precious kerme gayan_financial statements_terms

FINANCIAL STATEMENTS

BY: PRECIOUS KERME GAYAN 0

BANKING & FINANCE

By: Precious Kerme Gayan

BANKING & FINANCE


INTRODUCTION

This paper briefly describes some major Financial Statements items on the Balance

Sheet and the Income statement. The compilations were done with a focus on the United

States hence, some items might not apply to other countries.

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BALANCE SHEET

ASSETS

VAULT CASH

This balance sheet item on a bank statement represents cash kept on hand in a bank

vault to meet day-to-day business needs, such as cashing checks for customers. The

bank must have a certain amount of cash on hand in order to deal with these types of

every day transactions. Vault cash is considered to be part of a bank's reserves, and

banks will usually be required to have a certain amount of "vault cash" on hand.

FEDERAL RESERVED DEPOSITS

This balance sheet item on a bank statement represents a certain proportion of deposits

that banks are required to maintain as reserve against potential withdrawals.

CASH ITEMS IN PROCESS OF COLLECTION

This balance sheet item on a bank statement represents checks and other cash items

that have been deposited with the Federal Reserve for collection on behalf of an institution

having an account with the bank. They also represent those checks given immediate

credit to a customer’s account, before a bank has received payment from the paying bank.

Examples are a depository transfer check (DTC) and a pre-authorized check.

FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENT (RPS)

This balance sheet item on a bank statement represents short-term loans to other

depository at financial institutions without any collateral. This is usually provided by the

Federal Reserve banks, usually at the Federal Funds rate. These may be considered

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wholesale loans to other banks. RP is an acquisition of immediately available funds

through the sale of securities, together with a simultaneous agreement to repurchase

them at a later date.

US TREASURY AND US AGENCY SECURITIES

This balance sheet item on a bank statement represents the government department

responsible for issuing all Treasury bonds, notes and bills. Some of the government

branches operating under the U.S. which includes printing of bills, postage, Federal

Reserve notes and minting of coins,

U.S AGENCY SECURITIES

This balance sheet item on a bank statement represents securities issued by corporations

and agencies created by the US government, such as the federal home loan, band board

and ginnie mae.

SECURITIES ISSUED BY STATES AND POLITICAL SUBDIVISION

This balance sheet item on a bank statement represents securities issued by state and

local governments, their agencies, and/or political subdivisions to finance public

improvement projects. The bond issuer borrows needed money by selling municipal

bonds. The investors who buy municipal bonds become creditors and are essentially

loaning money to the issuer to fund public projects

MORTGAGE-BACKED BONDS OR SECURITIES (MBS)

This balance sheet item on a bank statement represents bonds or notes backed by

mortgages on residential or commercial properties. As the underlying loans are paid off

by the borrowers, the investors in MBS receive payments of interest and principal over

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time. The MBS market is for institutional investors and is not suitable for individual

investors.

OTHER DEBT AND EQUITY SECURITY

This balance sheet item on a bank statement represents any debt instrument that can be

bought or sold between two parties and has basic terms defined, such as notional amount

(amount borrowed), interest rate and maturity/renewal date. Debt securities include

government bonds, corporate bonds, CDs, municipal bonds, preferred stock,

collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities.

COMMERCIAL AND INDUSTRIAL (C&I) LOAN

This balance sheet item on a bank statement represents any type of loan made to a

business or corporation and not to an individual. Commercial and industrial loans can be

made in order to provide either working capital or to finance major capital expenditures.

This type of loan is usually short-term in nature and is almost always backed with some

sort of collateral.

REAL ESTATE SECURED LOANS

This balance sheet item on a bank statement represents money that are borrowed, homes

that are pledge or other real property that served as collateral. This item also represents

a signed promissory note evidencing your promise to repay the loan, but you also offer

security in the form of real estate to encourage an approval. First and second mortgage

loans, along with home equity lines of credit, are common examples of real estate secured

loans.

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CONSUMER LOAN

This balance sheet item on a bank statement represents an amount of money lent to an

individual (usually on a non-secured basis) for personal, family, or household purposes.

