Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 12

Commenting on the following six-month operating statement, the president of the Bay Street Bank reports to the board of directors, "The bank has a six-month operating loss of $90.6 million compared with a budgeted loss of $13.7 million. In the annual budget for 2009, we planned on covering the budgeted six-month operating loss ($13.7 million) with projected surpluses in the second half of the year. Thus, unless we have a better-than-expected second six months, we are projecting an operating shortfall of $76.9 million for 2009. The problem has been almost entirely on the revenue side of the budget. The extremely weak economy the last six months caused us to make fewer new loans and charge lower interest rates than we projected. Interest rates are substantially lower than when the budget was prepared. This has forced us to invest our funds in lower-yielding investments than we planned. Revenues were $70.7 million under budget, but expenses were only $6.2 million over budget. Much of the expense increase was the result of higher unexpected costs for CDs (certificates of deposit). We have done a good job controlling costs; now if only we could control the general economy and interest rates."


Required:
Critically analyze the bank president's comments.