Chapter 1

Question 1

Why would a claim rep use financial statements?

Answer 1

1) determine if there was a moral hazard.

2) determine amount of inventory claim.

Question 2

What are the tree goals of finance and accounting?

Answer 2

Maximize shareholder wealth
Provide for transparency of financial reporting
Conducting operations ethically

Question 3

Which companies did Sarbanes-Oxley apply to?

Answer 3

Publicly-traded. Public accounting firms also regulated.

Question 4

What does financial manager/cfo do?

Answer 4

Determine financial strategy

Manages treasurer and controller

Question 5

What does Sarbox do?

Answer 5

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

Question 6

Why would an underwriter use financial statements for?

Answer 6

Assess financial stability of a company.

Question 7

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?

Answer 7

Working capital management

Question 8

What are the controller’s primary responsibilities?

Answer 8

Financial reporting, taxating, accounting

Question 9

Capital structure management focuses on __________ need of a corporation.

Answer 9

Long-term

Question 10

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?

Answer 10

Working capital management

Question 11

What are two capital structure management decisions?

Answer 11

Whether to borrow or issue stock

Vehicles used to raise capital

Question 12

What kind of decisions does capital budgeting involve?

Answer 12

Long-term investments.

Question 13

What are the treasurer’s responsibilities?

Answer 13

Budgeting and capital management (working capital and capital structure)

Question 14

Provide 2 examples of investments l capital budgeting involves.

Answer 14

Equipment

Insurance writing capacity

Question 15

What does the cost principle say?

Answer 15

Many assets must be reported at historical (acquisition) cost, not current value.

Question 16

This GAAP principle says that revenue must be recorded when services were rendered or goods were sold.

Answer 16

Revenue recognition principle.

Question 17

Records transactions when cash is received and paid, which does not allow matching of revenues and expenses; compare accrual basis accounting.

Answer 17

Cash basis accounting

Question 18

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.

Answer 18

accrual basis accounting

Question 19

A set of global accounting principles that are principles-based and take a broader approach to accounting standards than GAAP

Answer 19

IFRS

Question 20

What method accounting do IFRS and GAAP require financial statements to be prepared under?

Answer 20

accrual method

Question 21

Which assets do IFRS and GAAP both require to be reported at Fair Market Value?

Answer 21

equity securities, debt securities, intangible assets

Question 22

How are property and equipment valued under IFRS?

Answer 22

Fair market value (consistent with economic income)

Question 23

How are property and equipment valued under GAAP?

Answer 23

historical cost

Question 24

This GAAP principle helps businesses to accurately measure the profitability of their activities.

Answer 24

Matching principle.

Question 25

Insurers record premium as revenue when _______.

Answer 25

earned

Question 26

______ ______ _____ are part of a company’s economic income and affect the company’s net worth.

Answer 26

unrealized capital gains

Question 27

A company’s market value is based on ______ income.

Answer 27

Economic

Question 28

Why do unrealized capital gains have a significant effect on a company’s business operations?

Answer 28

Because they are part of a company’s economic income and affect net worth.

Question 29

Why will SAP have to be changed when GAAP and IFRS converge?

Answer 29

Because SAP is based on GAAP.

Question 30

How does a producer use financial statements?

Answer 30

Identify and analyze loss exposures or financial liabilities. They can reveal trends in financial performance which can show potential problems or growth opportunities.

Question 31

What is the purpose of Sarbox?

Answer 31

Protect investors by improving the accuracy and reliability of corporate decisions.