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M92: Insurance Business and Finance > 6. Accounting principles and practices > Flashcards

6. Accounting principles and practices Flashcards

1
Q

What is the actual record-making process of accounting called?

A

Book-keeping

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2
Q

What is financial accounting?

A

A general business discipline consisting of techniques and procedures used to identify, measure, record, and communicate information about an organisation.

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3
Q

What are generally included in the accounts of a quoted company?

A

Narrative reports, a strategic report, financial statements, and other legal requirements.

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4
Q

What is the primary legislation governing accounting in the UK?

A

The Companies Act 2006

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5
Q

What are the 4 key accounting regulations included in the Companies Act 2006?

A
  1. Requirement to keep adequate accounting records.
  2. Directors’ duty to prepare accounts for a company.
  3. Directors’ duty to prepare accounts for a group of companies and ensure consistency in financial reporting.
  4. Requirement to prepare accounts that show a true and fair view.
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6
Q

What is the requirement for company accounts regarding auditing?

A

Companies, other than certain small companies, must have their financial year-end accounts audited by an independent auditor.

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7
Q

What do a company’s financial statements include?

A

The income statement, the balance sheet and a cash flow statement

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8
Q

What does the income statement show?

A

The results of the company as a consequence of transactions during the accounting period, including income, expenses, tax, and the profit or loss.

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9
Q

What is the balance sheet?

A

A statement of the financial position of the business at a specific point in time, showing the company’s assets, liabilities, and shareholders’ equity.

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10
Q

What are cash flow statements

A

Statements that show the sources and uses of cash and
are a useful indicator of a company’s liquidity.

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11
Q

How is shareholders’ equity calculated on the balance sheet?

A

Shareholders’ equity is the total of the assets less the total of the liabilities

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12
Q

What does ‘true and fair view’ mean in financial reporting?

A

Financial statements should accurately reflect the economic activities of the organisation and be available to anyone wishing to review them.

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13
Q

What are the two main types of accounting involved in the operation and control of a business?

A

Financial accounting and management accounting

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14
Q

What is the primary focus of financial accounting?

A

Providing historic information to external stakeholders and interested parties.

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15
Q

What is the main purpose of management accounting?

A

To support internal planning and control, helping managers make sound decisions.

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16
Q

How does management accounting differ from financial accounting in structure and sources?

A

Management accounting is flexible, using both transactional data and additional information to help managers fulfil their responsibilities, while financial accounting follows a structured framework for external reporting.

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17
Q

What is the primary format used for financial accounting information?

A

Financial position is provided in the balance sheet, and performance is shown in the income statement.

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18
Q

What types of information do management accounting systems include?

A

Both monetary and non-monetary quantitative information, such as labour hours, raw materials used, and energy consumption.

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19
Q

How do the time periods covered by financial and management accounting differ?

A

Financial accounting is based on historical information, whereas management accounting focuses largely on the future with forecasts and projections.

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20
Q

What regulatory framework must financial accounting adhere to?

A

Companies must use a conceptual framework as defined by accounting standards, ensuring comparability and demonstrating stewardship management.

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21
Q

Are companies legally required to produce management accounts?

A

No

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22
Q

How does the public access financial accounting information?

A

Through Companies House

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23
Q

Is management accounting information publicly available?

A

No

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24
Q

Do management accounts legally need to be audited?

