Balance sheets and banks assets. Likely effects of the recession on business.

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Student number: 08015867

Global Business Context-Spring assignment

       

      The purpose of a balance sheet is to ascertain the financial position of a business at a certain moment in time .The balance sheet is comprised of assets that the business hold , and claims (in this case liabilities) that are held against the business.

An asset is basically a resource that is held by the business, these can either be tangible assets (assets that have a physical substance and can be seen or touched) or intangible assets (assets that have no physical substance but can still benefit the business like patents).

Liabilities represent the claims held against the business by either individuals or organisations. These can refer to the supply of materials on credit or the lending of money to a business .These claims will eventually need to be paid back.

The relationship between the two is simple. If a business needs to acquire assets, it needs to raise the necessary funds in order to so. These funds may be provided by the owner (capital) or by an source outside of the business (liabilities).Therefore Assets= Liabilites+Capital.

           

               This is the money ‘put-up’ by the bank’s owners that is used to cover any potential losses on assets incurred by borrowers defaulting on their loans, or losses made on any investments that might subsequently collapse.

Ratio

              1. Leverage ratio = total equity÷total assets

              .

 

      2.Capital Ratio = Total Equity ÷ sum of risk-adjusted assets .

       I

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A4.

In order to restore its capital ratio level to the legal minimum a bank has two major options;

1. Increase total equity

  • Find new investors to put in money and thereby increase Equity
  • Delay the payments of dividends thereby increasing retained profits.
  • Improve profitability, either by increasing its loan rates & bank charges, or by laying off staff and closing underperforming branches (or both).

          2. Decrease risk adjusted assessments

  •  Change the composition of assets in favour of those which have a lower risk weighting. Therefore ...

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