chapter 6 Flashcards
What is financial accounting?
Financial accounting is the process of identifying, measuring, recording, and sharing financial information about a company with external stakeholders, using statutory accounts.
What are statutory accounts?
Statutory accounts include detailed reports about a company’s performance, such as the chairman’s report, strategic report, financial statements, and legal requirements like director’s pay.
What information is included in financial statements?
Financial statements include the income statement (profits and losses), balance sheet (financial position), and cash flow statement (how cash is used).
What does “true and fair view” mean?
“True and fair view” means that the financial statements give an accurate picture of a company’s financial performance and position, in line with accounting standards.
What is the difference between financial and management accounting?
Financial accounting provides external stakeholders with historical data, while management accounting focuses on internal decision-making, forecasting, and planning.
Who uses financial accounting information?
Stakeholders like owners, directors, employees, tax authorities, financial analysts, creditors, competitors, and the public use financial information to make decisions.
What are the legal requirements for financial accounting?
Companies must comply with laws like the Companies Act 2006, including preparing accurate accounts, auditing, and making them available to the public.
Why do users need both quantitative and qualitative financial information?
Users need both to make informed decisions about their relationship with an organization. This can come from financial statements, reports, or outside sources like analysts or the media.
What do financial statements reveal about an organization?
A: They provide information on activities, successes, failures, and future goals, including risks and social responsibilities, like environmental efforts.
What is working capital?
Working capital is the difference between a company’s current assets (like cash or debtors) and its current liabilities (like debts or bills). It helps ensure the business can pay short-term expenses.
What is the accounting equation?
A: The accounting equation is:
Assets = Liabilities + Equity.
It shows that everything a business owns (assets) is funded by either borrowing (liabilities) or by investment (equity).
What is expenditure in accounting terms?
Expenditure is money spent by the company on goods, services, or other costs necessary for operations.
What is regulatory capital for an insurance company?
Regulatory capital is the money an insurance company needs to have to meet legal requirements. It includes equity and long-term debt, which help improve the company’s financial strength and solvency.
What is the double-entry principle?
The double-entry principle records every transaction as having two effects: one increases and the other decreases an account.
What are non-current assets?
Non-current assets are items the business plans to keep for over a year, like property, machinery, and patents.
What does “Gross written premium” mean?
A: The total amount payable by the insured, including renewal premiums, instalments, and adjustments.
How do you calculate Net Earned Premium?
Net Earned Premium = Premiums written - Unearned premiums at year-end + Unearned premiums from the previous year.
What is “Claims Incurred” in the income statement?
The cost of claims paid plus outstanding claims at year-end, minus previous year’s outstanding claims.
What are Acquisition Costs?
A: Costs paid to brokers or intermediaries for acquiring business, including policy issue costs.
What is the “Provision for Losses and Loss Adjustment Expenses”?
It’s the estimated cost of all claims incurred but not settled at year-end.
What types of investments are included in the balance sheet?
A: Government bonds, property, corporate bonds, and equities (shares in other companies).
What are deferred acquisition costs?
A: Costs of acquiring insurance policies that will be earned in future years.
What does a cash flow statement show?
Movements of cash in and out of a business over a financial year.
Why is caution needed when interpreting financial data?
A: Costs, profitability, and business performance need deeper analysis beyond surface-level numbers.
How should projects be evaluated?
A: Using Internal Rate of Return (IRR) and Net Present Value (NPV) to assess profitability.
