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Analyzing a bank financial statement

Exam Card JVs 43

I. Read the text and translate it in a written form with the help of a dictionary

Money

The earliest form of trade was by barter. But barter has many drawbacks. Before the Puritan family could plan its dinner, it had to find someone willing to accept cloth in payment for fish. Or suppose they wanted to swap a cow for a few fish. How would they decide how many fish are worth a cow? The many problems associated with barter led the Massachusetts colonists to use wampum.

Wampum, a form of money Native Americans used in Massachusetts in the 1640s, consisted of certain black or white shells. (Black shells were worth twice as much as the white ones.) Both colonists and

A Medium of Exchange. Money economies differ from barter economies. In a barter economy you must find someone who has what you want and wants what you have. In a money economy people can sell what they have to anyone, then use the money to buy what they want. Money, therefore, is the medium that enables exchanges to be made easily.

A Measure of Value. Money enables us to state the price of something in terms that everyone can understand. One can say that a dozen eggs is worth 85 cents. This is far simpler than figuring out how much milk, meat, or clothing one could expect for a dozen eggs.

A Store of Value. Money enables us to use the value of something that we sell today to make a purchase some time in the future. For example, an egg seller could save the money from the day's sale to pay next year's college tuition. But imagine the diffi­culties in saving eggs to pay tuition.


Value-Added Tax

VAT is much like retail sales tax, except that the tax applies only to the difference between the value of a firm's sales and the value of its purchases from other firms. In essence, VAT would amount to a national sales tax on consumer goods. A number of European countries - for example, Great Britain and Sweden - currently use VAT as major source of revenue. One can avoid paying VAT by saving rather than consuming. And saving (refraining from consumption) will release resources from consumer goods production and thereby make them available for investment goods production. In short, elimination of the corporate income tax and the U.S. national output away from consumption and toward investment with the result that the productivity growth and "competitive edge" will be restored.

Others feel that higher tax rates or entirely new taxes are required to contain large and persistent Federal budget deficits. In recent years large Federal deficits have caused the public debt to rise sharply. Because many Federal expenditure programs are regarded to be "politically untouchable", any resolution of the deficit problem will undoubtedly entail tax increases. One option is to introduce VAT. Another is to increase the anomaly of marginal tax rates rising from 15 to 33 percent and then falling back to 28 percent cries out for adjustment. The existing structure invites the extension of the 33 percent rate on income above $ 149,250.




Analyzing a bank financial statement

Financial statements for banks present a different analytical problem than manufacturing and service companies. As a result, analysis of a bank's financial statements requires a distinct approach that recognizes a bank's somewhat unique risks.

Banks take deposits from savers, paying interest on some of these accounts. They pass these funds on to borrowers, receiving interest on the loans. Their profits are derived from the spread between the rate they pay for funds and the rate they receive from borrowers. This ability to pool deposits from many sources that can be lent to many different borrowers creates the flow of funds inherent in the banking system. By managing this flow of funds, banks generate profits, acting as the intermediary of interest paid and interest received and taking on the risks of offering credit.

Banking is a highly leveraged business requiring regulators to dictate minimal capital levels to help ensure the solvency of each bank and the banking system. In the U.S., a bank's primary regulator could be the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision or any one of 50 state regulatory bodies, depending on the charter of the bank. Within the Federal Reserve Board, there'are 12 districts with 12 different regulatory staffing groups. These regulators focus on compliance with certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the banking system.

As one of the most highly regulated banking industries in the world, investors have some level of assurance in the soundness of the banking system. As a result, investors can focus most of their efforts on how a bank will perform in different economic environments.

The first thing to notice in an income statement and balance sheet for a large bank is that the line items in the statements are not the same as your typical manufacturing or service firm. Instead, there are entries that represent interest earned or expensed as well as deposits and loans.


Date: 2015-12-24; view: 1177


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