3. 3
Special Topics
ο¬ How retail and wholesale banks differ
ο¬ Why some growth is good and some is bad
ο¬ How assets and liabilities affect earnings
ο¬ How inflation affects a bank
ο¬ How loan loss accounting works
ο¬ Why budgets and forecasts are difficult
4. 4
Course Perspective
ο¬ Bank financial statements as used in US
β Teacher: Does not know VN practices
β Students: Compare US practices to VN
β Students: Apply concepts to VN
β Students: Ask questions
6. 6
Basic Accounting
ο¬ Balance Sheet = βStockβ items
β Things of value measured at a point in time
ο¬ Income Statement = βFlowβ items
β Financial events measured during a period of time
8. 8
Basic Accounting β Balance Sheet
What
is
owned
Who
owns
it
Assets Liabilities & Equity
9. 9
Basic Accounting β Balance Sheet
Worth
of
things
Who the
worth is
owed to
Assets Liabilities & Equity
10. 10
Basic Accounting β Balance Sheet
Worth
of
things
Owed to
outsiders
Assets Liabilities & Equity
Owed to
insiders
Liabilities
Equity
11. 11
Basic Accounting β Balance Sheet
ο¬ Asset category flow:
β Most liquid β least liquid
β Most tangible β least tangible (intangible)
β Most specific β least specific (miscellaneous)
12. 12
Basic Accounting β Balance Sheet
ο¬ Liabilities and Equity category flow:
β Owed to outsiders β owed to insiders
β Owed soonest β owed latest
β Most specific β least specific (miscellaneous)
13. 13
Basic Accounting β Balance Sheet
Assets Liabilities & Equity
Deposits
Equity
Cash
Securities
Loans
Other Assets
Other Borrowings
Other Liabilities
14. 14
Point of View: Bank vs. Customer
ο¬ Customers hear bankers say, βThe bank will
credit your deposit account.β
ο¬ Customers view their deposits as assets.
ο¬ Therefore, customers think credits = assets.
15. 15
Basic Accounting β Off Balance
Sheet
ο¬ What does βoff balance sheetβ mean?
ο¬ Why do off balance sheet items exist?
ο¬ Why arenβt they on the balance sheet?
16. 16
Basic Accounting β Off Balance
Sheet
ο¬ Off balance sheet items:
β Things that a business has possession of (or
responsibility for) but does not actually own
β Commitments that a business has made but is not
yet scheduled to fulfill
β Obligations a business has committed to depending
on the outcome of contingent events
17. 17
Basic Accounting β Balance Sheet
Debits Credits
Assets Liabilities & Equity
At any point in time,
balance sheet debits
=
balance sheet credits
18. 18
Basic Accounting β Income
Statement
Debits Credits
Financial Events
Over any period of time,
all debits
=
all credits
27. 27
Basic Accounting β Income
Statement
Cost
Items
Revenue
Items
Expense Income
Decrease in
asset value
Decrease in
equity
28. 28
Basic Accounting β Income
Statement
ο¬ Income statement category flow:
β Income (revenues)
β expenses (costs)
β net income (profit)
β Core activities β non-core activities
β Ongoing operations β discontinued operations
β Major items β minor items
29. 29
Basic Accounting β Accrual
ο¬ Accrual accounting versus cash accounting
β Personal versus business
β Accrual accounting: Better matching of timing of
revenues and costs than cash accounting
β Accrual accounting: More complicated than cash
accounting
30. 30
Basic Reports β Balance Sheet
ο¬ Where is risk to value β¦ among assets?
ο¬ Cash
β Credit quality of banks holding deposits
ο¬ Investment securities
β Exposure to rising interest rates
β Credit quality of debt obligors
β Market liquidity
ο¬ Loans
β Credit quality of borrowers
β Exposure to prepayment
ο¬ Other assets
β ???
31. 31
Basic Reports β Balance Sheet
ο¬ Where is risk to value β¦ among liabilities?
ο¬ Noninterest-bearing deposits
β Deterioration in bankβs reputation
ο¬ Interest-bearing deposits
β Exposure to rising interest rates
ο¬ Borrowings
β Exposure to rising interest rates
β Deterioration in bankβs credit quality
ο¬ Other liabilities
β ???
32. 32
Cash Flow β Sources and Uses
ο¬ Typical sources of cash:
β Sales
β Decreases in assets
β Increases in liabilities
β Increases in capital accounts
β Non-cash expenses
33. 33
Cash Flow β Sources and Uses
ο¬ Typical uses of cash:
β Expenses
β Increases in assets
β Decreases in liabilities
β Decreases in capital accounts
34. 34
Cash Flow Calculation
β in Balance Sheet Accounts
and Effect on Cash Flow
Account β Cash Flow
Assets:
+ β
β +
Liabilities:
+ +
β β