Indicate which of the following is a “flow” quantity and which is a “stock” quantity: Provision...
Indicate which of the following is a “flow” quantity and which is a “stock” quantity:
- Provision for loan losses:
- Allowance for loan and lease losses:
Homework Answers
Provision for loan losses is a flow quantity.
A loan loss provision is an amount set aside by banks to cover loan losses from bad loans, customer default etc.
A loss on loan is considered a loss of an assets from the view point of balance sheet. But if we consider from the operating basis , cash flow is made available to the bank as a result of the loan loss provision.Due to this provision, banks have enough funds to pay to its depositors.
Allowance for lease and loan losses is a stock quantity.
It is a temporary account of the bank which tries to find out which lease and loans will not be paid back.It is a reserve to find out the amount of loan and lease which will not be paid back and thus reduce the value of loan or lease to that amount which the bank will ultimately receive from the borrower.
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