Financial Statements at a Bank

Financial statements at a bank are the same in the form and method of preparing as at any other business or organization, but they differ a little.

The Balance Sheet of a bank gives us a view of its financial situation at one point of time, usually at any day of a particular year. But we do not know what has happened between two balance sheets. This information is provided by the Income statement (Profit and Loss Account) for the period in question. Neither statement is exactly uniform from bank to bank, but both contain certain essential features.

The largest asset of a bank is normally its total portfolio of loans. Deposits usually constitute the largest liability. Balance sheets usually include the following items listed as assets:

1. Cash on hand and due from banks - money in vaults, balances with other banks, checks in process of collection;

2. Investments - bonds, shares, etc.;

3. Loans - to companies, the general public, etc.;

4. Fixed assets - buildings, equipment, etc.

Items listed in the balance sheet as liabilities are:

1. Deposits - all money owed to depositors;

2. Taxes payable - national and local;

3. Dividends payable - decided on, but not yet paid.

The Income Statement records the income of a bank: interest on loans, return on investments, fees, commissions, service charges. The granting of credit provides the largest source of bank income. Typically, two thirds of a bank's yearly earnings result from interest on loans. Nine out of every ten money units they lend come from depositors' funds.

The following items normally constitute the main expenses in a bank's Income Statement: interest paid, salaries and other benefits, taxes.

A bank's accounting systems are designed to record and present many transactions that take place every day. Substantial reserves over and above statutory requirements are an indication to customers of the bank's strength, that it has run its business well and has retained profits in the business for future operations.

International Methods of Payment and Settlement

In international trade delivery of goods and services generally takes longer and payment for them can take more time. So exporters need to take extra care in ensuring that prospective customers are reliable payers and that payment is received as quickly as possible. Payment for exports depends on the conditions fixed in the commercial contract with a foreign buyer. There are internationally accepted terms designed to avoid confusion about cost and price.

This field of the international finance is a settlement system which consists of methods of payment that are agreed in the contract between the buyer and the seller (a. payment in advance, b. open account; c. Documentary Letter of Credit, d. payment upon shipment of the goods; e. documentary collections, f. Bills of Exchange; e. barter, buy-back, counter trade); and the instruments (where instructions arc written) by which the payment is made, that is the methods of settlement (payment by check, bank transfer, SWIFT, draft, bank money order, TT (telegraphic transfer), MT (mail transfer), Bill of Exchange).

Payment in advance. It is the best possible method for the exporter. Cash with order (CWO) avoids any risk on small orders with new buyers and may even be asked for before production begins. However, this form of payment is extremely rare in exporting since it means that an overseas buyer is extending credit to an exporter - when the opposite procedure is the normal method of trade. Variations in this form of payment are cash on delivery (COD) where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.

Open account. The goods and accompanying documents are sent directly to an overseas buyer who has agreed to pay within a certain period after the invoice date - usually not more than 180 days. The buyer undertakes to remit money to the exporter by an agreed method. This method is popular within the ЕEC because it is simple. (E.g. 70 per cent of UK exports arc paid for under open account terms). It saves money and procedural difficulties but the risk to the exporter is obviously greater It is only successful if an exporter trusts the business integrity and ability of an overseas buyer. A variation of open account payment is the consignment account where an exporter supplies goods to an overseas buyer, but the exporter retains ownership of the goods until they arc sold, and then the buyer remits the agreed price to the exporter.

Bill of Exchange. An exporter can send a bill of exchange for the value of the invoice of goods for export through the banking system for payment by an over-seas buyer on presentation. The bill is called a sight draft if it is made out payable at sight, i.e. 'on demand'. If it is payable 'at a fixed future time' it is called a term draft, because the buyer is receiving a time period of credit, known as the tenor of the bill. The buyer signs an agreement to pay on the due date by writing an acceptance across the face of the bill. By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure greater control of the goods, because until the bill is paid or accepted by the overseas buyer the goods cannot be released. At the same time, the buyer does not have to pay or agree to pay by some agreed date until delivery of the goods from the exporter.

Documentary Letter of Credit. It is the most accepted method of payment, because both an exporter and an overseas buyer have high degree of security in completing the commercial contract. It is issued by a buyer's bank (issuing) and transferred to a seller's bank (advising) with the order to open a credit to the seller. The necessary documents, correctly completed, are presented to a bank by the expiry date of the credit. If the terms of the credit are met an exporter can receive payment from the advising bank. Documentary LC may be revocable or irrevocable. Most LC are irrevocable, which means that the terms of the credit cannot be cancelled without both the exporter's and importer's agreement.

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