Consumer loans are monitored by government regulatory agencies for their compliance

with consumer protection regulations such as the Truth in Lending Act. It is also called

consumer credit or consumer lending.

OTHER LOANS

This balance sheet item on a bank statement represents accounts that do not fit under

the broad categories of finances (assets, credit cards, auto loans and home loans). This

grouping may include things like closed accounts with leftover balances and student

loans, as well as the occasional item which has been mischaracterized on your

Transunion credit report.

LEASES

This balance sheet item on a bank statement represents rental properties from another

party. A lease guarantees the lessee (the renter) use of an asset and guarantees the

lessor (the property owner) regular payments from the lessee for a specified number of

months or years. Both the lessee and the lessor must uphold the terms of the contract for

the lease to remain valid.

UNEARNED INCOME

This balance sheet item on a bank statement represents any income that comes from

investments and other sources unrelated to employment services. Examples of unearned

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income include interest from a savings account, bond interest, alimony, and dividends

from stock. Once this income is realized then it is taxable.

RESERVED FOR LOANS AND LEASE LOSSES

This balance sheet item on a bank statement represents calculated reserve that financial

institutions establish in relation to the estimated credit risk within the institution’s assets.

This credit risk represents the charge-offs that will most likely be realized against an

institution’s operating income as of the financial statement end date

NET LOANS AND LEASES

This balance sheet item on a bank statement represents loans and lease-financing

receivables net of unearned income and the allowance for possible loans and lease

financing receivable losses divided by total assets.

INVESTMENT SECURITIES

This balance sheet item on a bank statement represents securities that are purchased in

order to be held for investment. This is in contrast to securities that are purchased by a

broker-dealer or other intermediary for resale. Banks often purchase marketable

securities to hold in their portfolios.

INTANGIBLE ASSET

This balance sheet item on a bank statement represents asset that is not physical in

nature also knowing as corporate intellectual property (items such as patents,

trademarks, copyrights, business methodologies), goodwill and brand recognition are all

common intangible assets.

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LIABILITIES

DEMAND DEPOSIT

This balance sheet item on a bank statement represents funds held in an account from

which deposited funds can be withdrawn at any time without any advance notice to the

depository institution. Demand deposits can be demanded by an account holder at any

time. Many checking and savings accounts today are demand deposits and are

accessible by the account holder through a variety of banking options, including teller,

ATM and online banking.

NEGOTIABLE ORDER OF WITHDRAWAL (NOW) ACCOUNT'

This balance sheet item on a bank statement represents an interest-earning bank account

with which the customer is permitted to write drafts against money held on deposit. It is

also known as a "NOW account". Commercial banks, mutual-savings banks and savings-

and-loan associations can offer this type of account to individuals, some nonprofit

organizations and certain governmental units.

MONEY MARKET DEPOSIT ACCOUNTS

This balance sheet item on a bank statement represents savings account which shares

some of the characteristics of a money market fund. Like other savings accounts, money

market deposit accounts are insured by the Federal government. Money market deposit

accounts offer many of the same services as checking accounts although transactions

may be somewhat more limited. These accounts are usually managed by banks or

brokerages, and can be a convenient place to store money that is to be used for upcoming

investments or has been received from the sale of recent investments.

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FOREIGN DEPOSITS

This balance sheet item on a bank statement represents a deposit made at, or money put

in to, domestic banks outside of the United States. These deposits are not subject to

deposit insurance premiums (a premium paid to ensure that funds can be retrieved if the

debtor cannot repay the deposit), or reserve requirements (the amount of funds an

institution must hold relative to its deposits).

CERTIFICATE OF DEPOSIT - CD

This balance sheet item on a bank statement represents a savings certificate entitling the

bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and

can be issued in any denomination. CDs are generally issued by commercial banks and

are insured by the FDIC. The term of a CD generally ranges from one month to five years.

CORE DEPOSITS

This balance sheet item on a bank statement represents banking deposits made by

customers in the bank's general market area. A bank considers its core deposits to be a

reliable source of funding, since customers in its general market area tend to be loyal and

consistent. For example, a business owner who deposits checks at a local bank is less

likely to alter his or her depositing habits based on general economic changes, such as

interest rate fluctuations.

