CPCU 540 Chapter 2

A unique category on an insurer's balance sheet is deferred policy acquisition costs. A similar category on a non-insurer's balance sheet is

prepaid expense

A start-up company, New Corporation, issued 10,000 shares of stock with a par value of $15 a share at $20 a share. What is the amount of New's paid-in capital?

$200,000 Paid-in capital represents the total amount invested in an organization by the owners and cosists of the par value of the stock issued ($150,000 here) plus an additional paid-in capital over the par value ($50,000).

On an insurer's balance sheet, incurred but not reported (IBNR) losses are

A category of reserves

Assets on the balance sheet are classified as current and non-current. Which one of the following is classified as a non-current asset?

A copyright that expires in 10 months

John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis?

A review of the financial statements helps John to determine XYZ's insurance needs

Which one of the following important pieces of risk management information is found in the notes to the financial statement?

A summary of loss contingencies

The four primary types of financial statements include the income statement, the statement of changes in shareholders' equity, the statement of cash flows, and the

Balance sheet

Reporting comprehensive income is especially important for insurance companies because

Insurers may have larged unrealized investment gains

Which one of the following is true of an organization's balance sheet?

It is illustrated by the accounting equation

Which one of the following is a major purpose of the statement of cash flows?

It is used to assess an organization's need for additional financing

Which one of the following is a major purpose of the statement of cash flows

It is used to assess the ability to generate positive future cash flows

Which one of the following is a major purpose of the statement of cash flows?

It is used to assess the ability to meet financial obligations

The notes to financial statements contain a description of the type of business and industry in which the organization operates. Which one of the following best explains why this is important as part of a financial statement?

It puts the financial information into context that can be better understood

An insurer's balance sheet lists unearned premiums as

Liabilities

Which one the following is an example of a noncurrent liability?

Long-term notes payable

The "bottom line" of an income statement shows the organization's

Net income

Which one the following statements about the balance sheet is correct?

Net worth is positive whenever the assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

CES Brokers is considering purchasing several shares of Tylo Industries to diversify their investment portfolio. Prior to the pruchase, CES would like detailed information on long-term debt issued by Tylo that is nearing maturing. CES should look for this information in

Notes to the financial statements

In the interset of complete disclosure in an organization's financial statements, in addition to financial data, information is also provided in

Notes to the financial statements

Heritage Planners Ltd is a consulting group that provides company cars to management. The fleet of vehicles was recently sold for a gain of $5,000. The gain should be classified on the income statement as

Other income and expenses

Capital accounts shown in the statement of the changes in owners' equity consist of

Paid-in capital

Under GAAP, which one of the following expenses incurred by insurers is matched to earned premiums?

Policy acquisition costs

An insurer's income statement can be described as a financial statement that shows the

Relationship between revenues, expenses, and net income.

Which one of the following best describes the result of the four major financial statements all taken together?

The financial condition of the organization

The purchase of a building is a capital expenditure. How is the purchase recorded on the income statement?

The purchase price is expensed over the building's life expectancy

The total owners' equity shown on the statement of changes in owners' equity equals the amount shown on the balance sheet at the end of the year

The total owners' equity shown on the statement of changes in owners' equity equals the amount shown on the balance sheet at the end of the year

A principal liability of insurers is the unearned premium reserve. Which one of the following statements best describes the unearned premium reserve?

The unearned premium reserve represents premiums paid but not yet earned.

Which of the following best describes the purpose of financial statements?

To communicate information about an organization's financial status

The two principal insurer liabilities that arise from the sale of insurance policies are loss reserve

Unearned premium reserves

Liabilities are claims against the organization's assets. Which one of the following best describes a current liability?

Unpaid invoices from vendors

An insurer's comprehensive income includes

Unrealized gains and losses on securities

Insurer Inc issued 10,000 shares of stock with par value of $0.10 a share at $15 a share. What is represented by the following calculation? (10,000 * 15) minus (10,000 *$0.10) equals $149,000

Additional paid-in capital

Which one of the following describes a section of the statement of cash flows?

Cash flows from financing activities

Which one of the following best describes the section of the statement of cash flows?

Cash flows from investing activities

Which one of the following describes a section of the statement of cash flows?

Cash flows from operating activities

The primary purpose of financial statements is to

Communicate information about an organization's financial activities to decision makers

Gross profit is reported on the income statement. How is gross profit calculated?

Gross profit = sales - cost of goods sold

Owners' equity represents the capital contributed by an organization's owners plus the organization's

Retained earnings

The portion of net income that is held onto by a company and not distributed to stockholders is called

Retained earnings

The income statement provides a detailed explanation of the results of the organization's operations. Net income is found on the income statement as well as the

Statement of changes in shareholders' equity

The total cash indicated on a statement of cash flows equals the cash entry on the balance sheet

The total cash indicated on a statement of cash flows equals the cash entry on the balance sheet

The Financial Accounting Standards Board requires organizations to report comprehensive income. Comprehensive income includes an organization's net income and

Unrealized gains on securities available for sale

Financial statements

can be used by agents and brokers to assess coverage needs

The four primary types of financial statements include the balance sheet, the statement of changes in shareholders' equity, the statement of cash flows, and the

income statement

The four primary types of financial statements include the balance sheet, the income statement, the statement of changes in shareholders' equity, and the

statement of cash flows

The basic accounting equation on which the balance sheet is structured is

Assets = Liabilities + Net Worth

Which one of the following represents the general form of a balance sheet?

Assets |. Liabilities, Owner's Equity Total Liabilities and Owners' Equity

The balance sheet provides a snapshot of a organization's financial condition

At a given point in time

Costs of goods sold appears on the income statements of manufacturing and retail entities. Which one of the following statements best describe cost of goods sold?

Costs of goods sold reports expenses after an inventory item is sold

A primary source of revenue for insurers is premiums earned. Another major source of revenue is

Coupon payments on fixed income securities

Which one of the following statements best describes an asset category on an insurer's balance sheet?

Equity investments are assets reported at fair value

Which one of the following paths best illustrates the flow of financial information within an organization?

Financial activity > Bookkeeping > Accounting > Financial statements

Which one of the following groups of financial statements, when considered together, would best present an organization's financial condition?

The balance sheet, the income statement, the statement of changes in shareholders' equity, and the statement of cash flow

Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year-end financial statements?

The beginning balance on the statement of changes in shareholders' equity will show as $0.

Ace Woodworking Company makes household furniture. Which one of the following best describes an expense that should be classified as an operating expense on Ace's income statement?

Utility charges for the manufacturing plant

The four primary types of financial statements include the balance sheet, the income statements, the statement of cash flows, and the

statement of changes in shareholders' equity