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Financial Statements
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Financial statements are the most widely used and the most comprehensive way of communicating financial information to users of the information provided on the reports.  Different users of financial statements have different informational needs.  General purpose financial statements have been developed to meet the needs of the users of financial statements, primarily the needs of investors and creditors.

The information provided by financial statements is primarily financial in nature quantified and expressed in units of money.  The information presented pertains to individual business enterprises, government entities, and other accounting entities, and not to industries or to members of society as consumers.  The information provided on the statements is often approximations, rather than exact, measures.  The measures involve estimates, classifications, summarizations, judgments, and allocations.  The information provided generally reflects the financial effects of transactions and events that have already happened.  The information provided involves a cost to provide and use; generally the benefits of information provided should be expected to at least equal the cost involved.

The basic output of the financial accounting process is presented in the following interrelated general purpose financial statements:

  1. A balance sheet (or statement of financial position) summarizes the financial position of an accounting entity at a particular point in time.

  2. An income statement summarizes the results of operations for a given period of time.

  3. A statement of cash flows summarizes the impact of an enterprise's cash flows on its operating, financing, and investing activities over a given period of time.

  4. A statement of retained earnings shows the increases and decreases in earnings retained by the company over a given period of time.  The statement is sometimes combined with the income statement.  The statement of retained earnings is sometimes expanded into a statement of stockholders' equity that discloses changes in other stockholders' equity accounts in addition to retained earnings.

Notes to financial statements are considered an integral part of a complete set of financial statements.

The major financial statements are interrelated (or articulate) with each other.  The income statement and the statement of changes in financial position can be viewed as connecting links between the beginning and ending statements of financial position.  The income statement basically describes the changes in the statement of financial position accounts that result from operations.  The statement of cash flows explains changes in cash between two points in time.

The aggregate condition and income data of FDIC-insured Commercial banks for 1988 and 1989 is appended.

Bank financial statements present a comprehensive report on the financial condition and results of operations.  A discussion of these activities is usually presented in management's discussion and analysis of financial condition and results of operations along with other information contained in the annual report.  For most banks, two significant purposes of funds management are to provide adequate liquidity and to maintain a reasonable relationship between the repricing of sources and uses of funds or interest sensitive assets and liabilities.  This is accomplished through maintaining a combination of sufficient core deposit growth, liquid assets and unused capacity to purchase funds in the money markets.  The more stable consumer core deposits are supplemented with large denomination certificates of deposit and purchased federal funds and other sources.  Major banks also have access to the Eurodollar market primarily as a source of funding foreign office loans and discretionary placements.  It is important that a bank has the ability to support healthy secular asset growth and cyclical peaks in customer loan demand.  The core demand and time deposit accounts should be supported with a strong capital base to produce a balance sheet which is asset sensitive (having more assets than liabilities sensitive to changes in market rates).

An objective of asset and liability management is to increase the level of variable rate assets (floating rate consumer and commercial loans, adjustable rate mortgages and shorter maturity investments) to balance increases in market-sensitive liabilities.  The long-term strategies of a bank coupled with its short-term tactics must be astutely employed to react to the dynamic effects of money market developments, regulatory changes, competition, customer demand, and other external forces.

The financial condition of a bank can usually be evaluated by reviewing the changes, trends, and relationship in the sources and uses of funds.  Deposits are the primary source of funds for most banks.  The major use of funds is for interest-earning assets, primarily loans and investment securities.  The components of assets, liabilities, and capital should be reviewed (Primary capital:  share-holders' equity; allowance for loan losses; long-term debt qualifying as primary capital; minority interest) along with capital ratios (shareholders' equity to total assets; primary capital to total assets; total capital to total assets).

The results of operations are impacted by loan demand and interest rates structures as well as by the marketplace.  Earnings performance as reflected in a bank's net interest income and selected average balances (loans; investment securities; interest-bearing bank balances; Federal funds sold and securities purchased under resale agreements; trading account assets); interest expense and selected average balances (savings and interest-bearing demand; money market checking and savings; saving certificates large denomination certificates; time denomination certificates; time deposits in foreign offices; short-term borrowed funds; long-term debt); net interest rate yield (net interest income as a percentage of average earning assets loans; investment securities; interest-bearing bank balances; Federal funds sold and securities purchased under resale agreements; trading account balances); net income per share fully diluted can provide basic information about a bank's performance; taxable equivalent rate/volume variance analysis; nonperforming assets and provision and allowance for loan losses; foreign country exposure; and noninterest income and noninterest expense.  Total average assets in relation to equity capital provides are useful in relating a bank with guidelines of federal regulators.  Net loan losses as a percentage of loans for a period of years is important in estimating the quality of a bank's loans.

While FINANCIAL STATEMENT ANALYSIS is basic when evaluating a bank, factors above and beyond the financial statements often are as significant in evaluating a bank as are the results of financial reporting:  capable people, an understanding of purpose or mission, responsive policies and objectives, competitive services, modern technology, attractive markets, sources of funding, strong and stable capital, sound loans, and sufficient reserves.


HYLTON, D.P.  "On the Usefulness of Consolidated Financial Statements."  CPA Journal, October, 1988.

Wang, P.  "What's Off, What's On?  [accounting rules for consolidations]."  Forbes, February 20, 1989.

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