Question

Discuss how bank's report of condition differ from its report of income, how the assets on the balance sheet are arranged in terms of expected return and liquidity, and the major categories of off-balance-sheet activities.

Answer 1

Banks report of condition ( Call report)

Banks report of condition is a regulatory report that must be filed by banks in the US on a quarterly basis with the FDIC. It contains information on banks financial statements, such as statements of income, assets, liabilities and write off for bad debts.

Major difference between report of condition and report of income are as follows:

1. Banks report of condition/ call report is a quarterly report of financial condition of US banks filed with FDIC whereas an income statement reports a business revenue, expense and overall profit or loss for a specific period of time.

2. Banks that are required to file call report are national banks, state member banks and non members banks. Income statement is prepared irrespective by all banks.

3. Call report is officially know as the Report of Condition and Income. An income statement is one of the three major financial statements that report a company financial performance of over a specific period.

Balance sheet lists assets inorder of liquidity. Liquidity assets are those which can be easily converted into cash. Cash tops the list since it doesn't need conversion. Stock and others investment are sold in a few days are next. Money receivable or owed to the business may have a 30/60 days liquidity. Inventory may take a month or two to be converted through turnover ans sales.

Fixed assets require a market for selling so they rank lower on balance sheet. Goodwill is realised only on sale so it's listed the bottom.

While liquidity plays a large role in defining the correct order, the flexible nature demonstrate the need for standard classification to provide direct comparison.

Assets classified on a Balance sheet are as

1. Current assets

2. Investment

3. Property,plant and equipment

4. Intangible assets

5.Other assets such as bonds issue

Off balance sheet activities is a term for assets or liabilities that doesn't appear on a company's balance sheet. Although not recorded on balance sheet they are still assets and liabilities of the company.

Major categories of off balance sheet activities are

1. Operating lease

It is one in which the lessor retains the leased assets on its balance sheet. The company leasing the assets only accounts for the monthly rental payments and other fees associated with rentals rather than listing the assets on its own balance sheet. At the end of the lease term the lease has the opportunity to purchase assets at a reduced rate.

2. Lease back agreement

Under this a company can sell an asset such as a piece of property to another entity. They may then lease that same property back from the new owner. The company only lists the rental expense on its balance sheet while the assets are listed on balance sheet of owing company