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Creating Financial Statements
Financial statements can be defined as written records which show the various business activities and the performance of an organization (Penman & Penman, 2007). The various financial statements include balance sheets, cash flow statement, and the balance sheet. Mostly, these financial statements are audited by government agencies and firms to ensure that they are accurate for tax and investing purposes. This paper compares the financial statements of various banks and institutions and gives a meticulous description between major organizations and smaller rising banks. Financial position of an organization can be best determined by the records reflected in the financial statements of the respective organizations.
Similarities between financial statements of smaller community banks and major money center banks
Smaller community banks and major money center banks have huge resemblance and this can be reflected in their respective financial statements. Both groups offer more and more similar services. This is especially true when it comes to credit and savings. The balance sheets of both banks are heavily dominated by loans, borrowings, and deposits in the money market (American Institute of Certified Public Accountants, 2017). Moreover, their incomes statements and skewed towards revenues on interests and loans and interest expenses on money market borrowing and deposits.
All banks use more leverage than other businesses. Moreover, they earn a spread between their income generated from loans and the customer deposits. A balance sheet simply reflects the assets equals to the liabilities plus the equity. A bank has a unique balance sheet which reflects the assets, liabilities and the equity. Under the assets, property, trading assets, loans to customers, and deposits to the central bank are recorded. On the other hand, the liabilities balances the loans from the central bank, deposits from customers, trading liabilities and the miscellaneous debts. Finally, the equity shows the common and preferred shares. Simply;
Assets = Liabilities + Equity
Both the major banks and community bank balance sheets have the loans and deposit to customers section. Customers deposit money to banks from which they receive small interests. The loans to customers are classified as assets. This is because, banks lends money at a higher rate receiving a high profit margin from the difference in interest rates. However, the deposits to the customers are classified as liabilities.
The incomes statement structure for both banks – community banks and major money lender – showcase the revenues at the top of the income statement while, the net income is at the bottom. Both small banks and big banks offer essential services like the checking and savings account. The assets of community banks are below $1 billion and serve fewer customers, local markets and businesses (Craig & Von Peter, 2014).
Contrary to most income statements, both community banks and major money center banks have non – interest revenue section. The non – interest revenue is composed of ancillary revenue that the bank makes in support of its revenue. This mostly consists of underwriting fees, gain and sale of trading assets, fees and commissions from products and services, and gains realized from the sale of trading assets. The above enlisted revenues are generated from anything not necessarily constituting interest revenue. For which, interest revenue can be defined as interest revenue the banks receives on the loans issued.
Differences between financial statements of smaller community banks and major money center banks
The financial statements of major money centered banks reveal high operating leverage while that for community banks have lower operating leverage. The community banks have small amounts of buildings, fixed assets and other equipment. The common factor about operating leverage is that it adds to the risk of the banking institution. Major money centered banks face fluctuations in earnings and net income per share for small changes in revenues. Money center banks finance a large percentage of their assets with debts hence have large financial leverage.
In major money center banks a small change in revenue can lead to large changes in revenues. Changes in interest rate can vastly affect the net income and capital position of financial firms. Moreover, most liabilities of financial firms are short term, meaning that liquidity problems might result. In addition, an impromptu demand by depositors for funds can cause huge problems for financial firms. Money center banks are heavily dependent on non – deposit
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