Chapter 5

The Financial Statements of Banks and Their Principal Competitors

Fill in the Blank Questions

1. Fed funds purchased is an example of _______________________ along with Eurodollar

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.

3. __________________________ is a noncash expense on the bank's income statement which

allows the bank to account for future bad loans.

4. __________________________ is the difference between interest income and interest expenses

for a financial institution.

5. __________________________ are the primary long term liabilities of the bank. These
liabilities are paid only after deposits have been paid in the event of bankruptcy.

6. A(n)__________________________ is where the financial institution agrees to guarantee

repayment of a customer's loan received from a third party.

7. A(n)__________________________ is a short term collateralized loan. The collateral that is

used generally consists of T-Bills.
Answer: 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.

9. _____________________ is the sum of all outstanding IOU's owed to the bank in the form of
consumer, real estate, commercial and agriculture loans as well as other types of credit
extensions.

10. A financial institution often records the value of its assets and liabilities at _______________
which is the original or historical cost of the asset.

11. The principal types of__________________________ include fee income, income from fiduciary
activities and services charges on deposits.

12. The__________________________ shows the amount of revenues received and expenses

incurred over a specific time period.

13. The__________________________ lists the assets, liabilities and equity capital held by the bank
on a given date.

14. ______________ is labeled "Accounting for Derivative Instruments and Hedging Activities."

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 15. ________________ labeled “Accounting for Derivative Instruments and Hedging Activities” and
its recent amendments, FASB 138, are designed to make derivatives more publicly visible on
corporate financial statements.

16. Under _____________ banks must account for the expected loss of interest income on
nonperforming loans when calculating their loan-loss provision.

17. Temporarily buying and selling securities by a securities firm in a thinly traded market so as to
influence the price is known as _________________.

18. The activity of manipulating the financial statements to artificially enhance the banks financial
strength is known as ___________________.

19. is direct and indirect investment in real estate. These are

properties obtained for compensations for nonperforming loans.

20. consists of interest income received on loans from customers that

has not yet been earned by the bank under accrual accounting methods.

21. can be held by individuals and nonprofit institutions, bear interest and
permit drafts from being written against the account to pay third parties.

22. In the worldwide banking system, represent transferable time deposits

in a variety of currencies and are often the principal source of short term borrows by banks.

23. One part of arises from fees charged for ATM and POS transactions.

24. Fees that arise from a financial firm’s trust activities, fees for managing a corporations’ interest
and dividend payments and fees for managing corporate or individual retirement plans are all
included in the category of fees arising from .

25. Checking account maintenance fees and overdraft fees are included in the noninterest income
account under .

True/False Questions

T F 26. On a bank's income statement (Report of Income) deposit costs are financial inputs.

T F 27. Loans and leases are financial outputs on a financial institution's balance sheet or Report
of Condition.

T F 28. Nondeposit borrowings are a financial input on a bank's balance sheet or Report of
Condition.

T F 29. The cost of nondeposit borrowings is a financial input on a bank's income statement or
Report of Income.

T F 30. Securities income is a financial output listed on a financial institution's Report of

Condition.

58 Test Bank, Chapter 5

 T F 31. Net loans on a bank's balance sheet are derived by deducting the allowance for loan
losses and unearned discounts from gross loans.

T F 32. When a loan is classified as nonperforming any accrued interest recorded on the bank's
books, but not actually received, must be deducted from a bank's loan revenues.

T F 33. In U.S. banking, securities gains are treated as ordinary income.

T F 34. Most banks report securities gains as a component of their total noninterest income.

T F 35. 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.

T F 36. Bad loans normally do not affect a bank's current income.

T F 37. The expensing of a worthless loan usually must occur in the year that loan become
worthless.

T F 38. Recoveries on loans previously charged off are added to the Provision for Loan Losses
(PLL) account on a bank's income statement.

T F 39. Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem
or present the bank with above-average risk are known as specific reserves.

T F 40. 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.

T F 41. Off-balance-sheet items for a bank are fee generating transactions which are not recorded
on their balance sheet.

T F 42. The experience method of accounting for future loan loss reserves allows a bank to
deduct from their income statement up to .6 percent of their eligible loans.

T F 43. 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.

T F 44. The number one source of revenue for a bank based on dollar volume is loan income.

T F 45. 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.

T F 46. The Pension Fund industry is now larger than the Mutual Fund industry.

T F 47. Off-balance-sheet items for banks have declined in recent years.

T F 48. Except for banks, Savings & Loans and Savings Banks hold the most deposits.

T F 49. "Painting the tape" refers to the practice whereby banks understate their nonperforming
loans.

