Learning Objective 5 Flashcards
Users of financial statements [Card 211]
Acronym - REPAIRS
RULE makers - SEC, FASB, AICPA EXPERT advisers to users of financial statements POLICYHOLDERS AUDITORS INVESTORS RATING AGENCIES STOCK analysts
Criteria for an item to be included in the financial statement [Card 212]
Acronym - DM Rihanna (DM Re Re)
Needs to meet the DEFINITION of an asset, liability, revenue or expense
Must be MEASURABLE in terms of a relevant attribute
RELEVANCE - needs to be consistent, comparable and meaningful to the user
RELIABILITY - must be accurate, verifiable and free of bias
Organizations responsible for setting GAAP standards [Card 213]
AICPA - Acronym = ABBA
FASB - Acronym = C FITES
SEC - No Acronym, just makes sure the standards are made public
AICPA Accounting Principles Board Opinions (APB) Research BULLETINS Practice BULLETINS AUDIT guides
FASB
CONCEPT statements - basic concepts of how standards are set
FAS Standards INTERPRETATIONS of FAS standards TECH bulletins EMERGING Issues Task Force issues STAFF positions
Renewability options for health insurance products [Card 214]
Acronym - CG iCONS
Collectively renewable - insurer can cancel policies in rating classes, but not individual policies
Guaranteed renewable - insurer cannot cancel the policy, but may increase prices
Conditionally renewable - policy may be cancelled if certain criteria are met
Optionally renewable - policy can be cancelled at any renewal date
Noncancelable - cannot cancel or increase premiums
Short term - only provides coverage for a short time period, but may provide 1 or 2 renewals
Types of health insurance policies [Card 215]
Acronym - My SLIM BID
MEDICARE Supp
SAVINGS accounts
LTC
INCOME replacement policies
MEDICAL coverage - pre and post 65
BUSINESS overhead policies - covers cost while owner is disabled
INDEMNITY policies - set amount per day
DISABILITY income
Formulas for benefit reserves [Card 216]
Benefit Net Premium => Present value of premiums equal present value of the benefits
PV Net Prem = Σ v^t * tPx * Benefit ÷ (Σ v^t * tPx)
Prospective Benefit Reserve = PV(Claims) - PV(Net Prem)
(Time = t –> future)
Retrospective Benefit Reserve= FV(Net Prem) - FV(Claims)
(Time = 0 –> t-1 )
Formulas for deferred acquisition cost reserves [Card 216]
DENP = Deferrable acquisition expense net premium
CREATES A NEGATIVE RESERVE
DENP = Σ v^t * tPx * DE ÷ (Σ v^t * tPx)
DAC = FV(Net Prem) - FV(Def Acq Expense)
Types of liabilities (reserves) for group life and health insurance [Card 217]
Acronym - RECAPS
Accrued experience REFUNDS
EXPENSE capitalization - if premium is owed and a % is for acquisition expense, an asset of DPAC = % * Prem should be set up
CLAIM reserves - IBNR, claims above IBNR
ACTIVE life and unearned premium reserves - unearned premium must be held as a liability
PREMIUM deficiency reserves - funds losses in advance, remove or reduce DAC if LR + Acq + Maint > 100%, if LR + Main is over 100%, then set up Prem deficiency reserve of X% - 100%
STOP-LOSS reinsurance
Primary financial statement exhibits [Card 218]
Acronym - BICS
BALANCE sheet - snapshot of all assets and liabilities
INCOME statement - shows revenues and expenses
CASH FLOW statement - Tracks cash flows for operating, investing, financing activities
SOURCES & USES statement - gain a picture of how money is gained and spent (those that generated vs. used cash)
Financial Statements:
Assets = ????
Assets = Liabilities + Equity
Financial Statements:
Net income = ????
Net Income = Revenues - Expenses
aka profit or earnings
Definition of types of earnings [Card 219]
Net income = revenues - expenses
Operating earnings = profit from day-to-day operations, excludes taxes, interest income and expense and extraordinary items
Pro forma = revenue - expenses AFTER the company removes anything they think could cloud perceptions of true earning power. VERY subjective
EBIT - Earnings before interest and taxes
EBITDA - Earnings before interest, taxes, depreciation, amortization
EIATBS - Earnings before all the bad stuff….HUH?!
Definitions of types of cash flows [Card 220]
Acronym - NCFD = Net Cash Flow Dollas
Net cash flow = Net income + Non cash items
a. Non cash items = depreciation and “other”
Cash flow from operating expenses = Net cash flow +/- changes in current assets and liabilities
Free cash flow = Total cash available for distribution to owners and creditors after funding all worthwhile investments
Discounted cash flows = A PV sum of money today having the same value as future free cash flows
Principle virtues of the cash flow statement [Card 221]
Acronym - Al Pacino = HUA!
Highlights how operations are generating or consuming cash
Easy to UNDERSTAND
Provides more ACCURATE information about some activities than what’s in the financial statement
a. ex = tax effects of employee stock options
Primary reasons why a company’s book value does not represent the value of the company [Card 222]
Acronym - The Value Problem
- Asset values in the financial statement are based on the transaction cost + depreciation, which isn’t true. Something could be technologically obsolete, or very rare, which could fluctuate the actual value greatly
- Investors buy shares of a company based on projected future earnings, and the value they hope to receive. It is NOT based on the value of the company’s assets
Techniques for forecasting external funding needs [Card 223]
Acronym - Duck Duck Goose = Cash Cash Pro
CASH FLOW forecast
a. Project sources and uses of cash
b. VERY straightforward and easily understood
c. External funding req = Total Uses $ - Total Sources $
CASH budget
a. forecast of cash inflows and outflows
b. Better for short term forecasting and mgmt of $
c. External funding req = Min desired cash - ending cash
d. Ending cash = BGN $ + Total $ in - Total $ out
Pro Forma forecasting
a. Prediction of what the company financials will look like at the end of the forecast period
b. Most used and recommended approach
c. External funding req = Assets - Liab - Equity
