Chapter5 Liabilities
商业银行学答案第八版罗斯Chap005
CHAPTER 5THE FINANCIAL STATEMENTS OF BANKS AND THEIR PRINCIPALCOMPETITORSGoal of This Chapter: The purpose of this chapter is to acquaint the reader with the content, structure and purpose of bank financial statements and to help managers understand how information from bank financial statements can be used as tools to reveal how well their banks are performing.Key Topics in this Chapter•An Overview of the Balance Sheets and Income Statements of Banks and Other Financial Firms•The Balance Sheet or Report of Condition•Asset Items•Liability Items•Recent Expansion of Off-Balance Sheet Items•The Problem of Book-Value Accounting and 〞Window Dressing〞•Components of the Income Statement: Revenues and Expenses•Appendix: Sources of Information on theFinancial-Services IndustryChapter OutlineI. Introduction: The Statements Reviewed in This ChapterII An Overview of Balance Sheets and Income StatementsIII The Balance Sheet (Report of Condition)A. The Principal Types of AccountsB. Assets of the Banking Firm1. Cash and Due from Depository Institutions2. Investment Securities: The Liquid Portion3. Investment Securities: The Income-Generating Portion4. Trading Account Assets5. Federal Funds Sold and Reverse Repurchase Agreements6. Loans and Leases7. Loan Losses8. Specific and General Reserves9. International Loan Reserves10.Unearned Income11.Nonperforming (noncurrent) Loans12.Bank Premises and Fixed Assets13.Other Real Estate Owned (OREO)14.Goodwill and Other Intangible Assets15.All Other AssetsC. Liabilities of the Banking Firm1. Deposits2. Borrowings from Nondeposit Sources3. Equity Capital for the Banking Firma. Preferred Stockb. Common EquityD. Comparative Balance Sheet Ratios for Different Size BanksE. Recent Expansion of Off-Balance-Sheet Items in BankingF. The Problem of Book-Value AccountingG. Auditing: Assuring Reliability of Financial StatementsIV. Components of the Income Statement (Report of Income)A. Financial Flows and Stocks1. Interest Income2. Interest Expenses3. Net Interest Income4. Loan Loss Expense5. Noninterest Income6. Noninterest Expenses7. Net Operating Income and Net IncomeB. Comparative Income Statement Ratios for Different-Size Financial FirmsV. The Financial Statements of Leading Nonbank Financial Firms: A Comparison to Bank StatementsVI. An Overview of Key features of Financial Statements and Their ConsequencesVII. Summary of the ChapterConcept Checks5-1. What are the principal accounts that appear on a bank's balance sheet (Report of Condition)The principal asset items on a bank's Report of Condition are loans, investments in marketable securities, cash, and miscellaneous assets. The principal liability items are deposits and nondeposit borrowings in the money market. Equity capital supplied by the stockholders rounds out the total sources of funds for a bank.5-2. Which accounts are most important and which are least important on the asset side of a bank's balance sheetThe principal bank asset items from most important to least important are::Rank Order Assets1 Cash2 Investment Securities3 Loans4 Miscellaneous Assets5-3. What accounts are most important on the liability side of a balance sheetThe principal bank liability items from most important to least important are:Rank Order Liabilities and Equity Capital1 Deposits2 Nondeposit Borrowings3 Equity Capital4 Miscellaneous Liabilities5-4. What are the essential differences among demand deposits, savings deposits, and time depositsDemand deposits are regular checking accounts against which a customer can write checks or make any number of personalwithdrawals. Regular checking accounts do not bear interest under current U.S. law and regulation.Savings deposits bear interest (normally, they carry the lowest rate paid on bank deposits) but may be withdrawn at will (though a bank usually will reserve the right to require advance notice of a planned withdrawal).Time deposits carry a fixed maturity and the bank may impose a penalty if the customer withdraws funds before the maturity date is reached. The interest rate posted on time deposits is negotiated between the bank and its deposit customer and may be either fixed or floating.A NOW account combines features of a savings account and a checking account, while a money market deposit account encompasses transactional powers similar to a regular checking account (though usually with limitations on the number of checks or drafts that may be written against the account) but also resembles a time deposit with an interest rate fixed for a brief period (such as weekly) but then becomes changeable over longer periods to reflect current market conditions.5-5. What are primary reserves, and secondary reserves and what are they supposed to doPrimary reserves consist of cash, including a bank's vault cash and checkable deposits held with other banks or any other funds such as reserves with the Federal Reserve that are accessible immediately to meet demands for liquidity made against the bank.Secondary reserves consist of assets that pay some interest (though usually pay returns that are much lower than earned on other assets, such as loans) but their principal feature is ready marketability. Most Secondary reserves are marketable securities such as short term government securities and private securities such as commercial paper.Both primary and secondary reserves are held to keep the bank in readiness to meet demands for cash (liquidity) from whatever source those demands may arise.5-6. Suppose that a bank holds cash in its vault of $1.4 million, short-term government securities of $12.4 million, privately issued money market instruments of $5.2 million, deposits at the Federal Reserve banks of $20.1 million, cash items in the process of collection of $0.6 million, and deposits placed with other banks of $16.4 million. How much in primary reserves does this bank hold In secondary reservesThe bank holds primary reserves of:Vault Cash + Deposits at the Fed + Cash Items in Collection +Deposits With Other Banks= $1.4 mill. + $20.1 mill. + $0.6 mill. + $16.4 mill.= $38.5 millionThe bank has secondary reserves of:Short-term Government Securities + Private Money-Market Instruments= $12.4 mill. + $5.2 mill.= $17.6 million5-7. What are off-balance-sheet items and why are they important to some financial firmsOff-balance-sheet items are usually transactions that generate fee income for a bank (such as standby credit guarantees) or help hedge against risk (such as financial futures contracts). They are importantas a supplement to income from loans and to help a bank reduce its exposure to interest-rate and other types of risk.5-8. Why are bank accounting practices under attack right now In what ways could financial institutions improve their accounting methodsThe traditional practice of banks has been to record the value of assets and liabilities at their value on the day the accounts were originally created and not change those values over the life of the account. The SEC and FASB started questioning this practice in the 1980’s because they were concerned that investors in bank securities would be misled about the true value of the bank. Using this historical value accounting method may in fact conceal a bank that insolvent in a current market value sense.The biggest controversy centered on the banks’ investment portfolio which would appear to be easy to value at its current market price. At a minimum, banks could help themselves by marking their investment portfolio to market. This would give investors an indication of the true value of the bank’s investment portfolio. Banks could also consider using the lower of historical or market value for other accounts on the balance sheet.5-9. What accounts make up the Report of Income (income statement of a bank)The Report of Income includes all sources of bank revenue (loan income, investment security income, revenue from deposit service fees, trust fees, and miscellaneous service income) and all bank expenses (including interest on all borrowed funds, salaries, wages, and employee benefits, overhead costs, loan loss expense, taxes, and miscellaneous operating costs.) The difference between operating revenues and expenses (including tax obligations) is referred to as net income.5-10. In rank order, what are the most important revenue and expense items on a Report of IncomeBy dollar volume in most recent years the rank order of the revenue and expense items on a bank's Report of Income is:Rank Order Revenue Items Expense Items1 Loan Income Deposit Interest2 Security Income Interest on Nondeposit Borrowings3 Service Charges on Deposits Salaries, Wages, andand Other Deposit Fees Employee Benefits4 Other Operating Revenues Miscellaneous Expenses5-11. What is the relationship between the provision for loan losses on a bank's Report of Income and the allowance for loan losses on its Report of ConditionGross loans equal the total of all loans currently outstanding that are recorded on the bank's books. Net loans are equal to gross loans less any interest income on loans already collected by the bank but not yet earned and also less the allowance for loan-loss account (orbad-debt reserve).The allowance for loan losses is built up gradually over time by an annual noncash expense item that is charged against the bank's current income, known as the Provision for Loan Losses. The dollar amount of the annual loan-loss provision plus the amount of recovered funds from any loans previously declared worthless (charged off) less any loans charged off as worthless in the current period is added to the allowance-for-loan-losses account.If current charge-offs of worthless loans exceed the annual loan-loss provision plus any recoveries on previously charged-off loans the annual net figure becomes negative and is subtracted from the allowance-for-loan-losses account.5-12. Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the year, charges current income for a $250,000 provision for loan losses, charges off worthless loans of $150,000, and recovers $50,000 on loans previously charged off. What will be the balance in the allowance for loan losses at year-endThe balance in the allowance for loan loss (ALL) account at year end will be:Beginning ALL = $1.25 millionPlus: Annual ProvisionRecoveries onCharged OffMinus: ChargeOffs of Worthless =LoansEnding ALL = $1.40 million5-13. Who are banking’s chief com petitors in the financial servicesThe closest competitors of banks in recent years (at least in terms of the similarity of their financial statements) are the thrift institutions. These include credit unions and savings associations. If we move a little further away from banks both in terms of what they do and the way their financial statements look, banks also compete with finance companies, life and property casualty insurance companies and security brokers and dealers.5-14. How do the financial statements of major nonbank financial firms resemble or differ from bank financial statements Why do these differences or similarities existBanks have very similar financial statements to credit union and savings associations. The only difference may be in the structure of their loan portfolio. Credit unions probably have more loans to individuals and savings associations may have more real estate loans as well as loans to individuals.More differences exist between banks and other major competitors. These diff erences exist because of each company’s unique function. Finance companies have loans but on their balance sheet they are called accounts receivables. In addition, they show heavy reliance on money market borrowings instead of deposits. Insurance companies are different in that loans they make to businesses show up on the balance sheet as bonds, stocks, mortgages and other securities. On the liability side, insurance companies receive the majority of their funds from insurance premiums paid by customers for insurance protection.Mutual funds hold primarily corporate stocks, bonds, asset-backed securities and money market instruments and their liabilities consist primarily of units of the mutual fund sold to the public. Security brokers and dealers tend to hold a similar range of securities funded by borrowings in the money and capital markets.5-15. What major trends are changing the content of the financial statements prepared by financial firmsThe content of the financial statements of financial firms is changing for several reasons. One trend that has affected the financial statements of financial firms is the call for those statements to reflect the true market value of the assets held by the financial firm. More accounts are being listed at the lower of historical or market value so that investors can get a better understanding of the true value of the firm.Another trend that is affecting financial firms is the increased use of off-balance sheet items. The notional amount of these items issometimes surpassing the value of the items on the balance sheet, especially for larger financial institutions. This has led regulators to change their reporting requirements for financial firms and there are likely to be additional requirements in the future.Another trend that is affecting financial firms is the convergence of the various types of financial firms. In addition, financial firms are becoming larger and more complex and more financial holding companies are formed. These are also leading to changes in the content and structure of the financial statements of financial firms. 5-16. What are the key features or characteristics of the financial statements of banks and similar financial firms What are the consequences of these statement features for managers of financial-service providers and for the publicThe financial statements of financial-service firms exhibit three main characteristics that have important consequences for managers of these firms and the public.The first characteristic of these firms is that they have lower operating leverage. They have small amounts of buildings, equipment and other fixed assets. Operating leverage adds risk to the firm and firms with large amount of operating leverage can face large fluctuations in net income and earnings per share for small changes in revenues.Financial-service firms do not have this problem. However, financial service firms have large amounts of financial leverage. Financial leverage comes from how the firm finances their assets. If a firm borrows a lot, they face have larger financial leverage and have a larger amount of risk as a result. Financial service firms finance approximately 90% of their assets with debt and therefore face significant financial leverage.Small changes in revenues can lead to large changes in net income and earnings per share as a result. In addition, changes in interest rates can have significant effects on the net income and capital position of financial firms. Finally, most of the liabilities of financial firms are short term. This means that financial firms can face significant liquidity problems. A sudden demand by depositors for funds can lead to large problems for financial firms.Problems5-1. Jasper National Bank has just submitted its Report of Condition to the FDIC. Please fill in the missing items from itsstatement shown below (all figures in millions of dollars): Report of ConditionTotal assets $2,50Cash and due from Depository Institutions 87 Securities233 Federal Funds Sold andReverse Repurch.45Gross Loans and Leases 1,90* Gross Loans and Leases = Net Loansand Leases+Loan Loss Allowance200Loan Loss Allowance Net Loans and Leases1700Trading Account Assets20Bank Premises and FixedAssets25*This is the only asset missing and so is total assetsless all of the rest of the assets listed hereOther Real Estate Owned15 Goodwill and Other Intangibles200 All Other Assets175Total Liabilities and Capital 2,50*Total Liabilities and Capital = TotalassetsTotal Liabilities 2,26* Total Liabilities = Total Liabilitiesand Capital-Total Equity CapitalTotal Deposits 1,60*Total Deposits = Total Liabilities LessAll of theOther LiabilitiesFederal Funds Purchased and Repurchase Agreements.80 Trading Liabilities10 Other Borrowed Funds50 Subordinated Debt480 All Other Liabilities40Total Equity Capital240Total Equity Capital = Perpetual Preferred Stock +Common Stock+Surplus+Undivided ProfitPerpetual Preferred Stock2 Common Stock24 Surplus144 Undivided Profit705-2. Along with the Report of Condition submitted above, Jasper has also prepared a Report of Income for the FDIC. Please fill in the missing items from its statement shown below (all figures in millions of dollars):Report of IncomeTotal Interest Income$120Total Interest Expense80* Total Interest Expense = Total Interest Income - Net Interest IncomeNet Interest Income40Provision for Loan and Lease Losses4* Provision for Loan and Lease Losses = Net Interest Income + Total Noninterest Income - Total Noninterest Expense - Pretax Net Operating IncomeTotal Noninterest Income58 Fiduciary Activities8 Service Charges on Deposit Accounts6Trading Account Gains and Fees14* There are four areas of Total NoninterestIncome and only one is missing and the totalis givenAdditional Noninterest Income30 Total Noninterest Expense77Salaries and Benefits47*There are three areas of Total NoninterestExpense and only one is missing and the totalis givenPremises and Equipment Expense10 Additional Noninterest Expense20 Pretax Net Operating Income17 Securities Gains (Losses)1 Applicable Income Taxes5Income Before Extraordinary Income13*Pretax Income Plus Security Gains LessTaxes is income before extraordinary incomeExtraordinary Gains – Net2Net Income15* Net Income = Income Before Extraordinary Income + Extraordinary Gains – Net5-3. If you know the following figures:Total Interest Income$140Provision for Loan Loss$5 Total Interest Expenses100Income Taxes5Total Noninterest Income15Increases in bank’s undivided profits6Total Noninterest Expenses35 Please calculate these items:Net Interest Income40*Total Interest Income Less Total Interest ExpenseNet Noninterest Income -2*Total Noninterest Income Less Total Noninterest ExpensePretax net operating income15*Net Interest Income Plus Net Noninterest Income Less PLLNet Income After Taxes10*Pretax net operating income less PLL less TaxesTotal Operating Revenues 155*Interest Income Plus Noninterest IncomeTotal Operating Expenses 14*Interest Expenses Plus Noninterest Expenses Plus PLLDividends paid to Common Stockholders4Net Income After Taxes Less Increases in bank’s undivided profits5-4. If you know the following figures:Gross Loans$275Trading Account Securities Allowance for Loan Losses5Other Real Estate Owned Investment Securities36Goodwill and other Intangibles Common Stock5Total LiabilitiesSurplus19Preferred StockTotal Equity Capital39Nondeposit BorrowingsCash and Due from Banks9Bank Premises and Equipment, Ne Miscellaneous Assets38Bank Premises and Equipment, Gross34Please calculate these items:Total Assets414*Total Liabilities Plus Total Equity CapitalNet Loans270*Gross Loans Less ALLUndivided Profit12*Total Equity Capital less PS less CS Less Surpl Fed funds sold23*This is the only asset missing so subtract all otassets from total assetsDepreciation5* Bank Premises and Equipment, Gross less Ban Total Deposits355*Total Liabilities less Nondeposit Borrowings5-5. The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45 million. Two years ago the bank made a loan for $10 million to finance the Mountain View Hotel. Two million in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Mountain High Bank believes the hotel will sell at auction for $7 million and they want to charge off the remainder immediately.a. The dollar figure for Net Loans before the charge-off isNet Loans = Gross Loans –ALL = $750 - $45 = $705b. After the charge-off, what are the dollar figures for GrossLoans, ALL and Net Loans assuming no other transactions.Gross Loans = $750 - $1 = $749 The gross loans nowreflect the realizable value.ALL = $45 - $1 = $44 *The amount of the loan that is badNet Loans = $749 -$44 = $705c. If the Mountain View Hotel sells at auction for $8 million, thebank recovers full principal on the loan.Gross Loans = $750 - $8 = $742ALL = $45 ALL is restored to original amountNet Loans = $742 -$45 = $6975-6. For each of the following transactions, which items on a bank’s statement of income and expenses (Report of Income) would be affecteda. Office supplies are purchased so the bank will have enoughdeposit slips and other necessary forms for customer andemployee use next week.This would be part of Additional noninterest expense and part of Total Noninterest Expense.b. The bank sets aside funds to be contributed through itsmonthly payroll to the employee pension plan in the name of all its eligible employees.This would be part of Salaries and Benefits and part of Total Noninterest Expenses.c. The bank posts the amount of interest earned on the savings account of one of its customers.This would be part of Total Interest Expenses.d. Management expects that among a series of real estate loans recently granted the default rate will probably be close to 3 percent.This would be part of PLL to go into reserves for future bad debts.e. Mr. And Mrs. Harold Jones just purchased a safety deposit box to hold their stock certificates and wills.This would be part of Additional Noninterest Income and part of Total Noninterest Incomef. The bank colleges $1 million in interest payments from loans it made earlier this year to Intel Composition Corp.This would be part of Total Interest Incomeg. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned for insufficient funds.This would be part of Service Charges on Deposit Accounts and then part of Total Noninterest Incomeh. The bank earns $5 million in interest on government securities it has held since the middle of last year.This would be part of Total Interest Income.i. The bank has to pay its $5,000 monthly utility bill today to the local electric company.This would be part of Premises and Equipment Expenses and part of Total Noninterest Expensesj. A sale of government securities has just netted the bank a $290,000 capital gain (net of taxes).This would be part of Security Gains (Losses)5-7. For each of the transactions described here, which of at least two accounts on a bank’s balance sheet (Report of Condition) would be affected by each transactiona. Sally Mayfield has just opened a time deposit in the amountof $6,000 and these funds are immediately loaned to RobertJones to purchase a used car.Gross Loans +$6,000Total Deposits +$6,000b. Arthur Blode deposits his payroll check for $1000 in the bank and the bank invests the funds in a government security.Securities + $1,000Total Deposits +$1,000c. The bank sells a new issue of common stock for $100,000 to investors living in its community, and the proceeds of that sale are spent on the installation of new ATMs,Bank Premises & Equipment, Gross +$100,000Common Stock /Surplus +$100,000d. Jane Gavel withdraws her checking account balance of $2,500 from the bank and moves her deposit to a credit union; the bank employs the funds received from Mr. Alan James, who just paid off his home equity loan, to provide Ms. Gavel with the funds she withdrew.Gross Loans -$2,500Total Deposits -$2,500e. The bank purchases a bulldozer from Ace Manufacturing Company for $750,000 and leases it to Cespan Construction Company.Cash and Due from Bank-$750,000Gross Loans and Leases+750,000f. Signet National Bank makes a loan of reserves in the amount of $5 million to Quesan State Bank and the funds are returned the next day.On the day the funds are loaned the accounts are affected in the following manner:Cash and Due from Bank-$5,000,000Federal Funds Sold+$5,000,000and when the finds are returned the next day, the process is reversed.g. The bank declares its outstanding loan of $1 million from theDeprina Corp. to be uncollectible.Gross Loans -$1,000,000ALL -$1,000,0005-8. The Nitty Gritty Bank is developing a list of off-balance-sheet items for its call report. Please fill in the missing items from its statement shown below. Using Table 5-5, describe how Nitty Gritty compares with other banks in the same size category regarding its off-balance sheet activities.Off-balance-sheet items for Nitty Gritty Bank (in millions of $)Total unused commitments$7,000Standby letters of credit andforeign office guarantees$1,350(Amount conveyed to others)($50)Commercial Letters of Credit$48Securities Lent$2,200Derivatives (total)$97,000Notional Amount of CreditDerivatives$22,000Interest Rate Contracts54000Foreign Exchange Rate Contracts 19,800Total Derivatives LessAll Other DerivativesContracts on other commoditiesand equities$1,200 All other off - balance -sheetliabilities$49Total off-balance-sheet Items$107,597 The sum of all of the off-balance sheet itemTotal Assets (on-balance sheet)$10,500Off-balance-sheet assets ÷1025%on-balance-sheet assetsThis looks very similar to other banks of the same size.5-9. See if you can determine the amount of Cardinal State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.)Total Interest IncomeInterest on Loans$86Int earned on Govt. Bonds andNotes$9Total$95Total Interest ExpenseInterest Paid on Fed FundsPurchased$5Interest Paid to Customers Timeand Savings Deposits$34Total$39Net Interest Income$56Provision for Loan Loss$2Total Noninterest IncomeService Charges Paid byDepositors$3Trust Department Fees$3Total$6Total Noninterest ExpensesEmployee Wages, Salaries andBenefits$13Overhead Expenses$3Total$16 Net Noninterest Income($10) Pretax Income$44 Taxes Paid (28%)$12 Securities Gains/(Losses)$(7) Net Income$25 Less Dividends$4 Retained Earnings from CurrentIncome$215-10. Which of these account items or entries would normally occur on a ba nk’s balance sheet (Report of Condition) and which on a bank’s income and expense statement (Report of Income)The items which would normally appear on a bank's balance sheet are:Federal funds sold Deposits due to BankCredit card loans Leases of BusinessEquipment ToCustomersVault cash Savings DepositAllowance for loanlossesUndivided profitsCommercial and Industrial Loans Mortgage Owed on the Bank’s BuildingsRepayment of Credit Card Loan Other Real Estate OwnedCommon Stock Additions toUndivided profitsFederal fundspurchasedThe items which would normally appear on a bank’s income statement are:Interest Receivedon Credit CardLoansDepreciation on Plantand EquipmentInterest Paid on Money Market Deposits Provision for Loan LossesSecurity Gains or Losses Service Charges on。
会计英语第四版参考答案
会计英语第四版参考答案Chapter 1: Introduction to Accounting1. What is accounting?- Accounting is the systematic recording, summarizing, and reporting of financial transactions and events of a business entity.2. What are the main functions of accounting?- The main functions of accounting are to providefinancial information for decision-making, ensure compliance with laws and regulations, and facilitate the management of a business.3. What are the two main branches of accounting?- The two main branches of accounting are financial accounting and management accounting.4. What is the purpose of financial accounting?- The purpose of financial accounting is to provide an accurate and fair representation of an entity's financial position and performance to external users.5. What is the double-entry bookkeeping system?- The double-entry bookkeeping system is a method of recording financial transactions in which every transactionis recorded twice, once as a debit and once as a credit, to maintain the equality of the accounting equation.Chapter 2: Accounting Concepts and Principles1. What are the fundamental accounting concepts?- The fundamental accounting concepts include the accrual basis of accounting, going concern, consistency, and materiality.2. What is the accrual basis of accounting?- The accrual basis of accounting records transactions when they occur, regardless of when cash is received or paid.3. What is the going concern assumption?- The going concern assumption is the premise that a business will continue to operate for the foreseeable future.4. What is the principle of consistency?- The principle of consistency requires that an entity should apply accounting policies consistently over time.5. What is the principle of materiality?- The principle of materiality states that only items that could potentially affect the decisions of users of financial statements are included in the financial statements.Chapter 3: The Accounting Equation and Financial Statements1. What is the accounting equation?- The accounting equation is Assets = Liabilities +Owner's Equity.2. What are the four main financial statements?- The four main financial statements are the balance sheet, income statement, statement of changes in equity, and cashflow statement.3. What is the purpose of the balance sheet?- The balance sheet provides a snapshot of an entity's financial position at a specific point in time.4. What is the purpose of the income statement?- The income statement reports the revenues, expenses, and net income of an entity over a period of time.5. What is the purpose of the cash flow statement?- The cash flow statement reports the cash inflows and outflows of an entity over a period of time.Chapter 4: Recording Transactions1. What is a journal entry?- A journal entry is the initial recording of atransaction in the general journal.2. What are the steps in the accounting cycle?- The steps in the accounting cycle are analyzing transactions, journalizing, posting, preparing a trial balance, adjusting entries, preparing financial statements, and closing entries.3. What is the difference between a debit and a credit?- A debit is an increase in assets or a decrease inliabilities or equity, while a credit is an increase in liabilities or equity or a decrease in assets.4. What are adjusting entries?- Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recorded in the correct period.5. What is the purpose of closing entries?- Closing entries are made to transfer the balances of temporary accounts to the owner's equity account and to prepare the accounts for the next accounting period.Chapter 5: Accounting for Merchandising Businesses1. What is a merchandise inventory?- A merchandise inventory is the stock of goods held by a business for sale to customers.2. What is the cost of goods sold?- The cost of goods sold is the direct cost of producing the merchandise sold during an accounting period.3. What is the gross profit?- The gross profit is the difference between the sales revenue and the cost of goods sold.4. What is the difference between a perpetual and a periodic inventory system?- A perpetual inventory system updates inventory records in real-time with each sale or purchase, while a periodicinventory system updates inventory records at specific intervals, such as at the end of an accounting period.5. What is the retail method of inventory pricing?- The retail method of inventory pricing is a method of estimating the cost of ending inventory by applying a cost-to-retail ratio to the retail value of the inventory.Chapter 6: Accounting for Service Businesses1. What are the main differences in accounting for service businesses compared to merchandise businesses?- Service businesses do not have inventory and their primary expenses are typically labor and overhead costs.2. What is the main source of revenue for service businesses? - The main source of revenue for service businesses is the fees charged for the services provided.3. What are the typical expenses。
Chapter_01会计学原理答案 principles of accounting 19th edition john j.wild 人大出版社
Importance: GAAP are the rules that specify acceptable accounting
practices.
SEC:
Securities and Exchange Commission
Importance: The SEC is charged by Congress to set reporting rules for
To illustrate, many companies base compensation of managers on the amount of reported income. When the choice of an accounting method affects the amount of reported income, the amount of compensation is also affected. Similarly, if workers in a division receive bonuses based on the division’s income, its computation has direct financial implications for these individuals.
Quick Study 1-7
Assets
=
$375,000 (b) $250,000
$185,000
Liabilities (a) $125,000
$ 90,000 $ 60,000
+
Equity
$250,000
$160,000
(c) $125,000
Quick Study 1-8
Assets
chapter5-ledger accounts and double entry
FINANCIAL STATEMENTS
Ledger accounts and nominal ledger
1.
The records of transactions, assets and liabilities should be kept in the following ways.
In chronological order, and dated so that transactions can be related to a particular period of time. Build up in cumulative totals. Books of original entry then to summarize these records.
The
wages of employee is the deduction of profit. Any amount paid by a business to its proprietor is treated by accountants as withdrawals of profit (the usual term is appropriations of profit) and not as expenses incurred by the business. The drawings of owner are the deduction of capital.
2.
The entries in the books of prime entry are posted to ledgers.
The books of prime entry are totaled up and two entries will be made in these accounts with each of these totals – this is called double entry. Ledger accounts summarise all the individual transactions listed in the books of pd general ledger, is an accounting record which summarizes the financial affairs of a business. It is the double entry books of account.
