Essay Example on Financial Statements: Assets, Liabilities, & Mitigating Errors

Financial statements of a bank or company provide a picture of the value of the business. The balance sheet provides a statement finances for a bank or company by representing resources in the form of assets, liabilities, and owners' equity. The company and banks use the funds to generate revenue. They help the banks to determine future cash flows or sustain future bank's or company's downturns. They are essential in mitigating errors caused by illegal activities (Selyutin, 2019). The purpose of this paper is to assess the components and significance of the balance sheets for commercial banks, the insurance company, and investment banks and how they generate earnings.

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The balance sheet displays a picture of how it operates and generates income. It is a financial statement showing the classification of assets and liabilities in a commercial bank at a particular date. It consists of assets, liabilities, and owners' equity (Selyutin, 2019). The assets are goods that generate income to the bank in the future, such as treasury securities and reserve. They comprise of current assets and fixed assets. Current assets consist of goods that are intangible, such as inventories and accounts receivable. Fixed assets include tangible goods, such as building and equipment. The liabilities are the bank's debts that arise during the operations such as loans, salaries, pension, and leases. They are of two types, the current term, and the long-term. The owners' equity is the residual of an entity's assets that remains after deducting liabilities. It is the capital used in lending to the shareholder. The commercial bank increases the amount of owner's capital by obtaining more funds from investors (Igan, Kabundi, Simone & Timirisa, 2017)

Commercial banks generate income through the provision of loans, fees, credit cards, add-ons, and earning interest from those loans. The cost attached for checking accounts and debit card use generates revenue for the bank. The bank offers an overdraft fee for those who suffer accounting errors, which is likely to cost the customer more than standard overdraft would. It generates revenue for commercial banks. The types of loans issued that generate income include personal loans, mortgages, and business loans. The banks generate income from the interest of lending loans to customers. For example, when the commercial bank lends money to customers, it charges interest higher than the amount they pay the depositors. The banks give a customer a $20000 loan at an interest rate of 2% payable for five years. The bank will make net interest that represents revenue for the bank (Igan et al., 2017).

The insurance company balance sheets enable the investors to determine the company's performance and compare the results against the insurance company competitors. The insurance company transactions relate to assumptions of risks and pay off of the claims. The requirements of balance sheets include total admitted assets, uncollected premiums, loss adjustments expenses, capital paid up, liabilities, and shareholder's surplus equity (Selyutin, 2019). The total admitted assets include assets accumulated by insurers, such as the company's policyholders. The liabilities include debts from policyholders. The insurer takes money from creditors and policyholders and pays out operating expenses.

The insurance company generates revenue by charging premiums in exchange for insurance coverage. They reinvest those premiums into revenue-generating assets. They achieve this through market their premiums and reduce administration costs. For example, when an insurance company receives money in premiums for its policies, the company finds short-term assets to invest its funds, which generate interest to the company. Additionally, the insurance companies invest the premiums paid by the insurance customers in financial markets to increase their earnings and revenue. They also make earning through coverage lapses and underwriting. Coverage lapses occur when the insurance customer fails to keep current on their insurance policies, which lead to revenue generation for the company ( Djavadi, Adrianto & Arifian, 2018).

Investment banks specialize in complex financial transactions, such as funding projects and facilitating mergers. The balance sheet for an investment bank provides a picture of the performance of the bank to make appropriate decisions. The generation of earning impacts report decision making of the investment banks through analyzing the merges requirements and financial lending capacity of other banks. They provide proper financial records of books of accounts ( Islam, Sanker, Rahman, Sultan & Prodhan, 2017). They also contribute to efficient methods to conduct economic research for other companies and banks which maintain knowledge on the fixed income and credit research used to advise customers by other banks. The balance sheets enable the investment banks to handle mergers and acquisitions of other banks by evaluating the worth of assets to arrive at fair prices. They allow the investment bank to structure and organize the purchase and merge that leads to efficient deals to the banks and companies. They enable the investor banks to determine who to fund and the expected earnings (Islam et al., 2017).

Conclusion

In conclusion, the financial statements provide banks and companies with a picture of the performance of the business. They help the banks and companies to determine future cash flows or sustain future commercial banks or insurance company's risks. The balance sheets enable the banks and companies to keep proper financial recording, to enhance appropriate decision making, and analyze the capital in the banks and companies. The balance sheet for a commercial bank includes assets, liabilities, and owner's equity. The commercial bank increases the amount of owner's capital by obtaining more funds from investors to generate revenue. The commercial bank makes earnings through the provision of loans, adds-on, paying for credit card services, and fees. These services, in turn, generate interest to the commercial banks. The requirements for the balance sheet for the insurance company are uncollected premiums, loss adjustment expenses, capital paid up, liabilities, and shareholder's surplus equity. It generates income through charging premiums, reinvesting dividends, coverage lapses, and underwriting. The primary components of a balance sheet for investment banks enable it to keep financial records of the money funded to other banks and projects. It facilitates proper decision making when evaluating the acquisition and merges of companies.

References

Djayadi, H., Adrianto, H. J., & Arifian, D. (2018). The Model of Insurance Companies Risk-Based Capital. International Journal of Economics and Financial Issues, 8(6), 61. https://search.proquest.com/openview/03412cd5aaa9beb7cfd91b5eeed41e2f/1?pq-origsite=gscholar&cbl=816338

Igan, D., Kabundi, A., De Simone, F. N., & Tamirisa, N. (2017). Monetary policy and balance sheets. Journal of Policy Modeling, 39(1), 169-184. https://www.sciencedirect.com/science/article/pii/S0161893816300849

Islam, M. A., Sarker, M. N. I., Rahman, M., Sultana, A., & Prodhan, A. S. (2017). Determinants of Profitability of Commercial Banks in Bangladesh. International Journal of Banking and Financial Law, 1(1), 1-11 https://www.researchgate.net/profile/A_Prodhan/publication/317561278_Determinants_of_Profitability_of_Commercial_Banks_in_Bangladesh/links/5aa7d02ba6fdcc9576d5a951/Determinants-of-Profitability-of-Commercial-Banks-in-Bangladesh.pdf

Selyutin, V. (2019). Simplified Model of Bank Balance Sheet Management (No. 1128). EasyChair. https://www.semanticscholar.org/paper/Simplified-Model-of-Bank-Balance-Sheet-Management-Selyutin/a22cc520c24018d2936113e285fe9bc2564023f6