11. 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 atone 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.

12. Introduction to Corporate Finance

To begin our study of modern corporate finance and financial management, we need to address two central issues. First, what is corporate finance and what is the role of the financial manager in the corporation? Second, what is the goal of financial management? To describe the financial management environment, we consider the corporate form of organization and discuss some conflicts that can arise within the corporation. We also take a brief look at financial markets in the United States.

Corporate Finance and the Financial Manager

In this section, we discuss where the financial manager fits in the corporation. We start by defining corporate finance and the financial manager's job.

13. What Is Corporate Finance?

Imagine that you were to start your own business. No matter what type you started, you would have to answer the following three questions in some form or another:

1. What long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need?

2. Where will you get the long-term financing to pay for your investment? Will you bring in other owners or will you borrow the money?

3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers?

These are not the only questions by any means, but they are among the most important. Corporate finance, broadly speaking, is the study of ways to an­swer these three questions. Accordingly, we'll be looking at each of them in the chapters ahead.