会计英语课后习题答案作者叶建芳会计英语课后习题参考答案
Suggested SolutionChapter 11.3.4.5.(a)(b) net income = 9,260-7,470=1,790(c) net income = 1,790+2,500=4,290Chapter 21.a.To increase Notes Payable -CRb.To decrease Accounts Receivable-CRc.To increase Owner, Capital -CRd.To decrease Unearned Fees -DRe.To decrease Prepaid Insurance -CRf.To decrease Cash - CRg.To increase Utilities Expense -DRh.To increase Fees Earned -CRi.To increase Store Equipment -DRj.To increase Owner, Withdrawal -DR2.a.Cash 1,800Accounts payable ................................................. 1,800 b.Revenue ................................................................. 4,500Accounts receivable ..................................... 4,500c.Owner’s withdrawals............................................... 1,500Salaries Expense ........................................... 1,500 d.Accounts Receivable (750)Revenue (750)3.Prepare adjusting journal entries at December 31, the end of the year.Advertising expense 600Prepaid advertising 600Insurance expense (2160/12*2) 360Prepaid insurance 360Unearned revenue 2,100Service revenue 2,100Consultant expense 900Prepaid consultant 900Unearned revenue 3,000Service revenue 3,000 4.1. $388,4002. $22,5203. $366,6004. $21,8005.1. net loss for the year ended June 30, 2002: $60,0002. DR Jon Nissen, Capital 60,000CR income summary 60,0003. post-closing balance in Jon Nissen, Capital at June 30, 2002: $54,000Chapter 31. Dundee Realty bank reconciliationOctober 31, 2009Reconciled balance $6,220 Reconciled balance $6,2202. April 7 Dr: Notes receivable—A company 5400Cr: Accounts receivable—A company 540012 Dr: Cash 5394.5Interest expense 5.5Cr: Notes receivable 5400June 6 Dr: Accounts receivable—A company 5533Cr: Cash 553318 Dr: Cash 5560.7Cr: Accounts receivable—A company 5533Interest revenue 27.73. (a) As a whole: the ending inventory=685(b) applied separately to each product: the ending inventory=6254. The cost of goods available for sale=ending inventory + the cost of goods=80,000+200,000*500%=80,000+1,000,000=1,080,0005.(1) 24,000+60,000-90,000*0.8=12000(2) (60,000+24,000)/( 85,000+31,000)*( 85,000+31,000-90,000)=18828Chapter 41. (a) second-year depreciation = (114,000 – 5,700) / 5 = 21,660;(b) second-year depreciation = 8,600 * (114,000 – 5,700) / 36,100 = 25,800;(c) first-year depreciation = 114,000 * 40% = 45,600second-year depreciation = (114,000 – 45,600) * 40% = 27,360;(d) second-year depreciation = (114,000 – 5,700) * 4/15 = 28,880.2. (a) weighted-average accumulated expenditures (2008) = 75,000 * 12/12 + 84,000 * 9/12 + 180,000 * 8/12 + 300,000 * 7/12 + 100,000 * 6/12 = 483,000(b) interest capitalized during 2008 = 60,000 * 12% + ( 483,000 –60,000) * 10% =49,5003. (1) depreciation expense = 30,000(2) book value = 600,000 – 30,000 * 2=540,000(3) depreciation expense = ( 600,000 – 30,000 * 8)/16 =22,500(4) book value = 600,000 – 30,000 * 8 – 22,500 = 337,5004. Situation 1:Jan 1st, 2008 Investment in M 260,000Cash 260,000June 30 Cash 6000Dividend revenue 6000Situation 2:January 1, 2008 Investment in S 81,000Cash 81,000June 15 Cash 10,800Investment in S 10,800December 31 Investment in S 25,500Investment Revenue 25,5005. a. December 31, 2008 Investment in K 1,200,000Cash 1,200,000June 30, 2009 Dividend Receivable 42,500Dividend Revenue 42,500December 31, 2009 Cash 42,500Dividend Receivable 42,500b. December 31, 2008 Investment in K 1,200,000Cash 1,200,000 December 31, 2009 Cash 42,500Investment in K 42,500Investment in K 146,000Investment revenue 146,000 c. In a, the investment amount is 1,200,000net income reposed is 42,500In b, the investment amount is 1,303,500Net income reposed is 146,000Chapter 51.a. June 1: Dr: Inventory 198,000Cr: Accounts Payable 198,000 June 11: Dr: Accounts Payable 198,000Cr: Notes Payable 198,000 June 12: Dr: Cash 300,000Cr: Notes Payable 300,000b. Dr: Interest Expenses (for notes on June 11) 12,100Cr: Interest Payable 12,100Dr: Interest Expenses (for notes on June 12) 8,175Cr: Interest Payable 8,175c. Balance sheet presentation:Notes Payable 498,000 Accrued Interest on Notes Payable 20,275d. For Green:Dr: Notes Payable 198,000 Interest Payable 12,100Interest Expense 7,700Cr: Cash 217,800For Western:Dr: Notes Payable 300,000Interest Payable 8,175Interest Expense 18,825Cr: Cash 327,0002.(1) 20⨯8 Deferred income tax is a liability 2,400Income tax payable 21,600 20⨯9 Deferred income tax is an asset 600Income tax payable 26,100(2) 20⨯8: Dr: Tax expense 24,000Cr: Income tax payable 21,600 Deferred income tax 2,400 20⨯9: Dr: Tax expense 25,500Deferred income tax 600Cr: Income tax payable 26,100 (3) 20⨯8: Income statement: tax expense 24,000Balance sheet: income tax payable 21,600 20⨯9: Income statement: tax expense 25,500 Balance sheet: income tax payable 26,1003.a. 1,560,000 (20000000*12 %* (1-35%))b. 7.8% (20000000*12 %* (1-35%)/20000000)5.Notes Payable 14,400 Interest Payable 1,296 Accounts Payable 60,000 +Unearned Rent Revenue 7,200 Current Liabilities 82,896Chapter 61. Mar. 1Cash 1,200,000Common Stock 1,000,000Paid-in Capital in Excess of Par Value 200,000Mar. 15Organization Expense 50,000Common Stock 50,000Mar. 23Patent 120,000Common Stock 100,000Paid-in Capital in Excess of Par Value 20,000The value of the patent is not easily determinable, so use the issue price of $12 per share on March 1 which is the issuing price of common stock.2. July.1Treasury Stock 180,000Cash 180,000The cost of treasury purchased is 180,000/30,000=60 per share.Nov. 1Cash 70,000Treasury Stock 60,000Paid-in Capital from Treasury Stock 10,000Sell the treasury at the cost of $60 per share, and selling price is $70 per share. The treasury stock is sold above the cost.Dec. 20Cash 75,000Paid-in Capital from Treasury Stock 15,000Treasury Stock 90,000The cost of treasury is $60 per share while the selling price is $50 which is lower than the cost.3. a. July 1Retained Earnings 24,000Dividends Payable—Preferred Stock 24,000b.Sept.1Dividends Payable—Preferred Stock 24,000Cash 24,000c. Dec.1Retained Earnings 80,000Dividends Payable—Common Stock 80,000d. Dec.31Income Summary 350,000Retained Earnings 350,0004.a. Preferred stock gives its owner certain advantages over common stockholders. These benefits include the right to receive dividends before the common stockholders and the right to receive assets before the common stockholders if the corporation liquidates. Corporation pay a fixed amount of dividends on preferred stock.The 7% cumulative term indicates that the investors earn 7% fixed dividends.b. 7%*120%*20,000=504,000c. If corporation issued debt, it has obligation to repay principald. The date of declaration decrease the stockholders’ equity; the date of record and the date of payment have no effect on stockholders.5.a. Jan. 15Retained Earnings 35,000Accumulated Depreciation 35,000To correct error in prior year’s depreciation.b. Mar. 20Loss from Earthquake 70,000Building 70,000c. Mar. 31Retained Earnings 12,500Dividends Payable 12,500d. Apirl.15Dividends Payable 12,500Cash 12,500e. June 30Retained Earnings 37,500Common Stock 25,000Additional Paid-in Capital 12,500To record issuance of 10% stock dividend: 10%*25,000=2,500 shares;2500*$15=$37,500f. Dec. 31Depreciation Expense 14,000Accumulated Depreciation 14,000Original depreciation: $40,000/40=$10,000 per year. Book value on Jan.1, 2009 is $350,000(=$400,000-5*$10,000). Deprecation for 2009 is $14,000(=$350,000/25).g. The company does not need to make entry in the accounting records. But the amount of Common Stock ($10 par value) decreases 275,000, while the amount of Common Stock ($5 par value) increases 275,000.Chapter 71.Requirement 1If revenue is recognized at the date of delivery, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................................................................... 480,000 Cash/Accounts payable ........................................................ 480,000 To record purchase of inventoryInventory .................................................................................... 124,000 Cash/Accounts payable ........................................................ 124,000 To record refurbishment of inventoryAccounts receivable ................................................................... 310,000 Sales revenue ...................................................................... 310,000 To record sale of goods on accountCost of goods sold...................................................................... 220,000 Inventory .............................................................................. 220,000 To record the cost of the goods sold as an expenseSales returns (I/S) ...................................................................... 15,500* Allowance for sales returns (B/S).......................................... 15,500 To record provision for return of goods sold under 30-day return period* 5% of $310,000Warranty expense ...................................................................... 31,000* Provision for warranties (B/S) ............................................... 31,000 To record provision, at time of sale, for warranty expenditures* 10% of $310,000Allowance for sales returns......................................................... 12,400 Accounts receivable ............................................................. 12,400 To record return of goods within 30-day return period.It is assumed the returned goods have no value and are disposed of.Provision for warranties (B/S) ..................................................... 18,600 Cash/Accounts payable ........................................................ 18,600 To record expenditures in year 1 for warranty workCash .......................................................................................... 297,600*Accounts receivable ............................................................. 297,600 To record collection of Accounts Receivable* $310,000 – $12,400Year 2Provision for warranties (B/S) ..................................................... 8,400 Cash/Accounts payable ........................................................ 8,400 To record expenditures in year 2 for warranty workRequirement 2If revenue is recognized only when the warranty period has expired, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................................................................... 480,000 Cash/Accounts payable ........................................................ 480,000 To record purchase of inventoryInventory .................................................................................... 124,000 Cash/Accounts payable ........................................................ 124,000 To record refurbishment of inventoryAccounts receivable ................................................................... 310,000 Inventory .............................................................................. 220,000 Deferred gross margin .......................................................... 90,000 To record sale of goods on accountDeferred gross margin ................................................................ 12,400 Accounts receivable ............................................................. 12,400 To record return of goods within the 30-day return period. It is assumed the goods haveno value and are disposed of.Deferred warranty costs (B/S)..................................................... 18,600 Cash/Accounts payable ........................................................ 18,600 To record expenditures for warranty work in year 1. The warranty costs incurred are deferred because the related revenue has not yet been recognizedCash .......................................................................................... 297,600* Accounts receivable ............................................................. 297,600 To record collection of Accounts receivable* $310,000 – $12,400Year 2Deferred warranty costs ............................................................. 8,400 Cash/Accounts payable ........................................................ 8,400 To record warranty costs incurred in year 2 related to year 1 sales. The warranty costs incurred are deferred because the related revenue has not yet been recognized.Deferred gross margin ................................................................ **77,600Cost of goods sold...................................................................... 220,000 Sales revenue ...................................................................... 297,600* To record recognition of sales revenue from year 1 sales and related cost of goods sold at expiry of warranty period* $310,000 – $12,400** ($90,000 – $12,400)Warranty expense ...................................................................... 27,000* Deferred warranty costs ....................................................... 27,000 To record recognition of warranty expense at same time as related sales revenue recognition* $18,600 + $8,400Requirement 3Allied Auto Parts Inc. might choose to recognize revenue only after the warranty periodhas expired if they are not able to make a good estimate, at the time of sale, of the amount of warranty work that will be required under the terms of the one-year warranty. If Allied is not able, at the time of sale, to make a good estimate of the warranty work that will be required, then the measurability criterion of revenue recognition is not met at the time of sale. The measurability criterion means that the amount of revenue can be reliably measured. If the seller is not able to estimate the amount of work that will have to be done under the warranty agreement, then it is not able to reasonably measure the profit that it will eventually earn on the sales. The performance criteria might also be invoked here.The performance criterion means that the seller has transferred the significant risks and rewards of ownership to the buyer. As long as there is warranty work to be performed after the sale that is the responsibility of the seller, you might argue that performance is not substantially complete. However, if the seller was able to reliably estimate the amount of warranty work, then performance would be satisfied on the assumption that we could measure the risk that remains with the seller, and make a provision for it.2.Percentage-of-completion method:The first step in applying revenue recognition using the percentage-of-completion method (using costs incurred to date compared to estimated total costs to determine the percentage of completion) is to estimate the percentage of completion of the project at the end of each year. This is done in the following table (in $000s):End of 2005 End of 2006 End of 2007Total costs incurred $ 5,400 $ 12,950 $ 18,800 Total estimated costs 18,000 18,500 18,800 % completed 30% 70% 100%Once the percentage of completion at the end of each year has been calculated as above, the next step is to allocate the appropriate amount of revenue to each year, based on the percentage completed to date, less what has previously been recorded in revenue. This is done in the following table (in $000s):2005 2006 20072005 $20,000 × 30% $ 6,0002006 $20,000 × 70% $ 14,0002007 $20,000 × 100% $ 20,000 Less: Revenue recognized in prior years (0) (6,000) (14,000) Revenue for year $ 6,000 $ 8,000 $ 6,000Therefore, the profit to be recognized each year on the construction project would be:2005 2006 2007 TotalRevenue recognized $ 6,000 $ 8,000 $ 6,000 $ 20,000 Construction costs incurred (expenses) (5,400) (7,550) (5,850) (18,800) Gross profit for the year $ 600 $ 450 $ 150 $ 1,200The following journal entries are used to record the transactions under thepercentage-of-completion method of revenue recognition:2005 2006 20071. Costs of construction:Construction in progress................. 5,400 7,550 5,850 Cash, payables, etc. ..... 5,400 7,550 5,850 2. Progress billings:Accounts receivable ........... 3,100 4,900 12,000 Progress billings ........... 3,100 4,900 12,000 3. Collections on billings:Cash .................................. 2,400 4,000 12,400 Accounts receivable ..... 2,400 4,000 12,400 4. Recognition of profit:Construction in progress..... 600 450 150Construction expense ......... 5,400 7,550 5,850 Revenue from long-termcontract..................... 6,000 8,000 6,000 5. To close construction in progress:Progress billings ................. 