Chapter 05 The Financial Statements of Banks and Their Principal
Competitors Answer Key
Fill in the Blank Questions
1. Fed funds purchased is an example of _______________________ along with Eurodollar
borrowings.
nondeposit borrowings
2. The short-term securities of the bank, including T-Bills and commercial paper, are often called
__________________________ because they are the second line of defense to meet demands
for cash.
secondary reserves
3. __________________________ is a noncash expense on the bank's income statement which
allows the bank to account for future bad loans.
Provision for loan losses
4. __________________________ is the difference between total interest income and total interest
expenses for a financial institution.
Net interest income
5. __________________________ are the primary long-term liabilities of the bank.
Subordinated notes and debentures
6. A(n) __________________________ is where the financial institution agrees to guarantee
repayment of a customer's loan, which the customer has received from a third party.
standby credit agreement
7. A(n) __________________________ is a short term collateralized loan. The collateral that is used
generally consists of T-Bills.
repurchase agreement
8. A(n) __________________________ is a deposit account which pays an interest rate competitive
with money market mutual funds and which generally has limited check writing ability.
money market deposit account
9. _____________________ is the sum of all outstanding IOUs owed to the bank in the form of
consumer, real estate, commercial, and agriculture loans as well as other types of credit
extensions.
Gross loans
10. A financial institution often records the value of its assets and liabilities at ____________ which is
the historical cost of the asset.
original cost
11. The principal types of __________________________ include fee income, income from fiduciary
activities, and service charges on deposits.
noninterest income
12. The __________________________ shows the amount of revenues received and expenses
incurred over a specific time period.
Report of Income (income statement)
13. The __________________________ lists the assets, liabilities and equity capital held by the bank
on a given date.
Report of Condition (balance sheet)
14. ______________ is labeled "Accounting for Derivative Instruments and Hedging Activities".
FASB 133
15. ________________ labeled "Accounting for Derivative Instruments and Hedging Activities" and its
recent amendments, __________, are designed to make derivatives more publicly visible on
corporate financial statements.
FASB 133, FASB 138
16. Temporarily buying and selling securities by a securities firm in a thinly traded market so as to
influence the price is known as ________________.
"painting the tape"
17. The activity of manipulating the financial statements to artificially enhance the banks financial
strength is known as __________________.
"window dressing" or "creative accounting"
18. ________________ is an asset category which includes direct and indirect investment in real
estate. These are properties obtained for compensations for nonperforming loans.
Other Real Estate Owned (OREO)
19. __________ consists of interest income received on loans from customers that has not yet been
earned by the bank under accrual accounting methods.
Unearned income
20. __________ can be held by individuals and nonprofit institutions, bear interest and permit drafts to
be written against the account to pay third parties.
NOW accounts
21. In the worldwide banking system, __________ represent transferable time deposits in a variety of
currencies and are often the principal source of short term borrowings by banks.
Eurocurrency borrowings
22. One part of __________ arises from fees charged for ATM and POS transactions.
noninterest income
23. Fees that arise from a financial firm's trust activities, fees for managing a corporation's interest and
dividend payments, and fees for managing corporate or individual retirement plans are all included
in the category of fees arising from __________.
fiduciary activities
24. Checking account maintenance fees and overdraft fees are included in the noninterest income
account under _________.
service charges on deposit accounts
True / False Questions
25. On a bank's income statement (Report of Income) deposit costs are financial inputs.
TRUE
26. Loans and leases are financial outputs on a financial institution's balance sheet or Report of
Condition.
TRUE
27. Nondeposit borrowings are a financial input on a bank's balance sheet or Report of Condition.
TRUE
28. The cost of nondeposit borrowings is a financial input on a bank's income statement or Report of
Income.
TRUE
29. Securities income is a financial output listed on a financial institution's Report of Condition.
FALSE
30. Net loans on a bank's balance sheet are derived by deducting the allowance for loan losses and
unearned discounts from gross loans.
TRUE
31. When a loan is classified as nonperforming, any accrued interest recorded on the books, but not
actually received, must be deducted from the bank's loan revenues.
TRUE
32. In U.S. banking, securities gains are treated as an ordinary income.
TRUE
33. Most banks report securities gains as a component of their total noninterest income.
FALSE
34. A bank displaying trading-account securities on its balance sheet is serving as a security dealer
and plans to sell those securities before they reach maturity.