TOTAL DEPOSITS

This balance sheet item on a bank statement represents various kinds of deposits that

are added together to determine the Total Deposits. Demands Deposits, Term Deposits,

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and Interest and Non-Interest bearing deposits are the cumulative examples of deposit

items that are summed to get the value of Total Deposits.

FEDERAL FUNDS PURCHASED

This balance sheet item on a bank statement represents short-term loans to other

depository financial institutions without any collateral, provided by Federal Reserve

banks, usually at the Federal Funds rate. These may be considered wholesale loans to

other banks.

REPURCHASE AGREEMENT

This balance sheet item on a bank statement represents is a type of short-term loan much

used in the money markets, whereby the seller of a security agrees to buy it back at a

specified price and time. The seller pays an interest rate called the repo rate when buying

back securities.

SUBORDINATE NOTES AND DEBENTURE

This balance sheet item on a bank statement represents loan (or security) that ranks

below other loans (or securities) with regard to claims on assets or earnings and debt

instrument that is not secured by physical assets or collateral.

SHAREHOLDER EQUITY

PREFERRED STOCK

This balance sheet item on a bank statement represents class of ownership in a

corporation that has a higher claim on the assets and earnings than common stock.

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Preferred stock generally has a dividend that must be paid out before dividends to

common stockholders and the shares usually do not have voting rights.

COMMON STOCK

This balance sheet item on a bank statement represents security that represents

ownership in a corporation. Holders of common stock exercise control by electing a board

of directors and voting on corporate policy. Common stockholders are on the bottom of

the priority ladder for ownership structure. In the event of liquidation, common

shareholders have rights to a company's assets only after bond holders, preferred

shareholders and other debt holders have been paid in full.

SURPLUS AND PAID IN CAPITAL

This balance sheet item on a bank statement represents the price paid by investors per

share at issue minus the par value per share, times the number of shares issued. It is

also called additional paid-in capital.

RETAINED EARNINGS

This balance sheet item on a bank statement represents the percentage of net earnings

not paid out as dividends, but retained by the company to be reinvested in its core

business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.

OFF BALANCE SHEET

It is an asset or debt that does not appear on a company's balance sheet. Items that are

considered off balance sheet are generally ones in which the company does not have

legal claim or responsibility for. For example, loans issued by a bank are typically kept on

the bank's books. If those loans are securitized and sold off as investments, however, the

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securitized debt is not kept on the bank's books. One of the most common off-balance

sheet items is an operating lease.

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INCOME STATEMENT

REVENUE

INCOME

This item on the income statement represents money that an individual or business

receives in exchange for providing a good or service or through investing capital.

INCOME ON COMMERCIAL AND INDUSRIAL LOAN

This income statement item on a bank statement represents fees gotten from a

commercial and industrial loan (C&I loan) that is loan to a business rather than a loan to

an individual consumer. These short-term loans may have an interest rate based on the

prime rate and are secured by collateral owned by the business requesting the loan.

INCOME ON REAL ESTATE LOAN

It is a loan on real estate that is usually secured by a mortgage.

INCOME ON OTHER LOANS

This income statement item on a bank statement represents fees gotten from other loans.

That is, those items that do not fit under the broad categories of finances income on

consumer loans

This income statement item on a bank statement represents fees gotten from money that

are lent to individuals (usually on a non-secured basis) for personal, family, or household

purposes.

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INCOME ON LEASES

This income statement item on a bank statement represents fees gotten from rental

properties from another party.

INTEREST AND FEES ON LOANS AND LEASES

This item represents charges made for loans and leases that bank establishes in relation

to borrow funds.

INTEREST ON INVESTMENT SECURITIES

This account on a bank statement represents charges made on Securities that are

purchased and held for investment.

