consumer,real estate,commercial,and agriculture loans as well as other types of credit extensions.

Question 18

__________________________ is a noncash expense on the bank's income statement which allows the bank to account for future bad loans.

Question 19

The __________________________ lists the assets,liabilities and equity capital held by the bank on a given date.

Question 20

__________________________ is the difference between total interest income and total interest expenses for a financial institution.

Question 21

Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL)account on a bank's income statement.

Question 22

Loans and leases are financial outputs on a financial institution's balance sheet or Report of Condition.

Question 23

Checking account maintenance fees and overdraft fees are included in the noninterest income account under _________.

Question 24

Nondeposit borrowings are a financial input on a bank's balance sheet or Report of Condition.

Question 25

In the worldwide banking system,__________ represent transferable time deposits in a variety of currencies and are often the principal source of short term borrowings by banks.

Question 26

Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or loans that represent above-average risk are known as specific reserves.

Question 27

Most banks report securities gains as a component of their total noninterest income.

Question 28

On a bank's income statement (Report of Income)deposit costs are financial inputs.

Question 29

The cost of nondeposit borrowings is a financial input on a bank's income statement or Report of Income.

Question 30

A bank displaying trading-account securities on its balance sheet is serving as a security dealer and plans to sell those securities before they reach maturity.

Question 31

Bad loans normally do not affect a bank's current income.

Question 32

Net loans on a bank's balance sheet are derived by deducting the allowance for loan losses and unearned discounts from gross loans.

Question 33

When a loan is classified as nonperforming,any accrued interest recorded on the books,but not actually received,must be deducted from the bank's loan revenues.

Question 34

One part of __________ arises from fees charged for ATM and POS transactions.

Question 35

The expensing of a worthless loan usually must occur in the year that troubled loans are judged to be worthless.

Question 36

U.S.banks (especially those with $500 million or more in total assets)are required to file financial statements,audited by an independent public accountant,with their principal federal regulatory agency and with the FDIC.

Question 37

In U.S.banking,securities gains are treated as an ordinary income.

Question 38

Securities income is a financial output listed on a financial institution's Report of Condition.

Question 39

Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their balance sheet.

Question 40

Fees that arise from a financial firm's trust activities,fees for managing a corporation's interest and dividend payments,and fees for managing corporate or individual retirement plans are all included in the category of fees arising from __________.

Question 41

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 loss reserves.

Question 42

Each of the following typically falls into the category of loans except:

A)real estate.
B)consumer.
C)commercial and industrial (business).
D)agricultural.
E)municipal.

Question 43

Except for commercial banks,savings & loans and savings banks hold the most deposits.

Question 44

Nonperforming loans are credits on which any scheduled loan repayments and interest payments are past due for more than:

A)30 days.
B)60 days.
C)90 days.
D)180 days.
E)None of the options are correct.

Question 45

The account that is built up by annual noncash expense deductions and is subtracted from Gross Loans on the Report of Condition is:

A)unearned income.
B)nonperforming loans.
C)allocated loan risk deductions.
D)allowance for possible loan losses.
E)None of the options are correct.

Question 46

An example of a contra-asset account is:

A)loan and lease loss allowance.
B)trading account assets.
C)buildings and equipment.
D)revenue bonds.
E)provision for loan loss.

Question 47

Financial statements issued by banks and by nonbank financial-service firms look increasingly similar today.

Question 48

Off-balance-sheet items for banks have declined in recent years.

Question 49

A financial institution's bad-debt reserve,as reported on its balance sheet,is called:

A)unearned income or discount.
B)allowance for possible loan losses.
C)intangible assets.
D)customer liability on acceptances.
E)None of the options are correct.

Question 50

Each of the following falls into the category of bank assets except:

A)loans.
B)investment securities.
C)demand deposits.
D)cash and due from banks.
E)other assets.

Question 51

Which of the following adjustments are made to gross loans and leases to obtain net loans and leases?

A)Loan and lease loss allowance is added to gross loans.
B)Unearned income is subtracted from gross interest received.
C)Investment income is added to gross interest received.
D)Loan and lease loss allowance and unearned income is subtracted from gross loans.
E)Loan and lease loss allowance is subtracted from gross loans and investment income is added to gross interest received.

Question 52

In looking at comparative balance sheets,it can be seen that large banks rely more heavily on nondeposit borrowings while small banks rely more heavily on deposits.

Question 53

The number one source of revenue for a bank based on dollar volume is loan income.

Question 54

The experience method of accounting for future loan loss reserves allows a bank to deduct from their income statement up to 0.6 percent of their eligible loans.

Question 55

The noncash expense item on a bank's Report of Income designed to shelter a bank's current earnings from taxes and to help prepare for bad loans is called:

A)short-term debt interest.
B)noninterest expense.
C)provision for taxes.
D)provision for possible loan losses.
E)None of the options are correct.

Question 56

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 Condition?

A)Investment securities
B)Taxable and tax-exempt assets
C)Trading account assets
D)Secondary reserves
E)None of the options are correct.

Question 57

The Pension Fund industry is now larger than the Mutual Fund industry.

