Read carefully the following Balance Sheet.

After reading all the available information carefully, prepare a two page (double-spaced) essay
presenting the consulting firm and answer the following questions:

1. A bank balance sheet is different from that of a typical company. Explain the
differences.

2. Looking on the percentages, comment on the Assets and Liabilities of the above Balance
sheet. Why do bank managers prefer Loans over Securities? Why is cash only 4%?

Cite references to material that you use in preparing the essay.

Balance sheets are a specific type of financial statement that take care of the assets and
liabilities of a bank. The assets are usually shown on the left side and the liabilities on the right.
The most basic accounting formula for assets and liabilities is as follows:

Assets = Liabilities + Equity

Assets are the financial and even material things that a bank owns and can use. Liabilities are
the financial/material things that banks owe to other banks, firms or people. Equity is the overall
net worth or capital a company has either in its own value or in the form of shares and other
financial branches.

Banks have slightly different methods of transaction and different balance sheets compared to
companies and firms. According to Wright and Quadrini (2009), a bank’s assets consist of
reserves, loans and other assets. Reserves are deposits and safely kept cash useful in any
circumstance. Loans are money that has been given to any other institution. These are expected
back, usually with interest. Other assets comprise of miscellaneous things like land, computers
etc… A bank’s liabilities consist mainly of deposits, borrowings and shareholders’ equity.
Deposits are financial tender that can be taken when needed for a plethora of uses. Borrowings
are loans that the bank has taken from other banks. Shareholder’s equity is the net worth or
capital that the bank owns, sometimes (especially in the case of typical companies) in the hands
of shareholders. 2

Also, banks usually borrow short and lend long while companies borrow long and lend short.
Banks tend to sell liabilities with different returns and liquidity and then buy assets with even
different characteristics, according to Wright and Quadrini (2009). Companies don’t do that and
may put themselves at risk if they do.

Let’s take a look at a consulting firm’s balance sheet:

You will notice that in this case, the liabilities and equities are underneath the assets rather than
being on the right side. No need to be alarmed, that’s just how to image was drawn up. Usually,
the liabilities and equity are on the right side sporting only numerical values of money while on
the left side we see assets. Also notice the percentages accompanying the financial values.
These only represent how much the financial value makes up of the total, which, in this case, is
$2.830 (million I suppose). 3

You can see that the loans in assets constitute 64% of the total while securities constitute only
20%. Why is that? The reason is, simply, interest. When a firm has securities safely tucked away
as a deposit or liquid bonds, it usually won’t grow with interest rates because very less or none
are applied. Loans, however, when given out, are coupled with an interest rate which will keep
building on the return and eventually get back more return than initially borrowed. Another
thing we will notice in the assets section is the obviously minuscule amount of cash, only 4%.
This is because most banks and other similar intermediaries (consulting firms, life insurance
companies, and property and casualty companies) don’t deal in cash directly. They either have
times or events where the issue of money rises or they provide the use of credit and debit to
their customers. As said by Wright and Quadrini (2009), banks usually have less reserve of cash
compared to the amount in their customers’ accounts.
In conclusion, due to the bank’s healthy reserve ratio and good return, we can say this bank is
doing okay for itself. Assets and liabilities/equities will always be balanced but what should be
viewed is where the money in assets is distributed and where the money in liabilities/equity is
distributed. Balance sheets of a bank are a great way of gauging how a bank is doing. Sometimes
banks indulge in off-road balancing activities which don’t record certain transactions but that’s
generally to stay safe from interest rate fluctuations. 4

Word Count: 648

References Used:

Wright, R. E., & Quadrini, V. (2009). Money and Banking. Flat World Knowledge Inc