A

No

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25
Why do creditors and lenders need financial information?
To judge whether to extend credit to an organisation and to set appropriate credit limits.
26
What can competitors learn from an organisation’s financial information?
They can analyse financial information to understand an organisation's strengths and weaknesses.
27
Why do brokers need financial information about companies?
To assess whether companies are financially strong.
27
Why is financial information important to customers?
To assure them they are dealing with a reputable organisation.
28
What is cash position (liquidity)?
The amount of cash which a business has, or has access to.
29
What is working capital?
Working capital is the difference between current assets and current liabilities.
30
What is the difference between liquidity and solvency?
Liquidity measures the cash available to a company, while solvency measures the excess of assets over liabilities. If liabilities exceed assets, the company is technically insolvent and may be required to cease trading.
31
What is shareholders' equity and how is it calculated?
The stake shareholders have in the company, calculated as the total value of assets minus the total value of liabilities.
32
What is regulatory capital?
The sum of equity and long-term debt classified according to specific rules set by the PRA
33
What are the two types of assets?
Tangible assets and intangible assets.
34
What are tangible assets?
Physical, "real" resources like cash, land, buildings, machinery, or investments. They lose value over time due to usage, known as depreciation.
35
What are intangible assets?
non-physical resources like trademarks, copyrights, or goodwill. Goodwill is the difference between the price paid to acquire a business and the value of its net assets.
35
What is goodwill?
The difference between the price paid to acquire a business and the value of its net assets.
36
What is the equation for straight-line depreciation?
Cost of Asset−Residual Value /Life of the asset ​
37
What is the accounting equation?
Assets = Equity + Liabilities Alternatively, it can be rearranged as: Equity = Assets - Liabilities
38
What is the double-entry principle?
The method of recording financial transactions where each transaction has a two-fold effect on the accounting equation, shows that the business both receives and gives value.
39
How are assets and liabilities classified on the balance sheet?
classified into non-current and current.
40
What are non-current assets?
Items that the business intends to hold for more than one year, such as property, and investments.
41
What are current assets?
Items expected to be used or converted into cash within the next twelve months, such as cash, stock, and debtors.
42
What are current liabilities?
Amounts the business must pay within twelve months, such as bank overdrafts and trade creditors.
43
What are non-current liabilities?
Amounts owed by the business that will not be paid within twelve months, such as long-term loans and mortgages.
44
What is working capital?
The money used to finance day-to-day trading activities, calculated by subtracting current liabilities from current assets.
45
What are assets employed?
Assets employed are calculated by adding non-current assets to working capital (net current assets).
46
What is minority interest in a consolidated balance sheet?
The share of a subsidiary company's net assets that is owned by external shareholders, not the parent company.
47
Can the total equity value be considered the value of the business for a potential purchaser?
No
48
What is the income statement (profit and loss account)?
A statement that shows the profit or loss made by a business in the last financial year, calculated as the difference between total income and total expenses.
49
What is gross profit?
Gross profit is calculated by subtracting the cost of sales from turnover, and it does not include the value of unsold stock.
50
How is the increase in stock recorded on the balance sheet and cash flow statement?
As a current asset on the balance sheet and as a reduction in cash flow on the cash flow statement.
51
What is finance income?
The income earned from any investments held during the year.
52
What are finance costs?
The costs of loans made to the company, such as bank loans, mortgages, and corporate bonds.
53
What are overheads?
Other expenses incurred by a company, such as the cost of management, administration staff, and office accommodation.
54
How do reserves change according to the income statement?
Reserves increase by the profit for the year and decrease by dividends paid to shareholders.
55
How does IFRS require changes in reserves to be shown?
In a statement of changes in equity (SOCE) or a statement of recognised income and expense (SORIE)
56
What are the main liabilities for insurance brokers?
premiums owed to insurance companies, loans raised to finance the business, and provisions for liabilities and charges that may need to be met.
57
What does "Insurance revenue" represent in insurance company accounts?
It is similar to earned premium.
58
What do "Insurance service expenses" include?
Cost of claims, policy acquisition costs, and reinsurance costs and recoveries
59
What is Gross Written Premium?
The total amount payable by the insured within the accounting period, regardless of the policy period.
60
What is Outward Reinsurance Premium
It is reinsurance purchased to protect the underwriting book of business.
61
What is the difference between premiums written and premiums earned?
Premiums written are recorded when the insurer is contractually bound, while premiums earned reflect the portion applicable to the coverage period within the accounting period.
62
What does Net Investment Return include?
Realised gains and losses, investment income (e.g., dividends, interest, rents).
