Odomirok 1-5

Question 1

Statutory Accounting Principles (SAP)

Answer 1

Accounting principles prescribed by the State Regulators

Question 2

Purpose of financial reporting

Answer 2

Communicate financial results to the stakeholders

Question 3

Main reason that SAP rules are conservative

Answer 3

Main focus of the regulators is to ensure that the policyholders will be protected

Question 4

Primary users of Generally Accepted Accounting Principles (GAAP)

Answer 4

Investors

Question 5

Main objective of GAAP

Answer 5

Present results that closely measure the financial performance during a period

Question 6

Describe the Balance Sheet

Answer 6

Shows the assets and liabilities as of a certain point in time

Question 7

Describe the Income Statement

Answer 7

Shows the financial results (income) earned during a period.

Question 8

Describe the Capital & Surplus exhibit

Answer 8

Lists those transactions that impact surplus, but which are not included in the income statement

Question 9

Describe the Cash Flow Statement

Answer 9

Shows the cash flows into and out of the firm

Question 10

List a party that would take a “liquidation” view of insurer & one that would take a “going concern” view

Answer 10

• going concern: Investors
• liquidation: Regulators

Question 11

Compare Fair Value to Historical Cost

Answer 11

• Fair value: value it can be traded at in the open market
• Historical cost: purchase price less depreciation

Question 12

List an advantage of Fair Value & one for Historical Cost

Answer 12

Historical cost is more reliable (objectively verifiable), but fair value is often more accurate (consistent with actual market value).

Question 13

Compare principles to rules, including their respective advantages

Answer 13

• Principle: a general accounting approach that the users need to interpret
• Rule: specific guidance that users need to follow
  The rules are easier to interpret, but the principles are more adaptable to changes