TRUE
35. Bad loans normally do not affect a bank's current income.
TRUE
36. The expensing of a worthless loan usually must occur in the year that troubled loans are judged to
be worthless.
TRUE
37. Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL)
account on a bank's income statement.
FALSE
38. Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or loans
that represent above-average risk are known as specific reserves.
TRUE
39. U.S. banks (especially those with $500 million or more in total assets) are required to file financial
statements, audited by an independent public accountant, with their principal federal regulatory
agency and with the FDIC.
TRUE
40. Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their
balance sheet.
TRUE
41. The experience method of accounting for future loan loss reserves allows a bank to deduct from
their income statement up to 0.6 percent of their eligible loans.
FALSE
42. After the Tax Reform Act of 1986, large banks (>$500 million in assets) were required to use the
reserve method of accounting for future loan loss reserves.
FALSE
43. The number one source of revenue for a bank based on dollar volume is loan income.
TRUE
44. In looking at comparative balance sheets, it can be seen that large banks rely more heavily on
nondeposit borrowings while small banks rely more heavily on deposits.
TRUE
45. The Pension Fund industry is now larger than the Mutual Fund industry.
FALSE
46. Off-balance-sheet items for banks have declined in recent years.
FALSE
47. Except for commercial banks, savings & loans and savings banks hold the most deposits.
TRUE
48. "Painting the tape" refers to the practice whereby banks understate their nonperforming loans.
FALSE
49. Financial statements issued by banks and by nonbank financial-service firms look increasingly
similar today.
TRUE
Multiple Choice Questions
50. Each of the following falls into the category of bank assets except:
A. loans.
B. investment securities.
C. demand deposits.
D. cash and due from banks.
E. other assets.
51. Banks generate their largest portion of income from:
A. loans.
B. short-term investments.
C. demand deposits.
D. trading account gains & fees.
E. certificates of deposits.
52. Each of the following typically falls into the category of loans except:
A. real estate.
B. consumer.
C. commercial and industrial (business).
D. agricultural.
E. municipal.
53. Which of the following adjustments are made to gross loans and leases to obtain net loans and
leases?
A. Loan and lease loss allowance is added to gross loans.
B. Unearned income is subtracted from gross interest received.
C. Investment income is added to gross interest received.
D. Loan and lease loss allowance and unearned income is subtracted from gross loans.
E. Loan and lease loss allowance is subtracted from gross loans and investment income is added
to gross interest received.
54. An example of a contra-asset account is:
A. loan and lease loss allowance.
B. trading account assets.
C. buildings and equipment.
D. revenue bonds.
E. provision for loan loss.
55. The noncash expense item on a bank's Report of Income designed to shelter a bank's current
earnings from taxes and to help prepare for bad loans is called:
A. short-term debt interest.
B. noninterest expense.
C. provision for taxes.
D. provision for possible loan losses.
E. None of the options are correct.
56. A financial institution's bad-debt reserve, as reported on its balance sheet, is called:
A. unearned income or discount.
B. allowance for possible loan losses.
C. intangible assets.
D. customer liability on acceptances.
E. None of the options are correct.
57. When a bank serves as a security dealer for certain kinds of securities (mainly federal, state, and
local government obligations) the value of these securities is usually recorded in what account on
a bank's Report of Condition?
A. Investment securities
B. Taxable and tax-exempt assets
C. Trading account assets
D. Secondary reserves
E. None of the options are correct.
58. ___________ is calculated by deducting noninterest expense and provision for loan losses from
noninterest income.
A. Net profit margin
B. Net interest income
C. Net income after provision for possible loan losses
D. Income or loss before income taxes
E. Net noninterest income
59. The account that is built up by annual noncash expense deductions and is subtracted from Gross
Loans on the Report of Condition is:
A. unearned income.
B. nonperforming loans.
C. allocated loan risk deductions.
D. allowance for possible loan losses.
E. None of the options are correct.
60. Nonperforming loans are credits on which any scheduled loan repayments and interest payments
are past due for more than:
A. 30 days.
B. 60 days.
C. 90 days.
D. 180 days.
E. None of the options are correct.
61. One-time-only transactions that often involve sale of financial assets or real property pledged as
collateral behind a loan and upon which the bank has foreclosed, affect a bank's account known
as:
A. allowance for loan losses.
B. nonrecurring sales of assets.
C. asset gains or losses.
D. provision for loan and security losses.
E. None of the options are correct.
62. The use of fixed assets, rather than financial assets, in order to increase the operating earnings is
known as:
A. plant and equipment investment.
B. financial leverage.
C. operating leverage.
D. nondeposit capital.
E. None of the options are correct.
63. Banks depend heavily upon borrowed funds supplied by customers with little owners' capital
invested. This means that banks make heavy use of:
A. financial leverage.
B. capital restructuring.
C. operating leverage.
D. margin borrowing.
E. None of the options are correct.
64. When a loan is considered uncollectible, the bank's accounting department will write (charge) it off
the books by reducing the ______ and the ______ accounts. Which choice below correctly fills in
the blanks in the preceding sentence?
