Final answer:
In financial statements, 'reserve' refers to the amount of money a bank keeps on hand and does not lend or invest. The Federal Reserve sets a requirement for banks to maintain a certain percentage of depositors' money on reserve.
Step-by-step explanation:
In the preparation of financial statements, the term 'reserve' refers to the amount of money that a bank keeps on hand and does not lend or invest in bonds. It is a requirement set by the Federal Reserve that banks maintain a certain percentage of depositors' money on reserve. This reserve requirement can be held in the bank's vaults or at the Federal Reserve Bank. Some banks may also choose to keep additional reserves on hand beyond the required amount.
For example, let's consider the Safe and Secure Bank, which is holding $2 million in reserves. These reserves are not available for lending or investment, and they serve as a buffer to ensure the bank can meet customer withdrawal demands or unexpected financial challenges.