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 T F 50. Financial statements issued by banks and nonblank financial service firms are looking
increasingly similar today.

Multiple Choice Questions

51. Bank assets fall into each of the following categories except:
A) Loans.
B) Investment securities.
C) Demand deposits.
D) Noninterest cash and due from banks.
E) Other assets.

52. Banks generate their largest portion of income from:

A) Loans.
B) Short-term investment.
C) Demand deposits.
D) Long-term investments.
E) Certificates of deposit.

53. Loans typically fall into each of the following categories except:
A) Real estate.
B) Consumer.
C) Commercial and Industrial (business).
D) Agricultural.
E) Municipal.

54. Which of the following adjustments are made to gross loans and leases to obtain net loans and
leases?
A) The loan and lease loss allowance is subtracted from gross loans
B) Unearned income is subtracted from gross interest received
C) Investment income is added to gross interest received
D) A and B.
E) A. and C.

55. An example of a contra-asset account is:

A) The loan and lease loss allowance.
B) Unearned income.
C) Buildings and equipment.
D) Revenue bonds.
E) The provision for loan loss.

56. 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 above.

57. A financial institution's bad-debt reserve, as reported on its balance sheet, is called:
A) Unearned income or discount

60 Test Bank, Chapter 5

 B) Allowance for possible loan losses
C) Intangible assets
D) Customer liability on acceptances
E) None of the above

58. 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 Securities
C) Trading Account Securities
D) Secondary Reserves
E) None of the above

59. The difference between noninterest income and noninterest expenses on a bank's Report of
Income is called:
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

60. 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 above.

61. 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 above.

62. One-time only transactions that often involve 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 above.

63. The use of fixed assets, rather than financial assets, in order to increase earnings flowing to a
bank's stockholders is known as:
A) Plant and equipment investment

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 B) Financial leverage
C) Operating leverage
D) Nondeposit capital
E) None of the above.

64. 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 above.

65. 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 blank in the preceding sentence?
A) PLL and Gross Loans
B) ALL and Net Loans
C) ALL and Gross Loans
D) PLL and Net Loans
E) None of the above.

66. 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 above.

67. 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 above.

68. 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 above.

69. 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

62 Test Bank, Chapter 5

 D) Securities Purchased for Resale
E) None of the above

70. 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 capital 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 capital surplus accounts
E) Only the common stock outstanding account is affected

71. A type of letter of credit which is widely used in international trade is known as:
A) Banker's acceptance
B) Commercial paper
C) Repurchase agreement
D) Fed funds purchased
E) None of the above

72. A bank which starts with ALL of $1.48 million at the beginning of the year, charges off worthless
loans of $.94 million during the year, recovers $.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) $.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

73. A bank that 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 above

74. A bank that 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) -$14
C) $18
D) $32
E) None of the above

75. A bank that 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

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 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 above

76. Which of the following financial statements shows the revenues and expense 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 above

77. Which of the following accounts is sometimes called the bank's primary reserves?
A) Cash and deposits due from bank
B) Investment securities
C) Trading account securities
D) Fed funds sold
E) None of the above

78. Which of the following assets is the largest asset item on the bank's balance sheet?
A) Securities
B) Cash
C) Loans
D) Bank Premises
E) None of the above

79. What financial service industry category is second to the banking industry in total assets held:
A) Mutual funds
B) Thrifts
C) Investment banks
D) Insurance companies
E) Pension funds

80. FASB Rule 115 focuses primarily on bank:

A) Deposit sources
B) Investments in marketable securities
C) Derivatives trading
D) Loan-loss reserves
E) Federal funds

81. 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

64 Test Bank, Chapter 5

 E) All of the above

82. Fee income arising from fiduciary transactions include all of the following except:
A) Checking account maintenance fees
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

83. You know the following information about the Miller State Bank:

Gross Loans $300

Miscellaneous Assets $50
Deposits $390
Total Equity $50
Common Stock Par $5
Non-Deposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70
Given this information, what is this firm’s Net Loans?
A) $250
B) $350
C) $500
D) $50
E) $150

84. You know the following information about the Miller State Bank

Gross Loans $300

Miscellaneous Assets $50
Deposits $390
Total Equity $50
Common Stock Par $5
Non-Deposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70
Given this information, what is this firm’s Depreciation?
A) $250
B) $30
C) $70
D) $40

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 E) $110

85. You know the following information about the Miller State Bank

Gross Loans $300

Miscellaneous Assets $50
Deposits $390
Total Equity $50
Common Stock Par $5
Non-Deposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70
Given this information, what is this firm’s Total Liabilities?
A) $390
B) $60
C) $450
D) $500
E) $50

86. You know the following information about the Miller State Bank

Gross Loans $300

Miscellaneous Assets $50
Deposits $390
Total Equity $50
Common Stock Par $5
Non-Deposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70

Given this information, what is this firm’s Undivided Profits?