20,000 Construction in progress 20,0002005 2006 2007Balance sheetCurrent assets:Accounts receivable $ 700 $ 1,600 $ 1,200 Inventory:Construction in process 6,000 14,000 Less: Progress billings (3,100) (8,000)Costs in excess of billings 2,900 6,000Income statementRevenue from long-term contracts $ 6,000 $ 8,000 $ 6,000 Construction expense (5,400) (7,550) (5,850) Gross profit $ 600 $ 450 $ 1503.a. The three criteria of revenue recognition are performance, measurability, andcollectibility.Performance means that the seller or service provider has performed the work.Depending on the nature of the product or service, performance may mean quitedifferent points of revenue recognition. For example, for the sale of products, IAS18 defines performance as the point when the seller of the goods has transferred therisks and rewards of ownership to the buyer. Normally, this means that performance is done at the time of sale. Although the seller may have performed much of the work prior to the sale (production, selling efforts, etc.), there is still significant risk to theseller that a buyer may not be found. Therefore, from a reliability point of view,revenue recognition is delayed until the point of sale. Also, there may be significant risks remaining with the seller of the product even after the sale. Warranties given by the seller are a risk that remains with the seller. However, if this risk can be reliably estimated at the time of sale, revenue can be recognized at the point of sale.Performance is quite different under a long-term construction contract. Here,performance really is considered to be a measure of the work done. Revenue isrecognized over the production period as the work is performed. It is intended toreflect the amount of effort expended by the seller (contractor). Although legal titlewon’t transfer to the buyer until the project is completed, revenue can be recognized because there is a known and committed buyer. If the contractor is not able toestimate how much of the work has been done (perhaps because he or she can’treliably estimate how much work must still be done), then profit would not berecognized until the extent of performance is known.Measurability means that the seller or service provider must be able to reliablyestimate the amount of the revenue from the sale or service. For the sale of products this is generally known at the time of sale (the sales price is set). However, if the seller provides a return period, it may be necessary to estimate the volume of returns at the time of sale in order to measure the revenue that will be recognized.Collectibility means that the seller or the service provider has reasonable assurance that the sales price will actually be collected. In most cases for the sales of products, the seller is able to recognize revenue at the time of sale even if the sale is on account.This is because the seller has experience with its customers and is able to estimate reliably the risk of non payment. As long as the seller is able to make this estimate, it is appropriate to recognize the revenue but to offset it with a provision for possible non collection. If the seller is unable to make reliable estimates of future collection ofamounts owing, the recognition of revenue would be delayed until the cash is actually received. This is what is done using the instalment sales method of revenuerecognition.b. Because of the performance criterion of revenue recognition, it would seem to bemost appropriate to recognize most revenue as the seller or service provider per forms the work. This would be the best measure of performance. This would mean, for example,that sellers of products would recognize their revenue over the whole production, selling, and post sales servicing periods. As we saw above, this is not commonly done because,in many cases, there are still significant risks that are retained by the seller (risk of not being able to sell the product, for example). There are also measurement risks (knowingthe selling price) that exist prior to the sale. The percentage-of-completion method of revenue used for some long-term construction contracts would seem to most closely recognize revenue as the work is performed. As mentioned in Part 1, we are able to recognize revenue on this basis since a contract exists which commits the purchaser tobuy the project (assuming certain conditions are met) and the sales price is known because of the existence of the contract.4.If all revenue is recognized when a student registers for the course, profit for 2007 would be:Sales Revenue1:Manuals and initial lessons (200 × $100) $ 20,000 Additional lessons ((200 × 8) × $30) 48,000 Examinations ((200 × 80%) × $130) 20,800 Total sales revenue 88,800Cost of sales:Manuals and initial lessons (200 × ($15 + $3)) 3,600 Additional lessons ((200 × 8) × $3)) 4,800Examinations ((200 × 80%) × $30) 4,800 Total cost of sales 13,200Depreciation of development costs:$180,000 × (200/1,000) 36,000Profit $ 39,6005.FINISH ENTERPRISESIncome Statementfor the year ending December 31, 2005Continuing operations (excluding the chemical division)Sales ($35,000,000 – $5,500,000) $ 29,500,000Cost of sales ($15,000,000 – $2,800,000) (12,200,000)Gross profit 17,300,000Selling & administration expenses($18,000,000 – $3,200,000) (14,800,000)Profit from operations 2,500,000Income tax expense (40%) 1,000,000Profit after tax $ 1,500,000Discontinuing operations (Chemical division)Sales 5,500,000Cost of sales (2,800,000)Gross profit 2,700,000Selling & administration expenses (3,200,000)Loss from operations (500,000)Income tax expense(40%) 200,000Loss after tax (300,000) Gain on discontinuance of the Chemical division 3,500,000Tax thereon (1,400,000)After-tax gain on discontinuance of the Chemical division 2,100,000 Enterprise net profit $ 3,300,000Chapter 81.Payment of account payable. operatingIssuance of preferred stock for cash. financingPayment of cash dividend. financingSale of long-term investment. investingAmortization of bond discount. no effectCollection of account receivable. operatingIssuance of long-term note payable to borrow cash. financing Depreciation of equipment. no effectPurchase of treasury stock. financingIssuance of common stock for cash. financingPurchase of long-term investment. investingPayment of wages to employees. operatingCollection of cash interest. investingCash sale of land. InvestingDistribution of stock dividend. no effectAcquisition of equipment by issuance of note payable. no effect Payment of long-term debt. financingAcquisition of building by issuance of common stock. no effect Accrual of salary expense. no effect2.(a) Cash received from customers = 816,000(b) Cash payments for purchases of merchandise. =468,000(c) Cash payments for operating expenses. = 268,200(d) Income taxes paid. =36,9003.Cash sales …………………………………………... $9,000 Payment of accounts payable ……………………….-48,000 Payment of income tax ………………………………-13,000 Payment of interest ……………………………..…..-16,000 Collection of accounts receivable ……………………93,000 Payment of salaries and wages ……………………….. -34,000 Cash flows from operating activitiesby the direct method -9,0004.Operating activities:Net loss -200,000 Add: loss on sale of land 250,000 Add: depreciation 300,000Add: amortization of patents 20,000Less: increases in current assets other than cash -750,000Add: increases in current liabilities 180,000Net cash flows from operating -200,000Investing activitiesSale of land -50,000Purchase of PPE -1,500,000Net cash flows from investing -1,550,000Financing activitiesIssuance of common shares 400,000Payment of cash dividend -50,000Issuance of non-current liabilities 1,000,000Net cash flows from financing 1,350,000 Net changes in cash -400,000 5.。
商业银行管理第2章习题答案
Chapter 2Analyzing Bank PerformanceChapter Objectives1.Introduce bank financial statements, including the basic balance sheet and income statement, and discuss theinterrelationship between them.2.Provide a framework for analyzing bank performance over time and relative to peer banks. Introduce key financial ratios that can be used to evaluate profitability and the different types of risks faced by banks. Focus on the trade-off between bank profitability and risk.3.Identify performance measures that differentiate between small, independent banks (specialty banks) and largerbanks that are part of multibank holding companies or financial holding companies.4. Distinguish between types of bank risk; credit, liquidity, interest rate, capital, operational, and reputational.5. Describe the nature of and meaning of regulatory CAMELS ratings for banks.6.Provide applications of data analysis to sample banks’ financial information.7.Describe performance characteristics of different-sized banks.8. Describe how banks can manipulate financial information to ‘window-dress’ performance.Key Concepts1. Bank managers must balance banking risks and returns because there is a fundamental trade-off between profitability, liquidity, asset quality, market risk and solvency. Decisions that increase banking risk must offer above average profits. The more liquid a bank is and the more equity capital used to fund operations, the less profitable is a bank, ceteris paribus.2. Banks face five basic types of risk in day-to-day operations: credit risk, liquidity risk, market risk, capital/solvency risk, and operational risk. Market risk encompasses interest rate risk, foreign exchange risk and price risk. Each type of risk refers to the potential variation in a ba nk's net income or market value of stockholders’ equity resulting from problems that affect that part of the bank's activities.3. Banks also face risks in the areas of country risk associated with loans or other activity with foreign government units and off-balance sheet activities, which create contingent liabilities. More recently, banks have focused on reputation risk. For example, from 2002-2005 Citigroup, JP Morgan Chase, and Bank of America found that even though they continued to report strong pro fits, they experienced strong criticism for 1) their roles in facilitating strategies to disguise Enron’s true financial status, 2) problems in sub-prime lending programs via the Associates Corp. and their own internal finance company activities, 3) problems with underwriting subsidiaries with analyst conflicts between stock reports and the firm’s investment banking relationships; facilitating market timing of stock trades to their detriment of their own mutual fund holders, 4) lack of supervision of trading groups, and 5) facilitating improper borrowing at Parmalat.4. A bank's return on equity (ROE) can be decomposed in terms of the duPont system of financial ratio analysis. This examination of historical balance sheet and income statement data enables an analyst to evaluate the comparative strengths and weaknesses of performance over time and versus peer banks. The Uniform Bank Performance Report (UBPR) data reflect the basic ratios from this return on equity model.5. Different-sized commercial banks exhibit different operating characteristics and thus performance measures. Small banks typically report a higher return on assets (ROA) than large banks because they earn higher gross yields on assets and pay less interest on liabilities.6. High performance banks generally benefit from lower interest and non-interest expense and limit credit risk so that loan losses are relatively low. They also operate with above average stockholders' equity.7. Many banks can successfully "window-dress" performance by manipulating the reporting of financial data. They may accelerate revenue recognition and defer expenses or selectively alter when they take securities gains or losses and time when to charge off loans or report loans as non-performing. As such, they may inappropriately smooth earnings with provisions for loan losses or by other means. Analysts must be careful when evaluating extraordinary transactions that have one-time gain or loss features.Answers to End of Chapter Questions1. For a large bank, assets consist approximately of marketable securities (20%), loans (70%), and other assets (10%). Liabilities consist of core deposits (40%-60%), noncore, purchased liabilities (20%-40%), and other liabilities (5 %-10%) as a fraction of assets. Small banks typically obtain more funds in the form of core deposits and less in the form of noncore, purchased liabilities. Small banks often invest more in securities as well. Of course, the actual percentages for any bank depend on that bank’s business strategy, mark et competition, and ownership.2. A bank's interest income consists of interest earned on loans and securities while noninterest income includes revenues from deposit service charges, trust department fees, fees from nonbank subsidiaries, etc. Interest expense consists of interest paid on interest-bearing core deposits and noncore liabilities while noninterest expense is comprised of overhead costs, personnel costs, and other costs. A bank’s net interest income equals its interest income minus interest expense. Note that interest income may be calculated on a tax-equivalent basis in which tax-exempt interest is converted to its pre-tax equivalent. A bank’s burden is defined as its noninterest expense minus noninterest income. This is often quoted as a fract ion of total assets. A bank’s efficiency ratio is calculated as noninterest expense divided by the sum of net interest income and noninterest income. The denominator effectively measures net operating revenue after subtracting interest expense. The efficiency ratio measure the noninterest cost per $1of operating revenue generated. Analysts often interpret the efficiency ratio as a measure of a bank’s ability to control overhead relative to its ability to generate noninterest income (and overall revenue). A lower number is presumably better because it reflects better cost control compared with revenue generation.3. Balance sheet accounts:a. Increase liability: money market deposit account (+$5,000)Increase asset: federal funds sold (+$5,000)b. Decrease asset: real estate loanIncrease asset: mortgage loanc. Increase equity: common stock (common and preferred capital)Increase asset: commercial loans4. Income statementInterest on U.S. Treasury & agency securities $44,500Interest on municipal bonds 60,000Interest and fees on loans 189,700Interest income = $294,200Interest paid on interest-checking accounts $33,500Interest paid on time deposits 100,000Interest paid on jumbo CDs 101,000Interest expense = $234,500Net interest income = $59,700Provisions for loan losses = $ 18,000Net interest income after provisions = $41,700Fees received on mortgage originations $23,000Service charge receipts 41,000Trust department income 15,000Non-interest income = $79,000Employee salaries and benefits $145,000Occupancy expense 22,000Non-interest expense = $167,000Income before income taxes -$46,300Income taxes 15,742Net income = -$30,558Cash dividends declared 2,500Retained earnings = -$33,058This assumes that expenses associated with the purchase of the new computer are included in occupancy expense. If not, the computer expense (depreciation) will increase the loss for the period. Also, the bank can receive a tax refund from prior tax payments if the bank made a taxable profit within recent years.5. The primary risks faced by banks are credit risk, liquidity risk, interest rate risk, foreign exchange risk (the latter two represent market risk), operational risk, reputational risk, and capital solvency. In general, promised, or expected, returns should be higher for banks that assume increased risk. There should also be greater volatility in returns over time.a. Credit risk: Net loan charge-offs/LoansHigh risk - high ratio; Low risk - low ratioHigh risk manifests itself in occasional high charge-offs, which requires above average provisions for loan lossses to replenish the loan loss reserve. Thus, net income is volatile over time.b. Liquidity risk: Core deposits/AssetsHigh risk - low ratio; Low risk - high ratioHigh risk manifests itself in less stable funding as a bank relies more on noncore, purchased liabilities thatfluctuate over time. These noncore liabilities are also higher cost, which raises interest expense.c. Interest rate risk: (|Repriceable assets-repriceable liabilities|)/AssetsHigh risk - high ratio; Low risk - low ratioHigh risk banks do not closely match the amount of repriceable assets and repriceable liabilities. Largedifferences suggest that net interest income may vary sharply over time as the level of interest rates changes.d. Foreign exchange risk: Assets denominated in a foreign currency minus liabilities denominated in the same foreign currency.High risk – a large difference; Low risk – a small differenceHigh risk manifests itself when exchange rates change adversely and the value of the bank’s net position of assets versus liabilities denominated in a currency changes sharply.e. Operational risk: total assets/number of employeesHigh risk – low ratio; Low risk – high ratioHigh risk manifests itself when the bank operates at low productivity measured by more employees per amount of assetsf. Capital/solvency risk: Stockholders’ equity/AssetsHigh risk - low ratio; Low risk - high ratioHigh risk manifests itself because fewer assets must go into default before a bank is insolvent and can be closed down by regulators.g. Reputational risk is difficult to measure ex ante. It is more observable by announced problems and issues.6. Equity multiplierBank L: Equity/Assets = 0.06 indicates Assets/Equity = 16.67XBank S: Equity/Assets = 0.10 indicates Assets/Equity = 10XIf each bank earns 1.5% on assets (ROA = 0.015), then the ROEs will equal 25% (Bank L) and 15% (Bank S). If, instead, each bank reports a loss with ROA = -0.012, then the ROEs will equal -20% (Bank L) and -15% (Bank S). When banksare