A. PLL, gross loans
B. ALL, net loans
C. ALL, gross loans
D. PLL, net loans
E. None of the options are correct.
65. The common banking practice of selling those investment securities that have appreciated in
order to reap a capital gain and holding onto those securities whose prices have declined is
known as:
A. gains trading.
B. performance banking.
C. loss control trading.
D. selective portfolio management.
E. None of the options are correct.
66. Noninterest revenue sources for a bank are called:
A. commitment fees on loans.
B. fee income.
C. supplemental income.
D. noninterest margin.
E. None of the options are correct.
67. Large U.S. banks must use which of the methods listed below to determine their provision for loan
loss expense?
A. Experience method
B. Reserve method
C. Specific charge-off method
D. Historical cost method
E. None of the options are correct.
68. A bank's temporary lending of excess reserves to other banks is labeled on the balance sheet as:
A. fed funds purchased.
B. fed funds sold.
C. money market deposits.
D. securities purchased for resale.
E. None of the options are correct.
69. A bank sells shares of its common stock with a par value of $100 for $200 in the market. Which
two accounts on the bank's balance sheet are going to be affected?
A. Retained earnings and surplus accounts
B. Subordinated notes and debentures and commons stock outstanding accounts
C. Retained earnings and common stock outstanding accounts
D. Common stock outstanding and surplus accounts
E. Only the common stock outstanding account
70. A bank which starts with ALL of $1.48 million at the beginning of the year, charges off worthless
loans of $0.94 million during the year, recovers $0.12 million on loans previously charged off and
charges current income for a $1.02 million provision for loan losses, will have an ALL at the end of
the year of:
A. $0.66 million.
B. $3.32 million.
C. $1.68 million.
D. $1.28 million.
E. The same amount as at the beginning of the year.
71. A bank has total interest income of $67 million and total noninterest income of $14 million. This
bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of
$28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net
interest income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.
72. A bank has total interest income of $67 million and total noninterest income of $14 million. This
bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of
$28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net
noninterest income?
A. $7
B. -$20
C. $18
D. $32
E. None of the options are correct.
73. A bank has total interest income of $67 million and total noninterest income of $14 million. This
bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of
$28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net
income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.
74. Which of the following financial statements shows the revenues and expenses of a bank over a
set period of time?
A. The Statement of Stockholders Equity
B. The Funds-Flow Statement
C. The Report of Financial Condition
D. The Report of Income
E. None of the options are correct.
75. Which of the following accounts is also called the bank's primary reserves?
A. Cash and deposits due from banks
B. Investment securities
C. Trading account securities
D. Fed funds sold
E. None of the options are correct.
76. Which of the following assets is the largest asset item on the bank's balance sheet?
A. Securities
B. Cas
h
C. Loans and leases
D. Bank premises
E. None of the options are correct.
77. What financial-service industry category is second to the banking industry in total financial assets
held?
A. Mutual funds
B. Thrifts
C. Investment banks
D. Insurance companies
E. Pension funds
78. FASB Rule 115 focuses primarily on:
A. deposit sources.
B. investments in marketable securities.
C. derivatives trading.
D. loan-loss reserves.
E. hedging activities.
79. Which of the following most accurately describes the principal type(s) of bank noninterest
income?
A. Fees from fiduciary transactions
B. Fees from deposit transactions
C. Fees from securities transactions
D. Fees from additional noninterest income
E. All of the options are correct.
80. Fee income arising from fiduciary transactions include all of the following except:
A. fees for checking account maintenance.
B. fees for managing and protecting a customer's property.
C. fees for recordkeeping for corporate security.
D. fees for dispersing interest and dividend payments for a corporation.
E. fees for managing corporate and individual retirement plans.
81. You know the following information about the Miller State Bank:
Given this information, what is the value of this firm's net loans?
A. $250
B. $350
C. $500
D. $50
E. $150
82. You know the following information about the Miller State Bank:
Given this information, what is the value of this firm's depreciation?
