Chapter 1 Flashcards
Why would a claim rep use financial statements?
1) determine if there was a moral hazard.
2) determine amount of inventory claim.
Why would an underwriter use financial statements for?
Assess financial stability of a company.
What are the tree goals of finance and accounting?
Maximize shareholder wealth
Provide for transparency of financial reporting
Conducting operations ethically
Which companies did Sarbanes-Oxley apply to?
Publicly-traded. Public accounting firms also regulated.
What does financial manager/cfo do?
Determine financial strategy
Manages treasurer and controller
What does Sarbox do?
Enhanced financial disclosure requirements for public companies
Regulate public accounting firms
Principal officers have to certify that they have reviewed the financial reports (quarterly and annual)
Criminal penalties
Disclose if has code of ethics
What are the treasurer’s responsibilities?
Budgeting and capital management (working capital and capital structure)
The following are examples of?
- should company pay cash or borrow?
- how should cash be invested?
- how much inventory should be carried
- should company extend customer credit?
Working capital management
What are the controller’s primary responsibilities?
Financial reporting, taxating, accounting
Capital structure management focuses on __________ need of a corporation.
Long-term
The following are examples of?
- should company pay cash or borrow?
- how should cash be invested?
- how much inventory should be carried
- should company extend customer credit?
Working capital management
What are two capital structure management decisions?
Whether to borrow or issue stock
Vehicles used to raise capital
What kind of decisions does capital budgeting involve?
Long-term investments.
Provide 2 examples of investments l capital budgeting involves.
Equipment
Insurance writing capacity
What does the cost principle say?
Many assets must be reported at historical (acquisition) cost, not current value.
This GAAP principle says that revenue must be recorded when services were rendered or goods were sold.
Revenue recognition principle.
Records transactions when cash is received and paid, which does not allow matching of revenues and expenses; compare accrual basis accounting.
Cash basis accounting
Records transactions when revenue is earned and expenses incurred, not when cash is received and paid, in order to match revenues and expenses; compare cash basis accounting. More frequently used.
accrual basis accounting
A set of global accounting principles that are principles-based and take a broader approach to accounting standards than GAAP
IFRS
What method accounting do IFRS and GAAP require financial statements to be prepared under?
accrual method
Which assets do IFRS and GAAP both require to be reported at Fair Market Value?
equity securities, debt securities, intangible assets
How are property and equipment valued under IFRS?
Fair market value (consistent with economic income)
How are property and equipment valued under GAAP?
historical cost
This GAAP principle helps businesses to accurately measure the profitability of their activities.
Matching principle.
Insurers record premium as revenue when _______.
earned
______ ______ _____ are part of a company’s economic income and affect the company’s net worth.
unrealized capital gains
A company’s market value is based on ______ income.
Economic
Why do unrealized capital gains have a significant effect on a company’s business operations?
Because they are part of a company’s economic income and affect net worth.
Why will SAP have to be changed when GAAP and IFRS converge?
Because SAP is based on GAAP.
How does a producer use financial statements?
Identify and analyze loss exposures or financial liabilities. They can reveal trends in financial performance which can show potential problems or growth opportunities.
What is the purpose of Sarbox?
Protect investors by improving the accuracy and reliability of corporate decisions.