profitable, financial leverage has the positive effect of increasing ROE; when banks report losses, financial leverage increases the magnitude of loss in terms of a negative ROE.7. ROE= net income/stockholders' equityROA = net income/total assetsEM = total assets/stockholders' equityER = total operating expense/total assetsAU = total revenue/total assetsBalance sheet figures should be measured as averages over the period of time the income number is generated.ROE = ROA x EM ROA = AU – ER – TAXwhere TAX = applicable income tax/total assets.8. Profitability ratios differ across banks of different size as measured by assets. The primary reasons are that different size banks have different asset and liability compositions and engage in different amounts of off-balance sheet activities. Typically, small banks report higher net interest margins because their average asset yields are relatively high while their average cost of funds is relatively low. This reflects loans to higher risk borrowers, on average, and proportionately more funding from lower cost core deposits. ROEs, in turn, are often lower because small banks operate with more capital relative to assets, that is with lower equity multipliers, so that even with comparable ROAs the ROEs are lower. Large banks ROAs are increasing faster over time because large banks operate with lower efficiency ratios as they have been more successful in generating fee income.9. CAMELSa. C =capital adequacy: equity/assetsb. A = asset quality: nonperforming loans/loans; loan charge-offs/loansc. M = management: no single ratio is good, although all ratios indicate overall strategyd. E = earnings: aggregate profit ratios; ROE, ROA, net interest margin, burden, efficiencye. L = liquidity: core deposits/assets; noncore, purchased liabilities/assets; marketable securities/assetsf. S = sensitivity to market risk; |repriceable assets-repriceable liabilities|/assets; difference in assets and liabilitiesdenominated in the same currency; size of trading positions in commodities, equities and other tradeable assets.10. Lowest to highest liquidity risk: 3-month T-bills, 5-year Treasury bond, 5-year municipal bond (if high quality and from a known issuer), 4-year car loan with monthly payments (receive some principal monthly, may be saleable), 1-year construction loan, 1-year loan to individual, pledged 3-month T-bill. As stated, the 3-month T-bill that is pledged as collateral is illiquid unless the bank can change its collateral status.11. Comparative credit riska. loan to a comer grocery store representing a little known borrower with uncertain financialsb. loan collateralized with inventory (work in process) because the collateral is less liquid and more difficult to value;this assumes that the receivables are still viable and not too aged.c. normally the Ba-rated municipal bond, unless the agency bond is an "exotic" mortgage backed security, because theagency bond carries an implied guarantee in that Freddie Mac is a quasi-public borrower.d. 1-year car loan because the student loan is typically government guaranteed12. For the balance sheet: high core deposits/assets; high equity/assets; low noncore, purchased liabilities/assets; high investment securities/assets; high agriculture loans/assets (the value refers to that for small banks); For the income statement: net interest margin (high); burden/assets (high), efficiency ratio (high); (the descriptor in parentheses refers to the relationship for small banks versus larger banks).13. Extending a loana. the new loan is typically not classified as nonperforming because no payments are past dueb. often a bank recognizes that the loan is in the problem stage and the borrower renegotiates the terms in its favor;rationale is that the borrower may default if the loan is not restructured. Note that this restructuring gives theappearance that asset quality is higher.c. the primary risk is that the bank is throwing more money down a sink hole and will never recover any of its loan.14. Dividend payment: For: the loss is temporary and stockholders expect the dividend payment. Failure to make the payment will sharply lower the stock price because stockholders will be alienated. Against: the bank has not generated sufficient cash to make the payment from normal operations. By paying the cash dividend, the bank is self-liquidating. The cash dividend will lower the bank’s capital. What normally decides the issue is whether the loss is truly temporary or more permanent. Management typically errs by assuming that losses are temporary, and thus continues to make dividend payments when it should be reducing or eliminating them.15.Liquidity risk:a.Securities classified as held-to-maturity cannot be sold unless there has been an unusual change in the underlyingcredit quality of the security issuer. A high fraction indicates low liquidity because few securities (just 5% of the total) can be sold.b. A low core deposit base indicates a bank that relies proportionately more on noncore, volatile liabilities that are lessstable and more likely to leave the bank if rates change. This makes a bank’s funding sources less reliable and the bank subject to greater liquidity risk.c. A bank that holds long-term securities (8 years is long term) has assumed significant price risk even if the securitiescan be readily sold because they are classified as available-for-sale. Such securities will fall in value if interest rates rise. This indicates high liquidity risk.d.Assuming that $10 million in securities is sufficient, the fact that none are pledged makes them more liquid and isindicative of lower liquidity risk than if any securities were pledged.Problems1. Community National Bank (CNB)1. Profitability analysis for 2004 using UBPR figures:RATIO Community National Bank Peer BanksROE 8.67% 11.72%ROA 0.63 1.09EM 13.97X 10.67XAU 5.91 6.23ER 4.94 4.73TAX 0.34 0.41a.Aggregate profitability for CNB is substantially lower measured both by both ROE and ROA. Because CNB has less equity relative to assets, it has greater financial leverage. Thus, the greater financial leverage increases CNB’s ROE relative to peer banks. The fact that its ROE is lower, despite the greater leverage, indicates that the higher risk does not produce higher overall profitability. CNB has assumed a riskier profile with its greater financial leverage in that fewer assets can default before the bank is insolvent. CNB’s ROA is lower because it earns a lower average yield on assets (AU), pays more in operating expense (ER), offset somewhat by the fact that it pays less in taxes (TAX).b.Risk ComparisonCredit risk: same net charge-offs, much lower nonperforming (more than 90 days past due) and nonaccrual loans, higher provisions for loan losses (.30% versus 0.18%); loan loss reserve is a greater fraction of total loans and leases and a much greater fraction of noncurrent loans. Overall, the ratios indicate below-average risk. Of course, these figures represent only one year of data.Liquidity risk: lower equity to assets suggests higher liquidity risk from a funding perspective, higher available for sale securities and lower pledged securities suggests lower liquidity risk from the asset sale perspective; very high core deposits, low noncore funding (liabilities), low loans and leases and high ST securities suggest lowerliquidity risk. Overall, liquidity risk appears lower because the bank has a strong core deposit base, fewer loans and more securities can be readily sold. Still, the bank might have difficulty borrowing if loans exhibit low qualityand deposit outflows arise. Conclusion: below-average liquidity risk.Capital Risk: low capital to asset ratios; low equity to assets indicate above average capital risk; bank pays less out in dividends and its growth rate in equity capital is lower. Overall, the bank exhibits greater capital risk. Thissituation is offset by the bank’s apparent higher quality assets.Operational risk: low assets to employees ratio, high personnel expense to employees and high efficiency ratio indicate high operational risk. Of course, these data do not capture the likelihood of fraud and other potentialoperational problems.c.Recommendations:1)Impro ve the bank’s capital position; slow asset growth and pursue greater profits.2)Evaluate credit risk carefully; ensure that loans are adequately diversified and that any default of a single loan ortype of loans cannot place the bank’s capital at risk to where regulators will restrict the bank’s activities. Slow loan growth until capital base is at target. Implement a formal credit risk review process.3)Improve operating efficiency. Review noninterest expense sources and cut costs where possible.4)The first t wo suggestions will have the impact of lowering the bank’s earnings, ceteris paribus. Therefore,management should focus on growing sources of noninterest income that currently are not being pursued.2.Citibank UBPRa.In 2004, Citibank’s ROE equaled 15.26% while its ROA equaled 1.49% versus peers’ figures of 14.58% and 1.31%,respectively. Citibank’s equity multiplier (EM = ROE/ROA) equaled approximately 10.24X versus 11.13X for peers. Citibank’s AU is higher at 8.83% (5.25% + 3.58%) versus 7.69% (4.46% + 3.23%) at peers. Citibank clearly generated higher gross revenues from both interest and noninterest sources. Citibank’s expense ratio (ER), in turn, equaled 6.27% while ER for peers was much lower for each type of expense and in total at 4.23%. Based on the profit figures alone, Citibank appears to be a high performance bank and achieves that by generating greater relative revenues.b.Citibank’s credit risk (as evidenced only by the ratios provided) appears high as net losses to loans is higher thanPeers (1.58% versus 0.25%), as is noncurrent loans and leases as a fraction of loans (1.78% versus 0.59%). The loss allowance (reserve) is a higher fraction of loans, but a much smaller fraction of net losses (charge-offs) andnoncurrent loans indicating that more reserves might be appropriate.c.Citibank’s liquidity risk appears high as the bank has a lower equity to asset (tier 1 leverage capital) ratio and reliesmuch more on noncore liabilities (noncore fund dependence). With its greater credit risk, you might expect it to operate with greater equity capital. Similarly, the bank is growing at a fast pace which generally increases overall risk because management cannot easily control risk from growth.d.Recommendations:Carefully assess credit risk; realign portfolio where appropriate.Increase the loan loss reserve.Slow loan growth and/or shift loans to less risky classes.Line up additional sources of liquidity.Review pricing of loans and deposits; identify sources of fees/noninterest income to see if they are sustainable.。
《商业银行管理》课后习题答案IMChap5
CHAPTER 5MEASURING AND EVALUATING BANK PERFORMANCEGoal of This Chapter: To help the reader learn how to analyze and evaluate a bank's performance, especially its rate of return, efficiency, and risk exposure, from the data provided in bank financial statements.Key Terms Presented in This ChapterBank Profitability Equity MultiplierROA Credit RiskROE Liquidity RiskEfficiency Market RiskNet Interest Margin Interest-Rate RiskNoninterest Margin Earnings RiskNet Profit Margin Solvency RiskAsset Utilization UBPRChapter OutlineI. Introduction: Performance Pressures Faced by Banks TodayII. Evaluating a Bank's PerformanceA. Determining the Bank's Long-Range ObjectivesB. Maximizing The Value of the Firm: A Key Objective for Any BankC. Profitability Ratios: A Surrogate for Stock Values1. Key Profitability Ratios in Banking2. Interpreting Profitability Ratios3. Useful Profitability Formulas4. Breaking Down Equity Returns for Closer Analysis5. Break-Down Analysis of a Bank's Return on Assets6. What a Breakdown of Bank Profitability Measures Can Tell UsD. Measuring Risk in Banking1. Credit Risk2. Liquidity Risk3. Market Risk4. Interest-Rate Risk5. Earnings Risk6. Solvency (or Default) Risk7. Other Forms of Risk in Banking (Inflation Risk, Currency orExchange-Rate Risk, Political Risk, and Crime Risk)E. Other Goals in BankingIII. The Impact of Bank Size on PerformanceIV. Watching out for Size, Location and Regulatory Bias in Analyzing Bank Performance V. Using Financial Ratios and Other Analytical Tools to Track Bank Performance--The UBPR.VI. Summary of the ChapterAppendix to the Chapter - Improving Bank Performance Through Knowledge: Sources of Information for Bankers, Their Customers, and Bank RegulatorsConcept Checks5-1. Why should banks be concerned about their level of profitability and exposure to risk? Banks in the U.S. and most other countries are private businesses that must attract capital from the public to fund their operations. If profits are inadequate or if risk is excessive, they will have greater difficulty in obtaining capital and their funding costs will grow, eroding profitability. Bank stockholders, depositors, and bank examiners representing the regulatory community are all interested in the quality of bank performance. The stockholders are primarily concerned with profitability as a key factor in determining their total return from holding bank stock, while depositors (especially large corporate depositors) and examiners typically focus on bank risk exposure.5-2. What individuals or groups are likely to be interested in these aspects or dimensions of bank performance?The individuals or groups likely to be interested in bank profitability and risk include other banks lending to a particular bank, borrowers, large depositors, holders of long-term debt capital issued by banks, bank stockholders, and the regulatory community.5-3. What factors influence a bank's stock price?A bank's stock price is affected by all those factors affecting its profitability and risk exposure, particularly its rate of return on equity capital and risk to shareholder earnings. A bank can raise its stock price by creating an expectation in the minds of investors of greater earnings in the future, by lowering the bank's perceived risk exposure, or by a combination of increases in expected earnings and reduced risk.5-4. Suppose that a bank is expected to pay an annual dividend of $4 per share on its stock in the current period and dividends are expected to grow 5 percent a year every year, and the minimum required return to equity capital based on the bank's perceived level of risk is 10 percent. Can you estimate the current value of the bank's stock?In this constant dividend growth rate problem the current value of the bank's stock would be: P o = D1 / (k – g) = $4 / (0.10 – 0.05) = $80.5-5. What is return on equity capital and what aspect of bank performance is it supposed to measure?Return on equity capital is the ratio of Net Income After Taxes/Total Equity Capital. It represents the rate of return earned on the funds invested in the bank by its stockholders.5-6. Suppose a bank reports that its net after-tax income for the current year is $51 million, its assets total $1,444 million, and its liabilities amount to 926 million. What is its return on equity capital?The bank's return on equity capital should be:ROE = Net After Tax Income = $51 million = .098 or 9.8 percentEquity Capital $1,444 mill.-$926 mill.5-7. What is return on assets and why is it important in banking?Return on assets is the ratio of Net Income After Taxes/Total Assets. The rate of return secured on a bank's total assets indicates the efficiency of its management in generating net income from all of the resources (assets) committed to the institution.5-8. A bank estimates that its total revenues from all sources will amount to $155 million and its total expenses (including taxes) will equal $107 million this year. Its liabilities total $4,960 million while its equity capital amounts to $52 million. What is the bank's return on assets? Is this ROA high or low? How could you find out?The bank's return on assets would be:ROA = Net After Tax Income = $155 mill. - $107 mill. = 0.0096 or 0.96 percent Total Assets $4,960 mill. + $52 mill.The size of this bank's ROA should be compared with the ROA's of other banks similar in size and location to determine if this bank's ROA is high or low relative to the average forcomparable banks.5-9. Why do bankers pay close attention today to the net interest margin and noninterest margin? To the earnings base and spread?The net interest margin (NIM) indicates how successful the bank has been in borrowing funds from the cheapest sources and in maintaining an adequate spread between its returns on loans and security investments and the cost of its borrowed funds. If the NIM rises, loan and security income must be rising or the average cost of funds must be falling or both. A declining NIM is undesirable because the bank's interest spread is being squeezed, usually because of rising interest costs on deposits and other borrowings.In contrast, the noninterest margin reflects the bank's spread between its noninterest income (such as service fees on deposits) and its noninterest expenses (especially salaries and wages and overhead expenses). For most banks the noninterest margin is negative. Management will usually attempt to expand fee income, while controlling closely the growth of noninterest expenses in order to make a negative noninterest margin as least negative as possible.The earnings base indicates the proportion of the bank's earning assets (loans, leases, and investments) relative to its total assets. As competition increases, greater pressure is placed on the bank's management to maintain the quality and quantity of these earning assets. Additionally, the bank's managers typically will shift some of their emphasis to increasing noninterest income generated by fees.The earnings spread measures the effectiveness of the bank's intermediation function of borrowing and lending money, which, of course, is the bank's primary way of generating earnings. As competition increases, the spread between the average yields on assets and the average cost of liabilities will be squeezed, forcing the bank's management to search for alternative sources of income, such as fees from various services the bank offers.5-10. Suppose a banker tells you that his bank in the year just completed had total interest expenses on all borrowings of $12 million and noninterest expense of $5 million, while interest income from earning assets totaled $16 million and noninterest revenues added to a total of $2 million. Suppose further that assets amounted to $480 million of which earning assets represented 65 percent of total assets, while total interest-bearing liabilities amounted to 55 percent of the bank's total assets. See if you can determine this bank's net interest and noninterest margins and its earnings base and earnings spread for the most recent year.The bank's net interest and noninterest margins must be:Net Interest = $16 mill. - $12 mill. Noninterest = $2 mill. - $5 mill.Margin $480 mill. Margin $480 mill.