Question

a. how is the balance sheet of banks differ from a non-bank business entity?

b. discuss how loans are processed.

Answer 1

Solution.>

Part a> Balance Sheet of banks:

1> It is prepared as per the mandate by the Regulatory Authorities.

2> Its main objective is to showcase an accurate trade-off between bank's profit and risk.

3> Its scope is limited since it is applicable only for banks.

4> Assets = Liabilities + Shareholder's equity [Banks assets and liabilities are very different than any regular company.]

5> Its preparation is quite complex since bank needs to calculate the "net loans".

6> Bank Balance sheet mentions reference through "Schedules".

7> In Bank balance sheet, the type of balance is average balance.

Balance Sheet of a company:

1> It is prepared as per the regulation of International Accounting Standards Board (IASB).

2> Its main objective is to reflect the accurate financial picture of an organization to the shareholders.

3> Its scope is much broader since it is applicable for all sorts of companies for e.g. manufacturing, Auto etc.

4> Equation used is : Assets = Liabilities + Shareholder's equity.

5> Its preparation is much simpler.

6> Company Balance sheet mentions reference through "Notes".

7> In the Company balance sheet, the type of balance is ending balance.

Part b> There are a series of steps in how loans are processed:

i> Pre-Qualification

ii> Mortgage Programs and Rates

iii> The Application

iv> Processing

v> Required Documents

vi> Credit Reports

vii> Appraisal Basics

viii> Underwriting

ix> Closing

x> Summation

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