INTEREST EXPENSE

The cost incurred by an entity for borrowed funds. Interest expense is a non-operating

expense shown on the income statement. It represents interest payable on any type of

borrowings – bonds, loans, convertible debt or lines of credit. It is basically calculated as

the interest rate times the outstanding principal amount of the debt. Interest expense on

the income statement represents interest accrued during the period covered by the

financial statements, and not the amount of interest actually paid over that period. While

interest expense is tax-deductible for companies, in an individual's case, it depends on

his or her jurisdiction and also on the loan's purpose.

INTERST ON NOW ACCOUNT

This item represents charges made on bank account with which the customer is permitted

to write drafts against money held on deposit

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INTEREST ON MONEY MARKET DEPOSIT AND OTHER SAVINGS

A money market account (MMA) or money market deposit account (MMDA) is a non-

financial account that pays interest based on current interest rates in the money markets.

Money market accounts typically have a relatively high rate of interest and require a

higher minimum balance (anywhere from $1,000 to $10,000 or $25,000) to earn interest

or avoid monthly fees. Like other bank deposits, they are liabilities from the bank's

perspective. They should not be confused with money market funds.

INTERST ON FOREIGN DEPOSIT

This item represents charges made on deposit put into domestic banks outside of the

United States.

INTEREST ON RETAIL CD

It is a savings certificate entitling the bearer to receive interest. A CD bears a maturity

date, a specified fixed interest rate and can be issued in any denomination. CDs are

generally issued by commercial banks and are insured by the FDIC. The term of a CD

generally ranges from one month to five years.

INTEREST ON WHOLESALE CD

It is a savings account, current account or any other type of bank account that allows

money to be deposited and withdrawn by the account holder. These transactions are

recorded on the bank's books, and the resulting balance is recorded as a liability for the

bank and represents the amount owed by the bank to the customer. Some banks may

charge a fee for this service, while others may pay the customer interest on the funds

deposited.

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INTEREST ON DEPOSIT ACCOUNT

It is a savings account, current account or any other type of bank account that allows

money to be deposited and withdrawn by the account holder. These transactions are

recorded on the bank's books, and the resulting balance is recorded as a liability for the

bank and represents the amount owed by the bank to the customer. Some banks may

charge a fee for this service, while others may pay the customer interest on the funds

deposited.

INTEREST ON OTHER BORROWED FUNDS

It is money one has received from another party with the agreement that it will be repaid.

Most borrowed funds are repaid with interest, meaning the borrower pays a certain

percentage of the principal amount to the lender as compensation for borrowing. Most

borrowed funds also have a maturity date by which time the borrower must have repaid

the loan. Borrowing and lending occur informally between family and friends, at the retail

level through banks and on a large scale through governments and institutional investors.

INTERST ON SUBORDINATE NOTES AND DEBENTURES

It is an amount earned on subordinated debt (also known as subordinated loan,

subordinated bond, subordinated debenture or junior debt) is debt which ranks after other

debts if a company falls into liquidation or bankruptcy.

NET INTEREST INCOME

It is the difference between the revenue that is generated from a bank’s assets and the

expenses associated with paying out its liabilities. A typical bank’s assets consist of all

forms of personal and commercial loans, mortgages and securities. The liabilities are, of

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course, the customer deposits. The excess revenue that is generated from the spread

between interest paid out on deposits and interest earned on assets is the net interest

income.

The net interest income of some banks is more sensitive to changes in interest rates than

others. This can vary according to several factors, such as the type of assets and liabilities

that are held. Banks with variable rate assets and liabilities will obviously be more

vulnerable to changes in interest rates than those with fixed-rate assets. Banks with

liabilities that price more often or quicker than its assets will also be affected by interest

rate changes.

PROVISION FOR LOAN LOSSES

It is an expense set aside as an allowance for bad loans (customer defaults, or terms of

a loan have to be renegotiated, etc. It is also known as a "valuation allowance" or

"valuation reserve". This would be a bank's equivalent of a manufacturing company's

allowance for returns on goods sold.

INTEREST FROM FEDUCIARY ACTIVITIES

The term “fiduciary activities” refers to assets, which a federal, state or municipal

government administers for non-federal individuals. Some types of fiduciary activities

include the Thrift Savings Plan, individual Indian trust funds and the Alaska Native Escrow

Fund. The Federal Accounting Standards Advisory Board (FASAB) sets guidelines for the

reporting of fiduciary activities on financial statements.

