Accounting (404) Section (2)

Chapter (2): Bank’s Financial statements

Example (1):

You are working in Emirates NBD in Egypt; you had the following balances at the end of the period
(In million Egyptian Pounds):
Borrowing from local banks. 220 Interests on customers' deposits. 300
Bank's deposit in the central bank. 400 Return on investments. 118
Cash and equivalents. 520 Current accounts. 632
Common stockholders' equity. 210 Commissions and fees earned. 244
Interests on customers' loans. 520 Lending local banks. 316
Loans to customers. 860 Fees of money transfer. 94
Other expenses. 42 Demand deposits. 320
Bank deposits in foreign currency. 300 Income from propriety. 65
Trading securities. 212 Salaries and other employees' benefits. 218
Reserve funds. 84 Commission paid to agents. 140
Time deposits. 320 Costs of services provided by banks. 203
Allowance for loans losses. 120 Commissions and service fees. 184
Commercial note of customers. 280

Required:
Prepare the income statement followed by Balance Sheet for Emirates NBD-Egypt in a proper order.
SOLUTION
st
1 : Income Statement

Revenues:

▪ Interest on customer’s loans. 520

(-) Interest on customer’s deposits. (300)

= Net Interest Income. 220

(+) Return on investments. 118

Commission & fees earned. 244
Fees for money transfer. 94
Income from propriety. 65
Commission and service fees. 184

= Total Revenues (1) 925

Expenses:

(-) Commission paid to agents. 140

Costs of services provided by banks. 203
Salaries and other employees’ benefits. 218
Other expenses. 42

= Total Expenses (2) (603)

Net Income for the year (1-2) 322

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2nd: Balance Sheet

Assets:
▪ Cash and equivalent. 520
▪ Bank's deposit in the central bank. 400
▪ Bank deposits in foreign currency. 300
▪ Trading securities. 212
▪ Loans to customers. 860
(-) allowance for loans losses (120) 740
▪ Lending local banks. 316
= Total Assets 2488

Liabilities:
▪ Current accounts. 632
▪ Demand deposits. 320
▪ Commercial note of customers. 280
▪ Time deposits 320
▪ Borrowing from local banks. 220
= Total Liabilities 1772

Owners’ equity:
▪ Common stockholders’ equity. 210
▪ Reserve funds. 84
▪ Retained earnings (Net income) 322

= Total Equity 716

= Total Liabilities & Owners’ equity 2488

End of example (1)

Theoretical part

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Chapter (2): Bank’s Financial statements

1- Chart of accounts in a bank:

• A bank opens accounts for items or activities that expresses its activities.

• The major accounts include:

➢ Assets:

- Cash and cash equivalents (local currency – foreign currencies)

- Deposits at (central bank - other commercial banks - banks abroad).
- Financial investments in (securities - governmental bills - loans given to customers
or to other banks).

➢ Liabilities:

- Customers' deposits.
- Amounts borrowed from other banks and other creditors.

• The major source of bank Income:

- Interest on loans to customers.
- Service fees and commissions.
- Income from financial investments.

• The largest Expense:

- Interest paid by bank on customers' deposits and other customer accounts.
- Commissions and fees paid to other banks and business partners for money transfer or
other services.

Revenue:
is income earned by bank through (lending - investing - providing other services to clients).

Expense:
is a cost or loss incurred by bank in (operating activities - lending transactions – trading).

True or False Question

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Question (1):
1. When The customer presented the commercial notes to the bank to keep them for safety, the
ownership of them has to be transferred to the bank. False

2. The currency exchange is considered as one of the first services offered by banks. True

3. Cheques dated more than six months prior to presentation may not, be honored. True

4. The bank reserves to itself the right of closing a customer account after previous warning, if it is
not operated upon satisfactorily or for any other reason whatsoever True

5. Mortgage loan is used to finance the construction of a building. True

6. In the deposit account for a fixed period, the customer can withdraw his money with complete
interest at any time. False

7. Rejecting a loan request means immedate loss. True

8. In the deposit account for a fixed period, the customer can withdraw his money with complete
interest at any time. False

9. One of the problems with liquidity management for a bank is that there is a trade-off between
bank liquidity and profitability True

10. Cheques dated more than eight months prior to presentation may not be honored True

11. When the customer presented the financial paper to the bank to keep them for safety, the
ownership of them has to be transferred to the bank False

12. If the customer has no current account in the bank, he cannot ask the bank for the service of
buying financial papers False

13. One of the special features of fixed and savings deposits that the banker is not obliged to keep
larger cash reserves than are needed in the case of Current Accounts True

14. In the deposit account for a fixed period, the customer can withdraw his money with complete
interest at any time. False

15. Overdraft is a cheapest form of borrowing, and interest rate is fixed by reference to the bank’s
base rate, and it is calculated on a daily basis. True

16. Managing the financial affairs and property of individuals and business firms falls under the type
of banking service line known as cash management services. True

Give the Correct term/Expression Question

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Question (2):
1. It is a way to lend money since the interest is added to the amount borrowed and the total is then
repaid by regular monthly repayments over an agreed period. (Personal loan)

2. It is another method to lend money to customers since the interest is calculated on a daily basis
and it is taken on the current account. (Overdraft)

3. It is a locked box to keep the value items for customers. (Safe custody)

4. It is used by customers who want to pay after the bank has closed. The customer puts his credit
and the cash in the wallet, locks it and then inserts it in an opening in the outer wall of the bank.
(Night Safe)

5. It is a scheme whereby customers' regular payments out over a year are evened out and debited to
him by equal monthly sums. (Budget scheme)

6. It is a locked box to keep the value items for customers. (Safe Custody)

7. It is used by customers who want to pay after the bank has closed. The customer puts his credit
and the cash in the wallet, locks it and then inserts it in an opening in the outer wall of the bank.
(Night Safe)

8. The bank sells a time on one of its computers to a customer who has no computer of his own but has
a need from time to time for the use of one. (Computer Services)

9. A financial transaction involving the exchange of currency to be completed at a future date.

(Forward Exchange)

M.C.Q Question
Question (3):
1- A financial transaction involving the exchange of currency to be completed at a future date.

a- Foreign Exchange
b- Forward Money
c- Foreign Currency
d- Forward Exchange

2- A bank that wires funds for the purchase of a beach house in Alexandria for a customer in Aswan is
carrying out the ………of banks.

a- the intermediation role

b- the payment role
c- the guarantor role
d- the agency role

3- Sources of liquidity for banks include:

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a- Deposit inflows
b- Money market borrowings
c- Sales of marketable securities
d- Loan repayments
e- All of the above

4- Financial institutions face significant liquidity problems because of:

a- Imbalances between the maturities of their assets and their principal liabilities.
b- Their high proportion of liabilities subject to immediate withdrawal.
c- Their sensitivity to changes in interest rates.
d- All of the above.

5- Uncollectible loans represent……………that ….………. bank’s income.

a- losses, has no effect on

b- gains, increases
c- Gains, effect depends on different factors
d- losses, reduce