63
How are investments classified in insurance accounts?
1. Held to maturity 2. Fair value through profit or loss 3. Available for sale
64
What is 'Held to Maturity' (HTM) classification in investments?
Financial assets with fixed or determinable payments and fixed maturities that the insurer intends and is able to hold until maturity.
65
What is 'Fair Value Through Profit or Loss' (FVTPL) classification in investments?
Investments measured at fair value, with changes in value directly impacting the income statement.
66
What is 'Available for Sale' (AFS) classification in investments?
Investments measured at fair value. Unrealised gains and losses are recorded in other comprehensive income (OCI) until the asset is sold or impaired.
67
What is the Reconciliation of Changes in Equity?
A statement required by IFRS showing the profit for the year, dividends, unrealised gains on investments, and other changes to accounting policies.
68
How do insurance companies present their Balance Sheets?
Based on liquidity rather than a current/non-current split.
69
What is the Provision for Unearned Premiums?
Premiums due but relating to a risk period after the balance sheet date, ensuring only earned premiums appear in the revenue account.
70
What does the Provision for Losses and Loss Adjustment Expenses include?
The estimated cost of all claims incurred but not settled, including incurred but not reported (IBNR) claims.
71
What types of Investments are included in the balance sheet?
Government bonds, property, corporate bonds, and equities.
72
What are Deferred Acquisition Costs?
Costs of acquiring policies during the financial year but earned in subsequent years, attributable to unearned premiums.
73
1. What are the three main sections of a cash flow statement?
1. Operating activities 2. Investing activities 3. Financing activities
74
What do cash flows from operating activities represent?
Cash generated or consumed from trading activities.
75
What do cash flows from investing activities include?
Inflows: Proceeds from sales of investments, associates, and subsidiaries. Outflows: Investments made.
76
What do cash flows from financing activities cover?
Inflows: New loans or issuing more shares. Outflows: Repaying loans, redeeming, or buying back share capital.
77
How is the increase/decrease in cash and cash equivalents calculated?
By totalling the cash flows from operations, investing, and financing activities.
78
What is unique about long-term business cash flows for insurance companies under IFRS?
Insurance companies must include these cash flows even if they are generally held for the benefit of policyholders and not usually available for the insurance company's use.
79
Why is a cash flow statement important?
Shows the business’s ability to generate cash.
80
What is the primary focus of management accounting?
Providing managers with information to make sound business decisions and assisting in corrective actions when needed.
81
What is the starting point in designing a management accounting system?
Examining the company's aims and objectives, including projections of future outcomes and performance for setting plans and targets.
82
What is "costing" in management accounting?
Establishing necessary accounting information for profit and contributions to overhead costs of business components.
83
What is the purpose of a good costing system?
To collect, store, process data, and report information in the required format.
84
What is a potential downside of simple cost allocation to profit centres?
Business managers may not control or take ownership of costs incurred on their behalf.
85
How does Activity-Based Costing (ABC) work?
Costs are allocated based on cost drivers, such as the number of invoices raised or customer queries received, promoting accountability and efficiency.
86
What is the typical planning period for profit centres?
Two to five years, aligning with the company's strategic aims.
87
What are annual budgets primarily used for?
Financial control purposes, usually prepared for profit centres and cost centres.
88
How are budgets typically prepared within each cost centre?
By type of expense and month.
89
What should management do before closing down a line of business?
Request the finance team to prepare a forecast assuming the line did not exist, considering potential fixed costs that may remain.
90
What is a common mistake when evaluating business line closure?
Assuming all costs are variable, while many might be fixed.
91
What are sunk costs?
Costs that have already been incurred and are not relevant to future decisions.
92
What costs should be excluded when deciding to shut down equipment?
Sunk costs, such as the capital cost of the machine if it has no resale value and the space cost if the space cannot be repurposed.
93
What additional cost should be considered when starting a new line of business?
Opportunity costs, which represent the revenue forgone by not pursuing alternative projects.
94
What is an opportunity cost?
The value of the best alternative that is not chosen when resources are allocated to a new project.
95
What two reports are typically used to evaluate projects?
Internal Rate of Return (IRR) and Net Present Value (NPV).
96
What does the IRR represent?
The 'internal rate of return' is the effective interest rate that a project will generate, e.g., if an investment of £100 returns £110 in a year, the IRR is 10%.
97
What does the NPV represent?
The 'net present value' of a project in today's money, considering the cost of capital over time.
98
Which metric is generally more reliable for project selection: IRR or NPV?
NPV, as it considers the absolute value of returns, whereas a high IRR might not always indicate the best project if it generates a smaller profit.

M92: Insurance Business and Finance (10 decks)

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