Question 58

Banks generate their largest portion of income from:

A)loans.
B)short-term investments.
C)demand deposits.
D)trading account gains & fees.
E)certificates of deposits.

Question 59

"Painting the tape" refers to the practice whereby banks understate their nonperforming loans.

Question 60

___________ is calculated by deducting noninterest expense and provision for loan losses from noninterest income.

A)Net profit margin
B)Net interest income
C)Net income after provision for possible loan losses
D)Income or loss before income taxes
E)Net noninterest income

Question 61

Which of the following accounts is also called the bank's primary reserves?

A)Cash and deposits due from banks
B)Investment securities
C)Trading account securities
D)Fed funds sold
E)None of the options are correct.

Question 62

Large U.S.banks must use which of the methods listed below to determine their provision for loan loss expense?

A)Experience method
B)Reserve method
C)Specific charge-off method
D)Historical cost method
E)None of the options are correct.

Question 63

FASB Rule 115 focuses primarily on:

A)deposit sources.
B)investments in marketable securities.
C)derivatives trading.
D)loan-loss reserves.
E)hedging activities.

Question 64

What financial-service industry category is second to the banking industry in total financial assets held?

A)Mutual funds
B)Thrifts
C)Investment banks
D)Insurance companies
E)Pension funds

Question 65

A bank's temporary lending of excess reserves to other banks is labeled on the balance sheet as:

A)fed funds purchased.
B)fed funds sold.
C)money market deposits.
D)securities purchased for resale.
E)None of the options are correct.

Question 66

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 blanks in the preceding sentence?

A)PLL,gross loans
B)ALL,net loans
C)ALL,gross loans
D)PLL,net loans
E)None of the options are correct.

Question 67

A bank has total interest income of $67 million and total noninterest income of $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 income?

A)$7
B)-$14
C)$18
D)$32
E)None of the options are correct.

Question 68

One-time-only transactions that often involve sale of financial assets or real property pledged as collateral behind a loan and upon which the bank has foreclosed,affect a bank's account known as:

A)allowance for loan losses.
B)nonrecurring sales of assets.
C)asset gains or losses.
D)provision for loan and security losses.
E)None of the options are correct.

Question 69

A bank has total interest income of $67 million and total noninterest income of $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 income?

A)$7
B)-$14
C)$18
D)$32
E)None of the options are correct.

Question 70

The use of fixed assets,rather than financial assets,in order to increase the operating earnings is known as:

A)plant and equipment investment.
B)financial leverage.
C)operating leverage.
D)nondeposit capital.
E)None of the options are correct.

Question 71

A bank which starts with ALL of $1.48 million at the beginning of the year,charges off worthless loans of $0.94 million during the year,recovers $0.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses,will have an ALL at the end of the year of:

A)$0.66 million.
B)$3.32 million.
C)$1.68 million.
D)$1.28 million.
E)The same amount as at the beginning of the year.

Question 72

The common banking practice of selling those investment securities that have appreciated in order to reap a capital gain and holding onto those securities whose prices have declined is known as:

A)gains trading.
B)performance banking.
C)loss control trading.
D)selective portfolio management.
E)None of the options are correct.

Question 73

A bank has total interest income of $67 million and total noninterest income of $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 income?

A)$7
B)-$20
C)$18
D)$32
E)None of the options are correct.

Question 74

A bank sells shares of its common stock with a par value of $100 for $200 in the market.Which two accounts on the bank's balance sheet are going to be affected?

A)Retained earnings and surplus accounts
B)Subordinated notes and debentures and commons stock outstanding accounts
C)Retained earnings and common stock outstanding accounts
D)Common stock outstanding and surplus accounts
E)Only the common stock outstanding account

Question 75

Which of the following most accurately describes the principal type(s)of bank noninterest income?

A)Fees from fiduciary transactions
B)Fees from deposit transactions
C)Fees from securities transactions
D)Fees from additional noninterest income
E)All of the options are correct.

Question 76

Which of the following assets is the largest asset item on the bank's balance sheet?

A)Securities
B)Cash
C)Loans and leases
D)Bank premises
E)None of the options are correct.

Question 77

Which of the following financial statements shows the revenues and expenses of a bank over a set period of time?

A)The Statement of Stockholders Equity
B)The Funds-Flow Statement
C)The Report of Financial Condition
D)The Report of Income
E)None of the options are correct.

Question 78

Fee income arising from fiduciary transactions include all of the following except:

A)fees for checking account maintenance.
B)fees for managing and protecting a customer's property.
C)fees for recordkeeping for corporate security.
D)fees for dispersing interest and dividend payments for a corporation.
E)fees for managing corporate and individual retirement plans.

Question 79

Banks depend heavily upon borrowed funds supplied by customers with little owners' capital invested.This means that banks make heavy use of:

A)financial leverage.
B)capital restructuring.
C)operating leverage.
D)margin borrowing.
E)None of the options are correct.

Question 80

Noninterest revenue sources for a bank are called:

A)commitment fees on loans.
B)fee income.
C)supplemental income.
D)noninterest margin.
E)None of the options are correct.