A. $250
B. $30
C. $70
D. $40
E. $110
83. You know the following information about the Miller State Bank:
Given this information, what is the value of this firm's total liabilities?
A. $390
B. $60
C. $450
D. $500
E. $50
84. You know the following information about the Miller State Bank:
Given this information, what the value of this firm's undivided profits?
A. $50
B. $5
C. $10
D. $40
E. $450
85. You know the following information about the Miller State Bank:
Given this information, what is the value of this firm's total liabilities plus equity?
A. $250
B. $450
C. $150
D. $50
E. $500
86. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's net interest income?
A. $300
B. $150
C. ($50)
D. $120
E. $80
87. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's net noninterest income?
A. $300
B. $150
C. ($150)
D. $120
E. $80
88. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's pretax net operating income (or net income
before extraordinary items)?
A. $300
B. $150
C. ($50)
D. $120
E. $80
89. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's net income?
A. $300
B. $150
C. ($50)
D. $120
E. $80
90. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's increase in undivided profits?
A. $300
B. $150
C. ($50)
D. $120
E. $80
91. You know the following information about the Davis National Bank:
Given this information, what is the value of this firm's total revenues?
A. $800
B. $850
C. $150
D. $950
E. $900
92. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's allowance for loan losses?
A. $1,300
B. $1,000
C. $50
D. $200
E. $100
93. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's net premises?
A. $130
B. $1,000
C. $50
D. $200
E. $100
94. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's total nondeposit borrowings?
A. $1,000
B. $300
C. $800
D. $200
E. $500
95. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's total liabilities?
A. $1,000
B. $300
C. $800
D. $200
E. $500
96. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's total equity?
A. $1,000
B. $300
C. $800
D. $200
E. $500
97. You know the following information about the Webb State Bank:
Given this information, what is the value of this firm's total assets?
A. $1,000
B. $300
C. $800
D. $200
E. $500
98. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's net interest income?
A. $150
B. $210
C. $400
D. ($250)
E. $750
99. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's net noninterest income?
A. $150
B. $210
C. $400
D. ($350)
E. $750
100. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's net operating income or net income before
extraordinary income?
A. $150
B. $210
C. $400
D. ($250)
E. $750
101. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's net income?
A. $150
B. $210
C. $400
D. ($250)
E. $750
102. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's increase in undivided profits?
A. $150
B. $210
C. $400
D. ($250)
E. $750
103. You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm's total revenues?
A. $1,500
B. $2,000
C. $2,050
D. $1,950
E. $1,450
104. The largest expense item often observed in the financial statement of the banks is:
A. personnel cost.
B. premises and equipment cost.
C. interest on borrowed funds.
D. provision for loan loss.
E. employee benefits.
105. The available-for-sale securities are shown on the:
A. Report of Condition at book value.
B. Report of Income at fair market value.
C. Report of Condition as a contra asset.
D. Report of Condition at fair market value.
E. Report of Income as an income.
106. The beginning balance in the allowance for loan loss account for Synopsis Bank is $500 million.
The banking firm charges $2 million for provision for loan losses. Synopsis Bank will report:
A. $502 million as adjusted allowance for loan losses.
B. $498 million as noninterest expense.
C. $2 million as allowance for loan losses.
D. $502 million as provision for loan loss expense.
E. $2 million as adjusted allowance for loan losses.
107. A bank's Report of Condition shows gross loans and leases or $1,500 million. The loan loss
allowance for the year is accumulated to $50 million and the bank reports an unearned income
amounting to $2 million. The net loans and leases accounted by the banks would be:
A. $1,550 million
B. $1,450 million
C. $1,448 million
D. $1,452 million
E. $1,548 million
108. Which of the following asset items may include deposits placed with correspondent deposits?
A. Savings deposit
B. Trading account assets
C. NOW accounts
D. Allowance for loan losses
E. Cash and due from depository institutions
109. If writing off a large loan reduces the balance in the allowance for loan losses account too much,
the principal regulatory agency:
A. reduces the provision for loan loss expense.
B. transfers funds to the account from retained earnings.
C. reduces the number of loans being sanctioned.
D. increases the provision for loan loss deduction.
E. removes the reserve from the financial statement.
110. Securities purchased to provide short-term profits from short-term price movements are reported
as:
A. investment securities.
B. trading account assets.
C. reverse repurchase agreements.
D. due from depository institutions.
E. federal funds.