=.00833 = -.00625 The bank's earnings spread and earnings base are:Earnings = $16 mill. - $12 mill.Spread $480 mill * 0.85 $480 mill. * 0.75= .0392 -.0333Earnings Base = $480 mill. - $480 mill. * 0.15 = 0.85 or 85 percent$480 mill.5-11. What are the principal components of ROE and what do each of these components measure?The principal components of ROE are:a. The net profit margin or net after-tax income to operating revenues which reflects theeffectiveness of a bank's expense control program;b. The degree of asset utilization or ratio of operating revenues to total assets which measures the effectiveness of managing the bank's assets, especially the loan portfolio; and,c. The equity multiplier or ratio of total assets to total equity capital which measures a bank's use of leverage in funding its operations.5-12. If a bank has an ROA of 0.80 percent and an equity multiplier of 12x what is its ROE? Suppose this bank's ROA falls to 0.60 percent. What size equity multiplier must it have to hold its ROE unchanged?The bank's ROE is:ROE = 0.80 percent *12 = 9.60 percent.If ROA falls to 0.60 percent, the bank's ROE and equity multiplier can be determined from:ROE = 9.60% = 0.60 percent * Equity MultiplierEquity Multiplier = 9.60 percent = 16x.0.60 percent5-13. Suppose a bank reports net income after taxes of $12, before-tax net income of $15,operating revenues of $100, assets of $600, and $50 in equity capital. What is the bank's ROE? Tax-management efficiency indicator? Expense control efficiency indicator? Asset management efficiency indicator? Funds management efficiency indicator?The bank's ROE must be:ROE = 50$12$ = 0.24 or 24 percentIts tax-management, expense control, asset management, and funds management efficiencyindicators are:Tax Management = $12 Expense Control = $15Efficiency indicator $15 Efficiency Indicator $100= .8 or 80 percent =.15 or 15 percentAsset Management = $100 Funds Management = $600Efficiency Indicator $600 Efficiency Indicator $50= 0.1666 or 16.67 percent = 12 x5-14. What are the most important components of ROA and what aspects of bank performance do they reflect?The principal components of ROA are:a. Total Interest Income Less Total Interest Expense divided by Total Assets, measuring a bank's success at intermediating funds between borrowers and lenders;b. Provision for Loan Losses divided by Total Assets which measures management's ability to control loan losses and manage a bank's tax exposure;c. Noninterest Income less Noninterest Expenses divided by Total Assets, which indicates the ability of management to control salaries and wages and other noninterest costs and generate tee income;d. Net Income Before Taxes divided by Total Assets, which measures operating efficiency and expense control; ande. Applicable Taxes divided by Total Assets, which is an index of tax management effectiveness.5-15. If a bank has a net interest margin of 2.50%, a noninterest margin of -1.85%, and a ratio of provision for loan losses, taxes, security gains, and extraordinary items of -0.47%, what is its ROA?The bank's ROA must be:ROA = 2.50 percent - 1.85 percent - 0.47 percent = 0.18 percent5-16. To what different kinds of risk are banks subjected today?a. Earnings Risk -- the probability that a bank's earnings (net income) will fall, subjecting its stockholders to actual losses or to lower rates of return.b. Credit Risk -- the probability that loans and securities the bank holds will not pay out as promised.c. Solvency Risk -- the possibility or probability the bank will fail.d. Liquidity Risk -- the probability the bank will not have sufficient cash on hand in the volume needed precisely when cash demands arise.e. Market Risk -- the probability that the value of assets held by the bank will decline due to falling market prices.f. Interest-Rate Risk - the possibility or probability interest rates will change, subjecting the bankto losses.5-17. What items on a bank's balance sheet and income statement can be used to measure it's risk exposure?There are several alternative measures of risk in banking. Solvency risk is often measured by bank capital ratios, such as the ratio of total capital to total assets or total capital to risk assets. Creditrisk can be tracked by such ratios as net loan losses to total loans or relative to total capital. Liquidity risk can be followed by using such ratios as cash assets to total assets or by total loans to total assets. Interest-rate risk may be indicated by such ratios as interest-sensitive liabilities to interest-sensitive assets or the ratio of money-market borrowings to money-market assets.5-18. A bank reports that the total amount of its net loans and leases outstanding is $936 million,its assets total $1,342 million, its equity capital amounts to $110 million, and it holds $1,150 million in deposits, all expressed in book value. The estimated market values of the bank's total assets and equity capital are $1,443 million and $130 million, respectively. The bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50. Uninsured deposits amount to $243 million and money market borrowings total $ 1 32 million, while nonperforming loans currently amount to $43 million, and the bank just charged off $21 million in loans. Calculate as many of the bank's risk measures as you can from the foregoing data.Net Loans and Leases = $936 mill. Uninsured Deposits $243 mill.mill.0.7069 or 70.69 percent 0.2113 or 21.13 percentEquity Capital = $130 mill. Stock Price $60Total Assets $1,443 mill. Earnings Per Share $2.50 = 0.0901 or 9.01 percent = 24 XNonperforming Assets = $43 mill. =0.0459 or 4.59 percentNet Loans and Leases $1,443 mill.Charge-offs of loans = $21 Purchased Funds = $243 mill. + $132 mill. Total Loans and Leases $936 Total Liabilities $1,324 mill. - $110 mill.=.0224 or 2.24 percent .3089 or 30.89 percentBook Value of Assets = $1324 =0.9175 or 91.75 percentMarket Value of Assets $1443Problems5-1. First National Bank of Inesco is expected to pay a dividend of $12 per share at the end of the year and its stock dividends are expected to grow 8 percent a year indefinitely into the future. If the appropriate discount rate applied to the bank's expected dividend stream is 15 percent,Inesco's current stock price should be:P o = D (k g)1- = $12(.15.08)- = $171.43 per share.5-2.Price State Bank's expected stream of dividends over the next three years is as follows: Expected Dividends Per SharePeriod 1 $3.00Period 2 $4.50Period 3 $6.00Applying a discount rate of 12 percent to this dividend stream yields an estimated stockprice ofP o = $3(1.12)+ + $4.50(1.12)2+ + $6(1.12)3+ + $60(1.12)3+P 0 = $53.24 per share.5.3 Depositors and Merchants Bank has an equity-to-asset ratio of 7.5 percent which means its equity multiplier must be:1/(Equity Capital / Assets) = Assets EquityCapital = 1 / 0.075 = 13.33xIn contrast, Newton National Bank has an equity multiplier of:1/(Equity Capital / Assets) = 10.06= 16.67xWith an ROA of 0.85 percent Newton National would have an ROE of:ROE = 0.85 x 16.67x = 14.17 percent.In this case Newton National Bank is making greater use of financial leverage and is generating a higher return on equity capital.Depositors and Merchants has an ROE of:ROE = 0.85 x 13.33 x = 11.33 percent.5-4. The income and expense statement for Gilcrest Merchants National Bank, when arranged in proper order, would appear as follows:Gilcrest Merchants National Bank Income and Expense StatementInterest Fees on Loans $61Interest Dividends on Securities 12Total Interest Income 73Interest Paid on Deposits 49Interest on Nondeposit Borrowings 6Total Interest Expense 55Net Interest Income 18Provision for Loan Losses 2Noninterest Income and Fees 7Noninterest Expenses:Salaries and Employee Benefits 10Overhead Expenses 5Other Noninterest Expenses3Total Noninterest Expenses 18Net Income Before Taxes and SecurityGains or Losses 5Taxes 1Securities Gains (or Losses), Net ofTaxes1Net Income After Taxes $5Among the key ratios that can be calculated are the following:ROE = Net Income After Taxes = $5 =0.0180 or 1.80 percentEquity Capital $80ROA = Net Income After Taxes = $5 =0.005 or .5 percentTotal Assets $1000Net Interest Margin = Total Interest Income–Total Interest Expenses[($61 + $12) –($49 + $6)]=0.0180 or 1.8percent Total Assets $1000Net Noninterest = $7 - $18 =-0.011 or –1.1 percentMargin $1000Net operating margin = [Total Operating Revenues – Total Operating Expenses] /Total Assets = 1000$73$80$ = 0.0070 or 0.70 percent.Earnings = Total Interest Income - Total Interest Expenses = $61 + $12 - $49 + $6 Spread Total Earning Assets Total Interest Bearing $830 $710 Liabilities0.0880 – 0.0775 or 8.8 percent – 7.75 percent or 1.05 percentEarnings base = Total Assets – Nonearning Assets = $830 =0.83 or 83 percent in assets Total Assets $1000Profit Margin =Net income after taxes Total operating revenue = $5$80 = 0.0625 or 6.25 percent. Asset Utilization =Total operating revenue Total Assets = $80$1000 = $80$1000 = 0.08 or 8.0 percent Equity Multiplier =Total Assets Total Equity Capital = 12.5x Net Loans / Total Assets = 1000$670$ = 0.67 or 67 percentCash and Due from Bank = $120 = 0.12 or 12 percent Total Assets $1000Operating Efficiency Ratio = Total Operating Expenes Total Operating Revenues = $73$80 = 0.9125 or 91.25 percentEmployee Productivity = Net Operating Income = $80 - $73 = $175,000Ratio # of Full Time Employees $40 per employee5-5. The rates of return requested for Shadowwood National Bank are as follows:ROE = $105 ROA = $105$15,765 - $15,440 $15,7650.3231 or 32.31 percent 0.0067 or .67 percentNet Interest = $1875 - $1210 = $665 = 0.0527 or 5.27 percentMargin $12,612 $12,612(If total assets are used as the denominator, NIM = 4.22%.)Net Noninterest Margin =$501$685$12,612= 0.0146 or –1.46 percent.(If total assets are used as the denominator, the noninterest margin is –1.17%).Net Operating = ($1,875+- $501) – ($1,210 + $685 + $381) = $100 =0.0063 or.63 percent Margin $15,765 $15,765Net Return Before = ($1,875 + $501) – ($1,210 + $685 + $381 + $16) = $84 = 0.0053 or .53 Special Transaction Costs $15,765 $15,765 .percentEarnings per Share = 000,145000,000,105$ = $724.14 per share.Alternative Scenario 1:Suppose interest income, interest expenses, noninterest income, and noninterest expenses each increase by 5 percent, with all other items remaining unchanged.If we assume that the 5% increase flows through to net income, resulting in a 5% increase in net income, then the ROE, ROA, and EPS will increase by (at least) 5% also. Actually, the scenario which does not have provision for loan losses, securities gains, and taxes increasing would result in a greater than 5% increase in net income. This would, of course, result in the ROE, ROA, and EPS increases being greater than 5%.Alternative Scenario 2:Suppose Shadowood's interest income, interest expenses, noninterest income, and noninterest expenses decline by 5 percent, all other factors held equal. As with scenario 1, if we assume the decrease flows through to net income, then net income will decrease by 5%. This decrease will result in ROE, ROA, and EPS actually being greater than 5% as a result of the other items, such as provision for loan losses, taxes, and securities gains, not changing. Base Problem Alternative Scenario 1 AlternativeScenario 2Interest Income $1875 $1968.75 $1781.25 Interest Expense 1210 1270.50 1149.50 Net Interest Income $ 665 $ 698.25 $ 631.75Provision for Loan Losses $ 381 $ 381 $ 381Noninterest Income $ 501 $ 526.05 $ 475.95 Noninterest Expense 685 719.25 650.75 Net Noninterest Income ($184) ($193.20) ($174.8)Net Income Before Taxes $ 100 $ 124.05 $ 75.95 Income Taxes $ 16 $ 16 $ 16 Securities Gaines (orLosses)21 21 21 Net Income After Taxes $ 105 $ 129.05 $ 80.95Common SharesOutstanding145,000 145,000 145,000Base Problem AlternativeScenario 1AlternativeScenario 2a. ROE 32.31% 39.71% 24.91%b. ROA 0.67 0.82% 0.51%c. NIM (1) 5.27% 5.54% 5.01%NIM (2) 4.22% 4.43% 4.01%d. EPS $724.14 $890.00 $558.28e. NNIM (1) -1.46% -1.53% -1.39%NNIM (2) -1.17% -1.23% -1.11%f. NOM 0.63% 0.79% 0.48%g. Net Returns BeforeSpecial Transactions0.53% 0.69% 0.38%Notes: All figures except Common Shares in millions.Equity Capital = Total Assets - Total Liabilities = $ 15,765 - $15,440= $ 325 (millions) Total Assets =$15,765 millionsEarning Assets = $12,612 millionsNIM(1) uses Earning Assets in the denominator; NIM(2) uses Total AssetsNNIM(1) uses Earning Assets in the denominator; NNIM(2) uses Total Assets5-6. Selected balance sheet and income statement data for Farmers and Merchants National Bank are given as follows:Given: ROA = 0.0076 (i.e., 0.76%)Total Assets = $1.69 billion ($1,690 million)Equity Capital = $139 millionSolution:ROE = ROA * Total AssetsEquity Capital = 0.0076 * $1,690$139= 0.0924 or 9.24%Alternative Scenario 1:R0A increases by 50%, with no change in assets or equity capital.Therefore, the new ROA = 0.0076 * 1.5 = 0.0114 or 1.14%.New ROE = 1.14% * 12.16 = 13.86%This represents a 50% increase in ROE. With no changes in assets or equity, the investors' funds are more effectively utilized, generating additional income and making the bank more profitable. Alternative Scenario 2:ROA decreases by 50%, with no change in equity or assets.Therefore, the new ROA = 0.0076 * 0.5 = 0.0038 or 0.38%.New ROE = 0.38% * 12.16 = 4.62%This represents a 50% decrease in ROE. The bank's management has been less efficient, in this case, in managing their lending and/or investing functions or their operating costs.Alternative Scenario 3:ROA = 0.0076 or 0.76% (as in the original problem)Total assets double in size to $3.38 billion and equity capital doubles in size to $278 million. Therefore, the equity multiplier (i.e. total assets/equity capital) remains the same (E.M. =$3,380/$278 = 12.16). As a result, there is no change in ROE from the original situation (i.e., 0.76% * 12.16 = 9.24%).Alternative Scenario 4:This, of course, is just the reverse of scenario 3. Since the changes in both assets and equity capital are the same, the ratio of the two (i.e., the equity multiplier) remains constant. As a result, there is again no change in ROE.E.M. = Total Assets/Equity Capital = $845/$69.5 = 12.16.Therefore, ROE = 0.76% * 12.16 = 9.24%.5-7. Granite Dells State Bank reports the following information:Given:Total Operating Revenues = $135 millionTotal Operating Expenses = $121 millionTax Liability = $2 millionTotal Assets = $1.17 billionTotal Liabilities = $989 millionSolution:Net Income after Taxes = $135 million -$121 million -$2 million = $12 millionEquity Capital = $1.17 billion - $989 million = $181 million= $12 million / $181 million = 0.0663 or 6.63%.ROE = Net Income after TaxesEquity CapitalAlternative Scenario 1:Given: Total operating revenues, total operating expenses, and taxes each grow by 10%, but assets and liabilities remain fixed.Solution:Total revenues = $135 million * 1.10 = $148.5 millionTotal expenses = $121 million * 1.10 = $133.1 millionTax liability = $2 million * 1.10 = $2.2 millionNet Income after Taxes = $148.5 - $133.1 - $2.2 = $13.2 millionROE = $13.2 million/$181 million = 0.0729 or 7.29%= 10% (ROE increases by 10%)Change in ROE = 7.29% 6.63%6.63%Alternative Scenario 2:Given: Total assets increase by 10% (Total assets = $ 