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SERVICE CHARGE ON DEPOSIT ACCOUNT

Many banks charge nominal fees for various services, such as requesting a deposit slip

or counter check or notarizing a document. Bank fees are usually nondeductible, except

for annual custodial fees charged by the bank for IRA accounts. Even checks that are

used for tax records are nondeductible, unless the checks are written from a money

market account with limited check-writing privileges, and violation of this privilege results

in forfeiture of the account's money market status. Bank fees generally constitute a major

portion of revenue for the bank, particularly for regional and local branches.

TRADING REVENUE

It is the profit that an investor derives from buying and selling short term securities, or

those that the investor holds for less than one year. Trading profits can be substantial if

the investor knows what he/she is doing, but there is a good deal of risk involved.

Governments often seek to encourage long-term investment at the expense of short-term,

and because of this, trading profit is usually taxed at the (higher) income tax rate instead

of the capital gains rate.

FFEES FROM SECURITY BROKERAGE

A fee charged by an agent, or agent's company to facilitate transactions between buyers

and sellers. There are many types of brokerage fees added in areas such as insurance,

realty, delivery services or stocks. Brokerage fees will usually be based on either a

percentage of the transaction or a flat fee. They can also be a combination of the two.

The brokerage fee is charged for services such as negotiations, sales, purchases,

delivery or advice on the transaction.

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FEES FROM INVESTMENT BANKING

An investment bank is a financial institution that assists individuals, corporations, and

governments in raising financial capital by underwriting or acting as the client's agent in

the issuance of securities (or both).

FEES FROM INSURANCE

A contract (policy) in which an individual or entity receives financial protection or

reimbursement against losses from an insurance company. The company pools clients'

risks to make payments more affordable for the insured.

NET GAIN OR LOSS FROM SALES OF INVESTMENT SECURITY

This is in contrast to securities that are purchased by a broker-dealer or other intermediary

for resale. They are Securities that are purchased in order to be held for investment. .

Banks often purchase marketable securities to hold in their portfolios.

OTHER NON INTEREST INCOME

Bank and creditor income derived primarily from fees. Institutions charge fees that provide

non-interest income as a way of generating revenue and ensuring liquidity in the event of

increased default rate. Examples of non-interest income include deposit and transaction

fees, insufficient funds (NSF) fees, annual fees, monthly account service charges;

inactivity fees, check and deposit slip fees, etc.

SALARIES AND EMPLOYEES BENEFIT

They are benefits in kind (also called fringe benefits, perquisites, or perks) include various

types of non-wage compensation provided to employees in addition to their normal wages

or salaries.

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EXPENSES

Expenses are economic costs that a business incurs through its operations to earn

revenue. Because expenses are such an important indicator of a business's operations,

there are specific accounting rule on expense recognition. In order to maximize profits,

businesses must attempt to reduce expenses without also cutting into revenues.

INCOME BEFORE TAXES AND EXTRAORDINARY ITEMS

Net profit before Tax and Extraordinary Items is the starting point for calculating Cash

from Operating Activities. To determine Net profit before Tax and Extraordinary Items we

make some adjustments to the Net Profits as shown by the Statement of Profit and Loss

of a concern by adding and subtracting various items.

APPLICABLE INCOME TAXES

It is a tax that governments impose on financial income generated by all entities within

their jurisdiction. By law, businesses and individuals must file an income tax return every

year to determine whether they owe any taxes or are eligible for a tax refund. Income tax

is a key source of funds that the government uses to fund its activities and serve the

public.

EXTRAORDINARY ITEMS

It includes gains or losses included in a company's financial statements, which are

infrequent and unusual in nature. These are usually explained further in the "notes to the

financial statements."

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These are the result of unforeseen and atypical events. They are usually accounted for

separately so they don't skew the company's regular earnings. An example would be a

snowstorm in Hawaii creating extraordinary losses to banana crops. These losses might

be written down as a one-time charge.

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