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Chapter 12
Special Industries: Banks, Utilities, Oil and Gas,
Transportation, Insurance, Real Estate Companies
QUESTIONS
12– 1. Interest income, service charges, and earnings in investments are the main
sources of revenue for banks.
12– 2. Loans are assets because they are an investment of the banks’ money. They
12– 4. Loans/deposits is a type of debt coverage, since loans are a main amount to
repay depositors.
12– 5. Banks report to the Comptroller of the Currency, the Federal Reserve, the
12– 6. Bank holding companies own banks and other types of subsidiaries that may
12– 9. Interest margin to average assets, earnings per share, return on equity, and
12–10. Earning assets are those that generate interest from which the firm earns its
profits.
12–13. A review of assets may indicate that the bank has a substantial investment in
rates increase.
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12–14. This review may indicate that investments have a market value that is
12–15. In general, foreign loans are perceived as being more risky than domestic
loans.
12–17. In general, nonperforming assets are assets that the bank is not receiving
12–18. A decreasing amount in savings deposits would indicate that the bank is losing
one of its cheapest source of funds.
12–19. This note may reveal significant additional commitments that the bank may or
12–20. Utilities have heavy investment in fixed assets, necessitating long-term debt.
nature of the product.
12–21. Demand for utilities is inelastic; there are no substitute services. There is
12–22. Plant and equipment are usually listed first because the uniform accounting
12–23. Inventory ratios have little meaning for utilities because they are unable to store
their finished product.
12–25. Yes, the times interest earned ratio is meaningful for utilities since they have
12–26. No. Long-term capitalization, the major source of funds, including long-term
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12–27. Electric utilities that have substantial construction work in progress are usually
viewed as being more risky investments than electric utilities that do not have
substantial construction work in progress.
reflect the construction work in progress.
It is possible that the utility commission will not allow all of this property and
provided for excess capacity.
For the costs that are allowed, the risk is that the utility commission will not
allow a reasonable rate of return.
12–28. The account allowance for equity funds used during construction represents an
borrowed funds that are used for construction.
12–29. Each relates to accounting for exploration costs. Successful efforts capitalize
both successful and unsuccessful projects.
12–30. Regulation makes their accounting systems uniform, and their revenues are
controlled by rate structure.
12–31. A variation of one of two costing methods is used by an oil or gas company to
The successful-efforts method places only exploration and production costs of
sheet under property, plant, and equipment.
12–32. Major items on this schedule are typically revisions of previous estimates,
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12–33. This is a true statement. One of the reasons is that large sums can be spent
deducted on the tax return. This is referred to as a timing difference.
12–34. A decreasing operating ratio means a lower proportion of expenses and more
profits.
12–35. Operating revenue to operating property is a turnover ratio. Because of the
utility.
12–37. Revenue is divided into categories by type or function of service, such as
passenger, freight, mail, etc.
12–38. Differences in traffic volume and distance traveled will change revenues. The
for a transportation firm.
12–40. The passenger load factor indicates utilization of capacity. The greater the
12–41. In this publication, data are compiled by composite carrier groups. It includes
12–42. The annual reports filed with the state insurance departments are in
accordance with Statutory Accounting Practices (SAP).
12–43. Annual reports that insurance companies issue to the public are in accordance
with generally accepted accounting principles (GAAP).
12–44. Real estate investments are reported at cost less accumulated depreciation
12–45. Under GAAP, these costs are deferred and charged to expense over the
incurred.
12–46. Intangibles are recognized as an asset under GAAP, while intangibles are not
recognized as an asset under SAP.
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12–47. For short-duration contracts, revenue is ordinarily recognized over the period of
protection.
12–48. Insurance industry-specific ratios are frequently based on SAP financial
annual report and SEC reporting.
12–49. Insurance is a highly regulated industry that some perceive as having relatively
The accounting environment probably also contributes to the relatively low
market price for insurance company stocks.
12–50. Conventional accounting recognizes depreciation but not the value of the
property. This potentially presents a problem to investors in judging the value of
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PROBLEMS
PROBLEM 12-1
a. 1.
2011
2010
Total Deposits
=
Average
Total Deposits
$24,000,000
$20,000,000
Times Capital
Average Total
Capital
$1,850,000
$ 1,600,000
= 12.97
= 12.50
2.
Loans to Total
=
Average Loans
$16,000,000
$13,200,000
Deposits
Average Total
Deposits
$24,000,000
$20,000,000
= 66.7%
= 66.0%
3.
Capital Funds to
=
Capital Funds
$1,850,000
$1,600,000
Total Assets
Average Total
Assets
$26,000,000
$22,000,000
= 7.12%
= 7.27%
4.
Interest Margin to
=
Interest
Margin
$1,750,000
– $1,615,00
$1,650,000
– $1,512,250
Average Total
Assets
Average Total
Assets
$26,000,000
$22,000,000
= .52%
= .63%
b. McEttrick National Bank has experienced a faster rise in deposits than in capital.
This has caused the deposits to capital to rise. Loans have risen faster than
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PROBLEM 12-2
a. 1. Earning Assets to Total Assets = Average Earning Assets
Average Total Assets
2011 2010 2009
2. Interest Margin to Average = Interest Margin
Earning Assets Average Earning Assets
2011 2010 2009
Pretax Income (Before Security
Transactions) + Provision For
2011 2010 2009
($562,000 ($480,500 ($440,000
4. Equity to Total Assets = Average Equity
Average Total Assets
2011 2010 2009
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5. Deposits Times Capital = Average Deposits
Average Stockholders’ Equity
2011 2010 2009
per year per year per year
6. Loans to Deposits = Average Net Loans
Average Deposits
2011 2010 2009
b. Earning assets to total assets has increased. This indicates that management has
improved in putting bank assets to work. Interest margin to average earning assets
have increased. This indicates improved profitability.
The loan loss coverage ratio has increased, indicating an improved level of
protection of loans.
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PROBLEM 12-3
a. 2011 2010
Operating Ratio:
Operating expenses as a percent of revenue have increased.
b. Times Interest Earned = Operating Income
Interest Expense
2011 2010
Operating income (after tax) $2,490,000 $2,375,000
This utility has experienced a heavy increase in interest expense, causing a decline in
the times interest earned.
c. Vertical common-size analysis:
2011 2010
Residential $11,800,000 51.7% $10,000,000 48.8%
There has been a rise in residential usage, and this causes a proportionate increase
in revenue from this source. Commercial use has not fallen.
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PROBLEM 12-4
a.
1.
Operating Ratio
=
Operating Expenses
Operating Revenues
2011 2010 2009
2.
Funded Debt to Operating Property
=
Funded Debt (Long-Term)
Operating Property
2011 2010 2009
3.
Percent Earned on Operating Property
=
Net Income
Operating Property
2011 2010 2009
4.
Operating Revenue to Operating Property
=
Operating Revenue
Operating Property
2011 2010 2009