1.17 * 1.10 = $1.287 billion)Total liabilities increase by 10% (Total liabilities = $989 million * 1.10 =1.0879Revenues and expenses (including taxes) remain unchanged.Solution: Equity Capital = $1.287 billion - $1.0879 billion = $199.1 million= 0.063 or 6.03%ROE = $12 million$199.1 millionTherefore change in ROE = 6.03% - 6.63% = -0.6% = -9%6.63% 6.63% (ROE decreases by 9%)Alternative Scenario 3:Given: Total revenues decline by 10% (Total revenues = $135 million * 0.90 = $121.5 million) Total expenses decline by 10% (Total expenses = $121 million * 0.9 = $108.9 million)Tax liability declines by 10% (Tax liability = $2 * 0.9 = $1.8 million)Assets and liabilities remain unchanged (Therefore, equity remains unchanged)Solution: Net Income after Tax = $121.5 million - 108.9 million - $1.8 million = $10.8 ROE = $10.8 million = 0.0597 = 5.97%$181 millionTherefore, change in ROE = 5.97% - 6.63% = -0.66% = -10% (ROE decreases by 10%)6.63% 6.63%Alternative Scenario 4:Given: Assets and liabilities decrease by 10%; therefore,Equity capital decreases by 10%,Operating revenues, operating expenses, and taxes remain unchanged.Solution: Total assets = $1.17 billion * 0.9 = $1.053 billionTotal liabilities = $989 million * 0.9 =$890.1 millionEquity capital = $1.053 billion - $890.1 million = $162.9 million= 0.0737 or 7.37%ROE = $12 million$162.9 million5-8. Suppose a bank is projected to achieve a 1.25 percent ROA during the coming year. What must its ratio of total assets to total equity capital be if it is to achieve a 12-percent ROE goal? Given: ROA = 1.25% and target ROE = 12%Solution: ROE = ROA * (Total Assets/Equity Capital)Total Assets = ROE = 12% = 9.6 xEquity Capital ROA 1.25%If ROA unexpectedly falls to 0.75% and target ROE remains 12%:Solution:12% = .75% * Total AssetsEquity CapitalTotal Assets = 12% =16 xEquity Capital .75%Alternative Scenario 1:Given: ROA = 1.5% and target ROE = 12%Solution: Total Assets = 12% = 8xEquity Capital 1.5%Alternative Scenario 2:Given: Bank's ROA unexpectedly declines to 0.75%Solution: Total Assets = 12% = 16 x (The same as part 2 of original problem) Total Equity .75%5-9. The following information is given for Blythe County National Bank:Net Income after Taxes = $16 millionTotal Operating Revenues = $215 millionTotal Assets = $1,250 millionTotal Equity Capital Accounts = $111 millionSolve for the bank's net profit margin, asset utilization ration, equity multiplier, and ROE. Solutions:a. Net Profit Margin = Income After Taxes = $16 mill. = 0.0744 or 7.44%Total Operating Revenue $215 mill.b. Asset Utilization = Total Operating Revenues = $215 mill. = 0.172 or 17.2%Total Assets $1250 mill.c. Equity Multiplier = Total Assets = $1250 mill. = 11.26 timesTotal Equity Capital $111 mill.d. ROE = Net Income After Taxes = $16 mill. = 0.1441 or 14.41%Total Equity Capital $111 mill.Alternative Scenario:Given: Total Liabilities = $1,475 million。
(财务会计)会计英语练习题
Chapter11. The Mill Run Golf & Country Club details the following accounts in its financial statements.(a) (b)Accounts payable and accrued liabilities ____ ____Accounts receivable ____ ____Property, plant, and equipment ____ ____Food and beverage operations revenue ____ ____Golf course operations revenue ____ ____Inventory ____ ____Long-term debt ____ ____Office and general expense ____ ____Professional fees expense ____ ____Wages and benefits expense ____ ____Instructions.(a)Classify each of the above accounts as an asset (A) , liability(L), stockholders’ equity (SE), revenue(R), or expense (E) item.(b)Classify each of the above accounts as a financing activity (F), investing activity (I), or operatingactivity (O). If you believe a particular account doesn’t fit in any of these activities, explain why.2.The following information was taken from the 2004 financial statements of pharmaceutical giantMerck and Co. All dollar amounts are in millions.Retained earnings, January 1, 2004 $34,142.0Materials and production expense 4,959.8Marketing and administrative expense 7,346.3Dividends 3,329.1Sales revenue 22,938.6Research and development expense 4,010.2Tax expense 2.161.1Other revenue 1,352.2Instructions.(a)After analyzing the data, prepare an income statement and a retained earnings statement for the yearending December 31,2004.(b)Suppose that Merck decided to reduce its research and development expense by 50%. What would bethe short-term implications? What would be the long-term implications? How do you think the stock market would react?3.Kellogg Company is the world’s leading producer of ready-to-eat cereal and a leading producer ofgrain-based convenience foods such as frozen waffles and cereal bars. The following items were taken from its 2004 income statement and balance sheet. All dollars are in millions._____Retained earnings $2,701.3 _____ Long-term debt $3,892.6 _____Cost of goods sold 5,298.7 _____ Inventories 681.0 _____Selling and administrative expense 2,634.1 _____ Net sales 9,613.9 _____Cash 417.4 _____ Accounts payable 767.2 _____Notes payable 709.7 _____Common stock 103.8 _____Interest expense 308.6 _____ Income tax expense 475.3_____ Other expense 6.6Instructions.Perform each of the following.(a)In each case identify whether the item is an asset (A), liability (L), stockholders’ equity (SE),revenue (R), or expense (E).(b)Prepare an income statement for Kellogg Company for the year ended December 31, 2004.4.The following items were taken from the balance sheet of Nike, Inc.(1)Cash $828.0 (7) Inventories $1,633.6(2)Accounts receivable 2,120.2 (8) Income taxes payable 118.2(3)Common stock 890.6 (9) Property, plant, and equipment 1,586.9(4)Notes payable 146.0 (10)Retained earnings 3,891.1(5)Other assets 1,722.9 (11)Accounts payable 763.8(6)Other liabilities 2,081.9Instructions.Perform each of the following.(a)Classify each of these items as an asset, liability, or stockholders’ equity. (All dollars are inmillions.)(b)Determine Nike’s accounting equation by calculating the value of total assets, total liabilities,and total stockholders’ equity.(c)To what extent dose Nike rely on debt versus equity financing?Chapter 2.1．These items are taken from the financial statements of Donovan Co. at December 31.2007Building $105,800Accounts receivable 12,600Prepaid insurance 4,680Cash 16,840Equipment 82,400Land 61,200Insurance expense 780Depreciation expense 5,300Common stock 62,000Retained earnings (January 1, 2007) 40,000Accumulated depreciation-building 45,600Accounts payable 9,500Mortgage payable 93,600Accumulated depreciation-equipment 18,720Interest payable 3,600Bowling revenues 19,180Instructions.Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2008.2. The following items were taken from the 2004 financial statements of Texas Instruments, Inc.(All dollars are in millions.)Long-term debt $ 368 Cash $ 2,668 Common stock 2,488 Accumulated depreciation 5,655 Prepaid expense 326 Accounts payable 1,444 Property, plant, and equipment 9,573 Other noncurrent assets 1,927Other current assets 554 Other noncurrent liabilities 943Other current liabilities 470 Retained earnings 10,575Long-term investments 264 Accounts receivable 1,696Short-term investments 3,690 Inventories 1,256Loans payable in 2005 11Instructions.Prepare a classified balance sheet in good form as of December 31, 2004.3. These financial statement items are for Snyder Corporation at year-end, July 31, 2007.Salaries payable $ 2,080Salaries expense 51,700Utilities expense 22,600Equipment 18,500Accounts payable 4,100Commission revenue 61,100Rent revenue 8,500Long-term note payable 1,800Common stock 16,000Cash 24,200Accounts receivable 9,780Accumulated depreciation 6,000Dividends 4,000Retained earnings (beginning of the year) 35,200Instructions.(a)Prepare an income statement and a retained earnings statement for the year. Snyder Corporation didnot issue any new stock during the year.(b)Prepare a classified balance sheet at July 31.(c)Compute the current ratio and debt to total assets ratio.(d)Suppose that you are the president of Allied Equipment. Your sales manager has approached you witha proposal to sell $20,000 of equipment to Snyder. He would like to provide a loan to Snyder in theform of a 10%, 5-year note payable. Evaluate how this loan would change Snyder’s current ratio and debt to total assets ratio, and discuss whether you would make the sale.4. The chief financial officer (CFO) of SuperClean Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 007, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.SUPERCLEAN CORP.Balance SheetDecember 30, 2007Current assets Current liabilitiesCash $30,000 Accounts payable $25,000Accounts receivable 20,000 Salaries payable 15,000 $40,000 Prepaid insurance 10,000 $60,000 Long-term liabilitiesNotes payable 80,000Total liabilities 120,000 Property, plant, and equipment (net) 200,000 Stockholders’ equityTotal assets $260,000 Common stock 100,000Retained earnings 40,000 140,000Total liabilities and stockholders equity$260,000Instructions.(a)Calculate the current ratio and working capital based on the preliminary balance sheet.(b)Based on the results in (a), the CFO requested that $25,000 of cash be used to pay off the balance ofthe accounts payable account on December 31, 2007. Calculate the new current ratio and working capital after the company takes these actions.(c)Discuss the pros and cons of the current ratio and working capital as measures of liquidity.(d)Was it unethical for the CFO to take these steps?5. The following data were taken from the 2004 and 2003 financial statements of American Eagle Outfitters. (All dollars are in thousands.)20042003 Current assets $525,623 $427,878Total assets 865,071 741,339Current liabilities 189,035 141,586Total liabilities 221,401 163,857Total stockholders’ equity 643,670 577,482Cash provided by operating activities 189,469 104,548Capital expenditures 64,173 61,407Dividends paid -0- -0-Instructions.Perform each of the following.(a)Calculate the debt to total assets ratio for each year.(b)Calculate the free cash flow for each year.(c)Discuss American Eagle’s solvency in 2004 versus 2003.(d)Discuss American Eagle’s ability to finance its investment activities with cash provided by operatingactivities, and how any deficiency would be met.Chapter 3.1．During 2007, its first year of operations as a delivery service, Cheng Corp. entered into the following transactions.(1)Issued shares of common stock to investors in exchange for $110,000 in cash.(2)Borrowed $45,000 by issuing bonds.(3)Purchased delivery trucks for $60,000 cash.(4)Received $16,000 from customers for services provided.(5)Purchased supplies for $4,200 on account.(6)Paid rent of $5,600.(7)Performed services on account for $8,000.(8)Paid salaries of $28,000.(9)Paid a dividend of $11,000 to shareholders.InstructionsUsing the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders’ Equity in the right-hand margin.Assets = Liabilities + Stockholders’EquityCash+Accounts+Supplies+Property,Plant, =Accounts +Bonds + Common + Retained Receivable and Equipment Payable Payable Stock Earningsmonth of business, are as follows.(1)Issued stock to investors for $12,000 in cash.(2)Purchased used car for $8,000 cash for use in business.(3)Purchased supplies on account for $300.(4)Billed customers $2,600 for services performed.(5)Paid $200 cash for advertising start of the business.(6)Received $1,100 cash from customers billed in transaction(4).(7)Paid creditor $300 cash on account.(8)Paid dividends of $400 cash to stockholders.Instructions(a)For each transaction indicate (a) the basic type of account debited and credited (asset,liability, stockholders’ equity); (b) the specific account debited and credited (Cash, Rent Expense, Service Revenue, etc.); (c) whether the specific account is increased or decreased; and (d) the normal balance of the specific account. Use the following format, in which transaction 1 is given as an example.Account Debited Account Credited(a) (b) (c) (d) (a) (b) (c) (d)Trans- Basic Specific Normal Basic Specific Normalaction Type Account Effect Balance Type Account Effect Balance1 Asset Cash Increase Debit Stock- Common Increase Creditholders’stockequity(b)Journalize the transaction. Do not provide explanations.3.This information relates to Matthews Real Estate Agency Corporation.Oct. (1) Stockholders invested $25,000 in exchange for common stock of the corporation.(2)Hires an administrative assistant at an annual salary of $42,000.(3)Buys office furniture for $3,600, on assount.(6)Sells a house and lot for M.E. Mills; commissions due from Mills, $10,800 (notpaid by Mills at this time).(10) Receives cash of $140 as commission for acting as rental agent renting anapartment.(27) Pays $700 on account for the office furniture purchased on October 3.(30) Pays the administrative assistant $3,500 in salary for October.InstructionsPrepare the debit-credit analysis for each transaction as illustrated on pages 119-124.4.Transaction data for Matthews Real Estate Agency are presented in 3 .Journalize the transaction. Do not provide explanations.5.Selected transactions for P.F. Quick Corporation during its first month in business arepresented below.Sept. (1) Issued common stock in exchange for $15,000 cash received from investors.(5) Purchased equipment for $12,000, paying $2,000 in cash and the balance on account.(25) Paid $5,000 cash on balance owed for equipment.(30) Paid $500 cash dividend.P.F. Quick’s chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends.Instructions(a)Prepare a tabular analysis of the September transaction. The column headings should be:Cash + Equipment = Accounts Payable + Stockholders’ Equity. For transactions affecting stockholders’ equity, provide explanations in the right margin, as shown on page107.(b)Journalize the transaction. Do not provide explanations.(c)Post the transactions to T accounts.Chapter 41．The following independent situations require professional judgement for determining when to recognize revenue from the transaction.(a)Southwest Airlines sells you an advance-purchase airline ticket in September foryour flight home at Christmas.(b)Ultimate Electronics sell you a home theatre on a “no monkey down, no interest, andno payments for one year” promotional deal.(c)The Toronto Blue Jays sells season tickets online to games in the Skydome. Fans canpurchase the tickets at any time, although the season doesn’t officially begin until April. The major league baseball season runs from April through October.(d)In August, you order a sweater from Sears using its online catalog. The sweaterarrives in September in full in November.(e)In August, you order a sweater from Sears using its online catalog. The sweaterarrives in September, and you charge it to your Sears credit card. You receive and pay the Sears bill in October.InstructionIdentify when revenue should be recognized in each of the above situations.2.Your examination of the records of a company that follows the cash basis ofaccounting tells you that the company’s reported cash basis earnings in 2007 are $33,640. If this firm had followed accrual basis accounting practices, it would have reported the following year-end balances.2007 2006 Accounts receivable $3,400 $2,300Unpaid wages owed 1,500 2,400Other unpaid amounts 1,400 1,600 InstructionDetermine the company’s net earning on an accrual basis for 2007. Show all your calculations in an orderly fashion.3.In its first year of operations Bere Company earned $28,000 in service revenue,$6,000 of which was on account and still outstanding at year-end. The remaining $22,000 was received in cash from customers.The company incurred operating expenses of $14,500. Of these expenses $13,000 were paid in cash; $1,500 was still owed on account at year-end. In addition, Bere prepaid $3,600 for insurance coverage that would not be used until the second year of operations.Instructions(a)Calculate the first year’s net earnings under the cash basis of accounting, and calculatethe first year’s net earning under the accrual basis of accounting.(b)Which basis of accounting (cash or accrual) provides more useful information fordecision makers?4．The Radical Edge, a ski tuning and repair shop, opened in November 2006. The company carefully kept track of all its cash receipts and cash payments. The following information is available at the end of the ski season, April 30, 2007.Cash Receipts Cash PaymentsIssue of common shares $20,000Payment for repair equipment $9,200 Rent payments 1,225 Newspaper advertising payment 375 Utility bills payments 970 Part-time helper’s wages payments 2,600 Income tax payment 10,000 Cash receipts from ski and snowboardrepair services 32,150Subtotals 52,150 24,370 Cash balance 27,780 Totals $52,150 $52,150 You learn that repair equipment has an estimated useful life of 5 years. The company rents space at a cost of $175 per month on a one-year lease. The lease contract requires payment of the first and last month s’ rent in advance, which was done. The part-timer helper is owed $220 at April 30, 2007, for unpaid wages. At April 30, 2007, customers owe The Radical Edge $650 for services they have received but have not yet paid for.Instructions(b)Prepare the April 30, 2007, classified balance sheet.5. MaxPlay, a maker of electronic games for kids, has just completed its first year of operations. The company’s sales growth was explosive. To encourage large national stores to carry its products MaxPlay offered 180-day financing-meaning its largest customers do not pay for nearly 6 months. Because MaxPlay is a new company, its components suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year MaxPlay owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year.Instructions(a)Explain how cash and accrual accounting would differ for each of the events listed aboveand describe the proper accrual accounting.