A) $50
B) $5
C) $10
D) $40
E) $450

87. You know the following information about the Miller State Bank

Gross Loans $300

Miscellaneous Assets $50

66 Test Bank, Chapter 5

 Deposits $390
Total Equity $50
Common Stock Par $5
Non-Deposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70

Given this information, what is this firm’s Total Liabilities Plus Equity?
A) $250
B) $450
C) $150
D) $50
E) $500

88. You know the following information about the Davis National Bank

Total Interest Expenses ($500)

Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)

Given this information, what is this firm’s Net Interest Income?

A) $300
B) $150
C) ($50)
D) $120
E) $80

89. You know the following information about the Davis National Bank
Total Interest Expenses ($500)
Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)

Given this information, what is this firm’s Net Non Interest Income?
A) $300
B) $150
C) ($50)

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 D) $120
E) $80

90. You know the following information about the Davis National Bank

Total Interest Expenses ($500)

Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)

Given this information, what is this firm’s Pretax Net Operating Income (or Net Income before
Extraordinary Items)?
A) $300
B) $150
C) ($50)
D) $120
E) $80

91. You know the following information about the Davis National Bank

Total Interest Expenses ($500)

Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)

Given this information, what is this firm’s Net Income?

A) $300
B) $150
C) ($50)
D) $120
E) $80

92. You know the following information about the Davis National Bank

Total Interest Expenses ($500)

Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)
Given this information, what is this firm’s Increase in Undivided Profits?

68 Test Bank, Chapter 5

 A) $300
B) $150
C) ($50)
D) $120
E) $80

93. You know the following information about the Davis National Bank

Total Interest Expenses ($500)

Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)
Given this information, what is this firm’s Total Revenues?
A) $800
B) $850
C) $150
D) $950

94. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700

Given this information, what is this firm’s Allowance for Loan Losses?
A) $1300
B) $1000
C) $50
D) $200
E) $100

95. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200

Rose/Hudgins, Bank Management and Financial Services, 8/e 69

 Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700
Given this information, what is this firm’s Net Premises?
A) $130
B) $1000
C) $50
D) $200
E) $100

96. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700
Given this information, what is this firm’s Total Non Deposit Borrowings?
A) $1000
B) $300
C) $800
D) $200
E) $500

97. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140

70 Test Bank, Chapter 5

 Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700
Given this information, what is this firm’s Total Liabilities?
A) $1000
B) $300
C) $800
D) $200
E) $500

98. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700
Given this information, what is this firm’s Total Equity?
A) $1000
B) $300
C) $800
D) $200
E) $500

99. You know the following information about the Webb State Bank

Accumulated Depreciation $40

Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20

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 Gross Loans $700
Given this information, what is this firm’s Total Assets?
A) $1000
B) $300
C) $800
D) $200
E) $500

100. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)
Interest Income $1500
Non Interest Expense $750
Interest Expenses $750
Given this information, what is this firm’s Net Interest Income?
A) $150
B) $210
C) $400
D) ($250)
E) $750

101. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)
Interest Income $1500
Non Interest Expense $750
Interest Expenses $750
Given this information, what is this firm’s Net Non Interest Income?
A) $150
B) $210
C) $400
D) ($250)
E) $750

102. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)
Interest Income $1500
Non Interest Expense $750

72 Test Bank, Chapter 5

 Interest Expenses $750

Given this information, what is this firm’s Net Operating Income or Net Income Before
Extraordinary Income?
A) $150
B) $210
C) $400
D) ($250)
E) $750

103. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)
Interest Income $1500
Non Interest Expense $750
Interest Expenses $750
Given this information, what is this firm’s Net Income?
A) $150
B) $210
C) $400
D) ($250)
E) $750

104. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)
Interest Income $1500
Non Interest Expense $750
Interest Expenses $750
Given this information, what is this firm’s Increase in Undivided Profits?
A) $150
B) $210
C) $400
D) ($250)
E) $750

105. You know the following information about the Taylor National Bank

Provision for Loan Losses ($100)

Income Taxes ($140)
Non Interest Income $500
Dividends ($60)
Securities Gains (Losses) ($50)

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 Interest Income $1500
Non Interest Expense $750
Interest Expenses $750
Given this information, what is this firm’s Total Revenues?
A) $1500
B) $2000
C) $2050
D) $1950
E) $1450

74 Test Bank, Chapter 5