Question

Q1. Accounting in the financial institutions has special characteristics compared to the non-financial institutions, discuss this statement and explain characteristics of balance sheets, income statement and cash flow statement in banks.

Q2. Regulations require banks to do detailed disclosure on the quality of assets, discuss this statement and explain the kind of disclosure on quality of loans done by banks working in Saudi Arabia.

Q3. In thrift banks in USA, the structure of income has been changed because the intermediation role is no longer the main source of income, discuss this statement and explain the structure of income of banks in Saudi Arabia.

Accounting for Financial Institution

Answer 1

The three financial statements are: (1) the Income Statement, (2) the Balance Sheet, and (3) the Cash Flow Statement. These three core statements are intricately linked to each other and this guide will explain how they all fit together. By following the steps below you’ll be able to connect the three statements on your own.

Overview of the three financial statements:

#1 Income statement

Often, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit. From there, the gross profit is affected by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business.

Key features:

• Shows the revenues and expenses of a business
• Expressed over a period of time (i.e. 1 year, 1 quarter, Year-to-Date, etc.)
• Uses accounting principles such as matching and accruals to represent figures (not presented on a cash basis)
• Used to assess profitability

#2 Balance sheet

The balance sheet displays the company’s assets, liabilities, and shareholders’ equity. As commonly known, assets must equal liabilities plus equity. The asset section begins with cash and equivalents, which should equal the balance found at the end of the cash flow statement. The balance sheet then displays the changes in each major account. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends).

Key features:

• Shows the financial position of a business
• Expressed as a “snapshot” or point in time (i.e. as at December 31, 2017)
• Has three sections: assets, liabilities, and shareholders equity
• Assets = Liabilities + Shareholders Equity

#3 Cash flow statement

The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then, using changes in the balance sheet, usage and receipt of cash is found. The cash flow statement displays the change in cash per period, as well as the beginning balance and ending balance of cash.

Key features:

• Shows the increases and decreases in cash
• Expressed over a period of time (i.e. 1 year, 1 quarter, Year-to-Date, etc.)
• Undoes all accounting principles to show pure cash movements
• Has three sections: cash from operations, cash used in investing, and cash from financing
• Shows the net change in cash balance from start to end of the period

The 3 statements are intricately linked

Summary comparison

	Income Statement	Balance Sheet	Cash Flow
Time	Period of time	A point in time	Period of time
Purpose	Profitability	Financial position	Cash movements
Measures	Revenue, expenses, profitability	Assets, liabilities, shareholders' equity	Increases and decreases in cash
Starting Point	Revenue	Cash balance	Net income
Ending Point	Net income	Retained earnings	Cash balance

Q2) a)Growth and stability in the recent decade

b)The capital adequacy ratio

c)A strong supervisory framework

d)Enhanced corporate governance

e)Expansion and technological enhancements

f)New banking products and services

g)Well-positioned for the new millennium