Assessment of Financial Statements
ASSESSMENT OF FINANCIAL STATEMENTS
Assessment of Financial Statements
Judith A Vicks
FIN7014-8: Managing Financial Institutions
Dr. Ekanayake: Northcentral University
June 23, 2013
ASSESSMENT OF FINANCIAL STATEMENTS
Abstract
It is important to understand the differences in how earnings and liabilities are generated or reported for different financial institutions. This paper will describe key points regarding the balance sheets of different financial institutions. Commercial Banks must mitigate interest rate and default risk, however, when a major financial crisis erupts they must have enough reserves on hand to cover their liabilities. Insurance companies use the float from the premiums paid in to invest their proceeds to cover their risk. Insurance companies will often increase premiums due to a variety of issues but must also be competitive. Investment companies often use fair market value when assessing the value of assets which serves them in two ways. First they can take advantage of a higher asset value during prosperous times, and secondly they can make firms seem more profitable especially when valuing mergers and acquisitions which is their largest money making business.
Assessment of Financial Statements To assess the balance sheets of commercial banks it is important to understand what items appear on the assets and liabilities sides of the sheet. On the assets side of the balance sheet banks have the cash that they have accumulated, the discounted bills and securities, the banks investments and most importantly the loans and advances given among other assets. On the liabilities side of the balance sheet the banks have the shareholders capital, the reserve funds, the deposits, as well as borrowings and other liabilities. In conclusion, the goal of the bank is to make a profit and have a positive asset balance in comparison to their liabilities. When a bank fails, it is likely the cause of a recession or sluggish
Assessment of Financial Statements
Judith A Vicks
FIN7014-8: Managing Financial Institutions
Dr. Ekanayake: Northcentral University
June 23, 2013
ASSESSMENT OF FINANCIAL STATEMENTS
Abstract
It is important to understand the differences in how earnings and liabilities are generated or reported for different financial institutions. This paper will describe key points regarding the balance sheets of different financial institutions. Commercial Banks must mitigate interest rate and default risk, however, when a major financial crisis erupts they must have enough reserves on hand to cover their liabilities. Insurance companies use the float from the premiums paid in to invest their proceeds to cover their risk. Insurance companies will often increase premiums due to a variety of issues but must also be competitive. Investment companies often use fair market value when assessing the value of assets which serves them in two ways. First they can take advantage of a higher asset value during prosperous times, and secondly they can make firms seem more profitable especially when valuing mergers and acquisitions which is their largest money making business.
Assessment of Financial Statements To assess the balance sheets of commercial banks it is important to understand what items appear on the assets and liabilities sides of the sheet. On the assets side of the balance sheet banks have the cash that they have accumulated, the discounted bills and securities, the banks investments and most importantly the loans and advances given among other assets. On the liabilities side of the balance sheet the banks have the shareholders capital, the reserve funds, the deposits, as well as borrowings and other liabilities. In conclusion, the goal of the bank is to make a profit and have a positive asset balance in comparison to their liabilities. When a bank fails, it is likely the cause of a recession or sluggish
References: Abraham, A. (2012). Financial instability and banks ' balance sheets: A Note. Journal of Business Management 43 (3), 95-98. Bech, M. R. (2009). Profits and balance sheet developments at US commercial banks in 2008. Washington D.C.: Federal Reserve. Hemenway, C. (2012, October 1). Income Statements, Not Balance Sheets, Driving E&S Rate Increases. P & C 116(31), 28. Karthik, R. (2013). Why fair value is the rule. Harvard Business Review 91(3), 99-101. Orens, R. L. (2010). Determinants of sell-side financial analysts ' use of non-financial information. Accounting and Business Research 40 (1), 39-53. Ruquet, M. E. (2012). Lloyd 's Reports Strong First Half; Says Underwriting Discipline 'Top Priority". P & C, 28.