(b)Assume that at the end of the year MaxPlay reported a favorable net income, yet thecompany’s management is concerned because the company is very short of cash. Explain how MaxPlay could have positive net income and yet run out of cash.6.The ledger of Reliable Rental Agency on March 31 of the current year includes theseselected accounts before adjusting entries have been prepared.Debits Credits Prepaid Insurance $3,600Supplies 3,000Equipment 25,000Accumulated Depreciation-Equipment $8,400Notes Payable 20,000Unearned Rent Revenue 10,200Rent Revenue 60,000Interest Expense 0Wage Expense 14,000An analysis of the accounts shows the following.(1)The equipment depreciates $250 per month.(2)Half of the unearned rent revenue was earned during the quarter.(3)Interest of $440 is accrued on the notes payable.(4)Supplies on band total $850.(5)Insurance expires at the rate of $300 per month.InstructionsPrepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and supplied Expense.7.Gene Hoffman, D.D.S., opened an incorporated dental practice on January 1, 2007.During the first month of operations the following transactions occurred:such services was earned but not yet billed to the insurance companies.(2)Utility expenses incurrent but not paid prior to January 31 totaled $520.(3)Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash andsigning a $60,000, 3-year note payable (Interest is paid each December 31). The equipment depreciates $400 per month. Interest is $500 per month.(4)Purchased a 1-year malpractice insurance policy on January 1 for $18,000.(5)Purchased $1,750 of dental supplies. On January 31 determined that $350 of supplieswere on hand.InstructionsPrepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation-Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.Chapter 5ExercisesE5-1 The following transactions are for Kale Company.1.On December 3 Kale Company sold $480000 of merchandise to Thomson Co., terms1/10,n/30 .The cost of the merchandise sold was 320000.2.On December 8 Thomson Co. was granted an allowance of $28000 for merchandisepurchased on December 3.3.on December 13 Kale company received the balance due from Thomson Co. instructions(a)Prepare the journal entries to record these transactions on the books of Kale Company .Kale uses a perpetual inventory system.(b)Assume that Kale Company received the balance due from Thomson Co. on January 2 ofthe following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.E5-2 Assume that on September 1 office depot had an inventory that included a variety of calculators. The company uses a perpetual inventory system. During September these transactions occurred.Sept.6 purchased calculators from black box co. at a total cost of $620,term n/30.Sept .9 Paid freight of $50 on calculators purchased from Black Box Co.Sept 10 Returned calculators to black box co. for $38 credit because they did not meet specifications .Sept 12 Sold calculators costing $520 for $780to University Book Store, terms n/30.Sept14 Granted credit of $45 to University Book Store for the return of one calculator that was not ordered .The calculator cost $28.Sept 20 Sold calculators costing $570 for $900 to Campus Card Shop. InstructionsJournalize the September transactions .E5-3 This information relates to Sherper Co.$220000,terms2/10,n/30.2.On April 6 paid freight costs of $900 on merchandise purchased from Newport.3.On April 7 purchased equipment on account for $26000.4.On April 8 returned some of April 5 merchandise of Newport Company which cost$3600.5.On April 15 paid the amount due to Newport Company in full.Instructions(a) Prepare the journal entries to record the transactions listed above on the books of SherperCo. uses a perpetual inventory system.(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15.Prepare the journal entry to record this payment.E5-8 In its income statement for the year ended December 31,2007,Knitz Company reported the following condensed data.Administrative expenses $435000 selling expenses $ 690000Cost of goods sold 987000 Loss on sale of equipment 83500Interest expense 68000 Net sales 2350000Interest revenue 45000Instructions(a)Prepare a multiple-step income statement.(b)Calculate the profit margin ratio and gross profit rate.(c)In 2006 Knitz had a profit margin ratio of 9%. Is the decline in 2007 a cause forconcern?E5-9 In its income statement for the year ended June 30,2004, The Clorox Company report the following condensed data (dollars in millions ).Selling and Research andAdministrative expenses $ 552 development expense $ 84Net sales 4324 Income tax expense 294Interest expense 30 Other income 1Advertising expense 429 Cost of goods sold 2387 Instructions(a)Prepare a multiple step income statement.(b)Calculate the gross profit rate and the profit margin ratio and explain what each means.(c)Assume by marketing department has presented a plan to increase advertising expensesby $300 million . It expects thos plan to result in an increase in both net sales and cost of goods sold of 25%. Redo parts (a) and (b) and discuss whether this plan has merit.(Assume a tax rate of 35%,and round all amounts to whole dollars .)E5-10 The trial balance of Rachel Company at the end of its fisical year , August 31 , 2007, includes these accounts :Merchandise Inventory $19200; Purchases $144000; Sales $190000; Freight-in $8000; Sales Returns and Allowances $3000;Freight-out $1000;and Purchase Returns and Allowances $5000. The ending merchandise inventory is $25000.InstructionsPrepare a cost of goods sold section for the year ending August 31.Chapter 6ExercisesE6-2Dennis Lee ,an auditor with Knapp CPAs, is performing a review of Nathan Company’s inentory account. Nathan did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $740000.However, the following information was not considered when determining that amount.1.Included in the company’s count were goods with a cost of $250000 that the company isholding on consignment.The goods belong to Anya Corporation.2.The physical count did not include goods purchased by Nathan with a cost of $40000that were shipped FOB shipping point on December 28 and did not arrive at Nathan’s warehouse until January 33.Included in the inventory account was $17000 of office supplies that were stored in thewarehouse and were to be used by the company’s supervisors and managers during the coming year4.The company received an order on December 29 that was boxed and was sitting on theloading dock awaiting pick-up on Decemeber 31.The shipper picked up the goods on January 1 and deliverde them on January 6.The shipping tems were FOB shipping point.The goods had a selling price of $40000 and a cost of $30000.The goods were not included in the count because they were sitting on the dock.5.On December 29 Nathan shipped goods with a selling price of $80000 and a cost of$60000 to Central Sales Corporation FOB shipping point.The goods arrived on January3.Central Sales had only ordered goods with a selling price of $10000 and a cost of $8000.However, a sales manager at Nathan had authorized the shipment and said that if Central wanted to ship the goods back next week, it could.6.Included in the count was $50000 of goods that were parts for a machine that thecompany on longer made. Given the higi-tech nature of Nathan’s products,it was unlikely that these obsolete parts had any other use .However, management would prefer to keep them on the books at cost, “since that is what we paid for them ,after all.”InstructionsPrepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.E6-3 Shippers Inc. had the following inventory situations to consider at January 31.its year end.(a)Goods held on consignment for MailBoxes Corp. since December 12.(b)Goods shipped on consignment to Rinehart Holdings Inc. on January 5(c)Goods shipped to a customer, FOB destination ,on January 29 that are still in transit.(d)Goods shipped to a customer, FOB shipping point, on January 29 that are still in transit.(e)Goods purchased FOB destination from a supplier on January 25,that are still in transit.(f)Goods purchased FOB shipping point from a supplier on January 25,that are still intransit.(g)Office supplies on hand at January 31.InstructionsIdentify which of the preceding items should be included in inventory. If the item should not be included in inventory, state where it should be recorded.E6-4Boarders sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Below if information relating to Boarders’s purchases of Xpert snowboards during September. During the same month, 118 Xpert snowboards were sold. Boarders uses a periodic inventory system.Instructions(a)Compute the ending inventory at September 30 using the FIFO and LIFO methods.Prove the amount allocated to cost of goods sold under each method.(b)For both FIFO and LIFO ,calculate the sum of ending inventory and cost of goods sold.What do you notice about the answers you found for each method?E6-7 Plato Company reports the following for the month of June.(1)FIFO,(2)LIFO,and (3) average cost.(b)Which costing method gives the highest ending inventory? The highest cost of goodssold ?Why?(c)How do the average-cost values for ending inventory and cost of goods sold relate toending inventory and cost of goods sold for FIFO and LIFO?(d)Explain why the average cost is not $6InstructionsCalculate the inventory turnover ratio,days in inventory,and gross profit rate for PepsiCo.,Inc. for 2002,2003, and 2004. Comment on any trends.E6-9 Cody Camera Shop es the lower of cost or market basis for its inventory. The following data are available at December 31.InstructionsWhat amount should be reported on Cody Camera Shop’s financial statements, assuming the lower of cost or market rule is applied?E6-10Deere&Company is a global manufacturer and distributor of agricultural, construction, and forestry equipment. It reportde the following information in its 2004 annual report.Instructions(a)Compute Deere’s inventory turnover ratio and days in inventory for 2004(b)Compute Deere’s current ratio using the 2004 data as presented, and then again afteradjusting for the LIFO reserve(c)Comment on how ignoring the LIFO reserve might affect your evaluation of Deere’sliquidity.chapter 8exercisese-8-3 At the beginning of the current period，Huang Crop. had balances in Accounts Receivable of 200000 and in Allowance for Doubtful Accounts of 9000（credit）. During the period，it had net credit sales of 800000 and collections of 743000. It wrote off as uncollectible accounts receivable of 7000.However，a 4000 account previously written off as uncollectible was recovered before the end before the end of the current period . Uncollectible accounts are estimated to total 25000 at the end of period.Instructions（a）Prepare the entries to record sales and collections during the period.（b）Prepare the entry to record the write-off of uncollectible accounts during the period.（c）Prepare the entries to record the recovery of the uncollectible account during the period.（d）Prepare the entry to record bad debts expense for the period.（e）Determine the ending balances in Accounts Receivable and Allowance for Doubtful accounts. （f）What is the net realizable value of the receivables at the end of period？E8-4 The ledger of Garcia Company at the end of the current year shows Accounts Receivable 96000；Credit Sales 780000 ；and Sales Returns and Allowances 40000.Instructions（a）If Garcia uses the direct write-off method to account for uncollectible accounts ，journalize the adjusting entry at December 31，assuming Garcia determines that Allied’s 900 balance is un collectible.（b）IF Allowance for Doubtful Accounts has a credit balance of $1100 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be 10% of accounts receivable.（c）If Allowance for Doubtful Accounts has a debit balance of 500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be 8% of accounts receivable.E8-5 Hachey Company has accounts receivable of 95100 at March 31,2007.An analysis of the accounts shows these amounts.Credit terms are 2/10,n/30.At March 31,2007,there is a $2200 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivable basis for estimating uncollectible accounts. The company’s estimates of bad debts as shown on next page.。
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Interest = Principal × Stated Rate × Time
Accounting English @2011 18
Bonds Payable
Bonds are issued through an intermediary called an underwriter. Bonds can be sold on organized securities exchanges. Bond prices are usually quoted as a percentage of the face amount. For example, a $1,000 bond priced at 102 would sell for $1,020.
Chapter 5
Liabilities
Accounting English @2011
1
The Nature of Liabilities
Defined as debts or obligations arising from past transactions or events.
Maturity = 1 year or less Maturity > 1 year
Accounting English @2011
4
Accounts Payable
Accounts payable:
Short-term obligations to suppliers for purchases of merchandise and to others for goods and services.
Accounting English @2011
Six months after this date promises to pay to the order of the sum of $10,000.00 of 12.0% per annum.
John Caldwell
treasurer
7
On November 1, 1999, Porter Company would make the following entry.
Total Notes Payable
Non-current Notes Payable
Accounting English @2011 6
PROMISSORY NOTE Miami, Fl Location Nov. 1, 1999 Date Porter Company Security National Bank with interest at the rate signed title
Office supplies invoices Utility and phone bills
Merchandise Inventory invoices Shipting English @2011
5
Notes Payable
When a company borrows money, a note payable is created.
Current Liabilities
I.O.U.
Non-current Liabilities
Accounting English @2011
2
Distinction Between Liabilities and Equity
The acquisition of assets is financed from two sources:
Accounting English @2011
19
Types of Bonds
Mortgage Bonds Debenture Bonds
Convertible Bonds
Junk Bonds
Accounting English @2011
20
The Concept of Present Value
In 5 years it will be worth $1,610.51.
In 25 years it will be worth $10,834.71!
Present Value
Accounting English @2011
Future Value
22
The Concept of Present Value
Date Description Debit Credit
1-Nov Cash Note Payable
10,000 10,000
Accounting English @2011
8
Interest Payable
Interest expense is the compensation to the lender for giving up the use of money for a period of time. The liability is called interest payable. To the lender, interest is a revenue. To the borrower, interest is an expense.
Accounting English @2011 24
The Present Value Concept and Bond Prices
The selling price of the bond is determined by the market based on the time value of money.
10
On December 31, Porter Company would record interest payable with the following entry:
Date Description Debit Credit
31-Dec Interest Expense Interest Payable
Current Portion of Notes Payable
The portion of a note payable that is due within one year, or one operating cycle, whichever is longer.
Current Notes Payable
Liabilities EQUITY
Funds from creditors, with Funds from a definite due date, and owners sometimes bearing Accounting English @2011 interest.
3
Current Liabilities
Accounting English @2011 13
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-
Advances from Customers
Cash is sometimes collected from the customer before the revenue is actually earned. - Unearned
As the earnings process is completed . . . Cash is received in advance. Deferred revenue is recorded.
-
Accounting English @2011
15
Long-term liabilities
Accounting English @2011
16
Bonds Payable
Bonds usually involve the
borrowing of a large sum of money, called principal. The principal is usually paid back as a lump sum at the end of the bond period. Individual bonds are often denominated with a par value, or face value, of $1,000.
Accounting English @2011
12
In China, Employee compensation payable includes following items:
Salary, bonus, allowance and subsidy Employee benefit Social insurance premiums Housing fund Labor-union expenditure and employee education expenses Non-monetary welfare Compensation for the termination of employment relationship Others
$1,000 invested today at 10%.
Money can grow over time, because it can earn interest.
Accounting English @2011 21
The Concept of Present Value
$1,000 invested today at 10%.
Accounting English @2011
Earned revenue is recorded.
14
Tax Payable
Corporations pay taxes following tax law, including:
value-added tax consumption tax business tax Income tax resources tax land value added tax house property tax vehicle tax land use tax others