Study 4- Financial Management and Analysis

Question 1

What are four (4) examples of Financial Statements

Answer 1

1. ) Balance Sheet
2. ) Statement of Income
3. ) Statement of Shareholders’ Equity
4. ) Statements of Cash Flows

Question 2

Which Financial Statement is a “SNAPSHOT” of the financial position an entity at a point in time?

Answer 2

Balance Sheet

• shows wealth and outstanding obligations
• Shows what the company owns and owes
• Main classifications are
• —- assets
• —- liabilities
• —- shareholders’ equity

Question 3

Which Financial Statement shows net income over a period of time?

Answer 3

Statement of Income

• net income is the difference between revenue and expenses
• Net income = revenue-expenses
• Classifications are designed to show the operating result of a company

Question 4

Which Financial Statement links the balance sheet at the beginning and end of a reporting period to the income statement?

Answer 4

The Statement of Changes in shareholder’ equity

- Illustrates how the net income activity is presented on the balance sheet

Question 5

Which Financial Statement uses the income statement to explain the movements in cash through the reporting period?

Answer 5

The Statement of cash flows

Question 6

What is Combined Ratio?

Answer 6

Combined Ratio = Claims Ratio + Underwriting Ratio
Claims ratio = net claims incurred ➗ net premium earned
Underwriting ratio = underwriting expenses ➗ net premiums earned

Question 7

Name three Generally Accepted Accounting Principles (GAAP):

Answer 7

1. ) Matching - this is when expenses are reported and matched to the revenue they helped earn
2. ) Consistency - how companies report should stay consistent from year to year or period to period. Companies are permitted to make changes but changes should be described
3. ) Conservatism - if there is a choice, pick the valuation that will lower assets and revenue and increase liabilities and expenses

Question 8

What are five (5) techniques used in Financial Statement Analysis?

Answer 8

1. ) Time Comparison - tracks how a company performed from one time period to next. Permits analysts to assess the performance or deterioration of a company over time.
2. ) Budget Comparison - when we talk about whether we are coming in under or over or on plan we’re talking budget comparison. Companies set a goal and measure their performance against this goal
3. ) Relationship comparison - Ratios are used to compare one aspect against another aspect (COR)
4. ) Detailed breakdown - determine what has been included in each item of the financial statement
5. ) Benchmark comparison - compare companies against one another or a company against the stock exchange index.