Chapter 6 Flashcards
Purpose of Financial Accounting
Financial accounting identifies, measures, records, and communicates financial information to stakeholders .
Difference Between Financial and Management Accounting
Financial accounting provides historical data for external stakeholders, while management accounting focuses on internal decision-making .
Users of Financial Information
Stakeholders include investors, regulators, employees, and creditors, each with different information needs .
Basic Financial Concepts – The Accounting Equation
Assets = Equity + Liabilities
Receipts and Payments Accounting
Tracks the cash flow within an organisation, showing income and expenses .
Statement of Financial Position (Balance Sheet)
Provides a snapshot of a company’s financial health at a specific point in time .
Statement of Profit or Loss (Income Statement)
Summarises revenue and expenses to determine net profit or loss .
Insurance Broker Accounts
Revenue mainly comes from commissions and fees, while liabilities include premiums owed to insurers .
Insurance Company Accounts vs. Other Businesses
Insurers must account for reserves, claims liabilities, and underwriting results .
Cash Flow Statements
Shows cash movements from operating, investing, and financing activities .
Management Accounting Reports
Used internally to track procurement, production costs, and sales .
Interpreting Management Accounting Information
Requires contextual analysis, not just numerical review .
New Developments in Accounting – AI & Automation
AI enhances fraud detection, compliance, and efficiency in accounting
Importance of Ethical Considerations in AI Accounting
AI lacks moral judgment, so human oversight is necessary .
Regulatory Reporting in Insurance Accounting
Insurance firms must adhere to IFRS and UK GAAP for compliance .
An insurance company’s total assets are £10 million, and its liabilities amount to £6 million. What is the company’s equity?
a) £16 million
b) £4 million
c) £10 million
d) £6 million
b) £4 million
A CFO prepares a report for shareholders summarising the company’s revenue and expenses. What type of accounting does this represent?
a) Management accounting
b) Financial accounting
c) Tax accounting
d) Internal auditing
b) Financial accounting
A claims manager wants to assess the insurer’s ability to pay claims. Which financial document should they review?
a) Profit and loss statement
b) Statement of financial position
c) Sales forecast report
d) Marketing expense report
b) Statement of financial position
An insurer’s liabilities exceed its assets. What risk does this pose?
a) Increased profitability
b) Higher tax deductions
c) Insolvency risk
d) Better investment opportunities
c) Insolvency risk
An insurance company has high profits but struggles to pay claims on time. What issue might they be facing?
a) Lack of underwriting profits
b) Poor investment performance
c) Cash flow shortage
d) Insufficient sales
c) Cash flow shortage
A large insurer implements AI to identify fraudulent transactions. What benefit does this bring?
a) Eliminates the need for accountants
b) Ensures 100% fraud detection
c) Improves efficiency and risk management
d) Allows illegal transactions to go unnoticed
c) Improves efficiency and risk management
An AI system flags an unusually high claims payout as suspicious, but the claim appears legitimate upon manual review. What should the insurer do?
a) Reject the claim based on AI findings
b) Conduct further human investigation before making a decision
c) Approve the claim without checking
d) Let the AI make the final decision
b) Conduct further human investigation before making a decision
An insurer’s balance sheet shows increasing liabilities with no corresponding increase in assets. What should management do?
a) Ignore the issue and continue operations
b) Increase reserves and seek additional capital
c) Reduce financial reporting to hide losses
d) Continue issuing policies without adjustments
b) Increase reserves and seek additional capital
A UK insurance firm reports financial results but fails to comply with IFRS standards. What could happen?
a) No consequences
b) Regulatory fines and reputational damage
c) Increased market trust
d) Automatic exemption from future audits
b) Regulatory fines and reputational damage
An insurer deliberately underestimates claims reserves to boost profits. What is the likely consequence?
a) Increased investor confidence
b) Regulatory investigation and financial penalties
c) Higher underwriting profits
d) Improved financial strength
b) Regulatory investigation and financial penalties
A company alters its cash flow statement to make the business appear more liquid. What risk does this create?
a) No impact as long as the firm pays claims
b) Severe penalties for misrepresentation
c) Higher customer trust
d) Increased profitability
b) Severe penalties for misrepresentation
An insurer estimates £100 million in claims reserves but, due to an unexpected rise in claim severity, the actual required reserves are £150 million. What is the most immediate financial risk?
a) Higher underwriting profits
b) Insolvency risk due to under-reserving
c) Increased customer confidence
d) Reduction in operating costs
b) Insolvency risk due to under-reserving
A life insurance company sees its solvency ratio fall below regulatory requirements due to a decline in investment portfolio value. What should the insurer do first?
a) Hide the issue from regulators to maintain market confidence
b) Raise additional capital and adjust risk management strategies
c) Stop paying claims to conserve cash
d) Cease writing new policies immediately
b) Raise additional capital and adjust risk management strategies
An insurer invests a large portion of its premium reserves in high-risk speculative assets. If the market crashes, what could be the consequence?
a) Increased profits as the insurer sells assets at a high price
b) Liquidity crisis, impacting claims payments
c) No impact as investments are not linked to claims
d) Higher policyholder confidence
b) Liquidity crisis, impacting claims payments
A general insurer overstates its claims reserves to reduce its taxable profit. What are the possible regulatory consequences?
a) No consequences if the reserves are adjusted later
b) Regulatory penalties and potential legal action
c) Increased investor trust due to higher reserves
d) Immediate bankruptcy
b) Regulatory penalties and potential legal action
An insurance company reports high profits in its income statement, but struggles to pay claims on time due to liquidity constraints. What does this indicate?
a) The company is financially strong
b) Poor cash flow management despite profitability
c) A regulatory advantage in financial reporting
d) Excessive claim fraud within the portfolio
b) Poor cash flow management despite profitability
An insurer cedes a significant portion of its premiums to a reinsurer. How will this impact financial reporting?
a) Reduced revenue but lower claims liabilities
b) Increased premium income and profitability
c) No effect on financial statements
d) Higher solvency ratio without risk transfer
a) Reduced revenue but lower claims liabilities
A financial audit reveals that an insurer inflated policyholder premium income to appear more profitable. What action should regulators take?
a) Fine the company and impose tighter reporting controls
b) Allow the company to correct the error in the next financial year
c) Ignore the issue if no policyholders complain
d) Offer the insurer a tax break for higher earnings
a) Fine the company and impose tighter reporting controls
A life insurer invests heavily in long-term government bonds. If interest rates rise significantly, how will this impact its balance sheet?
a) The value of bond investments will decrease
b) The insurer’s financial position will improve
c) There will be no impact on solvency calculations
d) The insurer can sell bonds at a higher price
a) The value of bond investments will decrease
A UK insurer is transitioning to IFRS 17 accounting standards but fails to update its financial models for contract liabilities. What is the main risk?
a) Compliance breaches and financial restatements
b) Increased revenue due to the transition
c) No impact on financial reporting
d) A higher solvency ratio
a) Compliance breaches and financial restatements
An insurer moves its entire investment portfolio into hedge funds to maximize returns. What is the primary concern?
a) High volatility and lack of liquidity in hedge funds
b) Guaranteed returns due to professional fund management
c) Reduced regulatory oversight
d) More predictable claims payouts
a) High volatility and lack of liquidity in hedge funds
