Chapter 6 - Accounting Princples And Practices Flashcards
1
Q
What is accounting known as in a wider context?
A
The analysis and interpretation of information that affects the performance and financial position of the business.
2
Q
What is financial accounting?
A
Business discipline which consists of a series of techniques and procedures that are used to identify, measure, record and communicate information including financial information to a range of people who may be interested in the information.
3
Q
The interested people in financial accounts are known as stakeholders and it it important that information is reported externally to the stakeholders by means of…
A
Statutory accounts
4
Q
Included in the statutory accounts of quoted companies will be?
A
- Narrative reports from the chairman and chief executive giving an overview of the governance activities and performance of the company in the previous period.
- A strategic report setting out the strategy, business model, a fair review of the business, future developments, kpi’s, principal risks and uncertainties and corporate and social responsibility matters.
- Financial accounts for the period including the balance sheet, income statement, cash flow position and
- Other legal requirements such as details of directors remuneration.
5
Q
The terms “statement of financial position” and “income statement” come from?
A
International financial reporting standards
6
Q
The terms “balance sheet” and “profit and loss account” come from?
A
UK generally accepted accounting principles and the companies act 2006
7
Q
The companies act 2006 includes regulation on accounting such as:
A
- Requirement to keep adequate accounting records
- Directors duty to prepare accounts for a company.
- Directors duty to prepare accounts for a group of companies and the consistency of financial reporting within a group.
- Requirements to show accounts that show a true and fair view.
8
Q
Other than small companies, companies legislation also requires?
A
Companies to have their financial year end accounts audited by an independent auditor.
9
Q
What does the income statement show?
A
Results of a company as a consequence of transactions during the accounting period. It sets out income, expenses, tax and most importantly to remember, profit or loss.
10
Q
What does the balance sheet show?
A
Statement of financial position of the business at a point in time. I.e the account period or year end date. It is a snap shot of the company’s position at a particular point in time. It lists all the companies assets and liabilities, what is owed and what is owned. What is owed by the company includes the shareholders equity, which is the total of the assets less the total of the liabilities.
11
Q
What do cash flow statements show?
A
Recognises that accounting, profit or loss, is not the only indicator of a company’s performance. Cash flow stamens show the sources and use of cash and are a useful indicator of a company’s liquidity.
12
Q
Cash flow statements are a useful indicator of?
A
Liquidity
13
Q
Financial statements are intended to show?
A
A true and fair view of the economic activities of the organisation, scalable not only to the stakeholders but any one who wishes to review them.
14
Q
Whether they are in the industry or not, to enable fair comparisons can be made across companies, financial accounts must be produced within a?
A
Highly regulated legal framework
15
Q
In preparing their consolidated accounts, companies listed on the London stock exchange have to follow?
A
International financial reporting standards
16
Q
Other companies on the UK not listed on the London stock exchange can adopt international standards or can continue to use the?
A
UK generally accepted accounting principles, referred to as UK GAAP.
17
Q
The true and fair view in financial accounts is similar to what concept and why is this relevant?
A
Substance over form concept which is that financial statements should show the economic substance of transactions rather than the legal form.
18
Q
Record making process of accounting is known as?
A
Book-keeping
19
Q
Financial accounting is concerned with providing what type of information to external stakeholders and interested parties?
A
Historic
20
Q
Management accounting is concerned with?
A
Internal planning and control of an organisation to enable its managers to make sound decisions. It aims to show managers how the organisation is performing in comparison with anticipated outcomes; and, if there is any deviation, what corrective action should be taken.
21
Q
Financial accounting is highly structured around the?
A
Accounting equation
22
Q
In financial accounting, to enable stakeholders to compare the company’s performance from one year to the next and also against other companies in the sector, information is prepared within a?
A
Framework
23
Q
To suit many purposes, management accounting can be?
A
Formulated in many different ways
24
Q
As well as using day to day source transactional data captured for financial accounting, management accounting will also incorporate…
A
A variety of other information sources to enable managers to fulfil their responsibilities
25
If financial position is shown within the balance sheet, what is shown through profit or loss in the income statement?
Performance
26
Management accounting systems are not just concerned with?
Money
27
Give 3 examples of non monetary information used in management accounting?
1. Labour hours
2. Raw material used
3. Electricity consumed
28
Whereas financial accounting looks at and records the financial impacts of events on the organisation as a whole, management accounting is naturally segmented and concentrates on...
Processes, individual departments and other areas of responsibility, in terms each manager can understand.
29
Which type of accounting looks at the historical information and which type of accounting looks at the future?
Financial accounting looks at historical information whereas management accounting is largely concerned with the future.
30
The framework companies must use to present their financial statements ensures?
Informational on the cm panties financial position and performance are comparable with previous years and with other companies.
31
Stewardship management enables?
Users to assess the quality of the managers who take responsibility for safeguarding the assets of the company on behalf of its owners the shareholders.
32
Management accounting has no external...
Regulatory constraints
33
Companies are not required by law to produce what type of accounts?
Management accounts
34
Companies are legally required under the companies act to produce what accounts?
Financial accounts
35
Which type of accounting is usually private?
Management accounting
36
Management accounts do not have to be ???? Externally
Audited externally, although some auditors may want to examine some management accounts to help their assessment of audit risk.
37
If an organisation has an internal audit department, it will have delegated responsibility from the audit committee or senior management to...
Report on the adequacy of the systems of control.
38
Why will owners of the business be important stakeholders and therefore have an interest in a company's financial information?
Need to know how the business is performing to be able to know whether to continue or increase their capital investment. This applies especially to shareholders in public limited companies in which investment decisions are often taken on a purely financial basis.
39
Why will directors and managers need an interest in a company's financial information?
These have overall responsibility for managing the business so will need to know whether or not the organisation has met its strategic objectives and have been making the best use of its resources. They will also need to know the company has enough capital and liquidity to enable it to carry out its plans, whether some parts of the business are more successful than others and whether the company has behaved as a responsible part of the community.
40
Why will employees require financial information about a company?
Usually concerned how secure their jobs are. Use financial information to decide if they think the company can continue to pay their wages. Employees can also be shareholders so may have conflicting stake holder objectives.
41
Why will the public be interested in financial information about a company?
Can be both potential investors and shareholders as well as people considering applying to work for an organisation.
42
Why will tax authorities want to know financial information about a company?
They will want to know the organisation is paying the appropriate level of tax.
43
Why will financial analysts be interested in the financial information about a company?
Can be for example independent financial advisors who will want to know whether they should advise shareholders and potential shareholders to buy or sell shares in an organisation. They use financial information to track the organisations performance. Others may be journalists for example who provide info to the public at large. Also rating agencies for wanting to know they are meeting their financial obligations by seeing the companies financial strength.
44
Why will creditors and lenders be interested in the financial information about a company?
They will need to make a judgement about whether they should extend credit to an organisation and if so, what limit they should set.
45
Why will competitors of a company be interested in its financial information?
Can use financial information to be able to help them readily understand its strengths and weaknesses.
46
Why will brokers be interested in the financial information of a company?
Brokers will want to know the companies they deal with are financially strong.
47
Why will customers be interested in the financial information of a company?
They will want to know they are insured with a reputable company who will be able to pay claims.
48
Why will the prudential regulation authority and the financial conduct authority be interested in the financial information of a company?
These are the regulatory bodies so they will need to know this information to know which action if any to take, with the PRA regulating the prudential issues, as the FCA regulating the conduct of businesses.
49
What two types of information beginning with q will the different stakeholders need in regards to financial information of companies?
Quantitative and qualitive
50
Information, despite being clearly available on the published accounts will need to be ???? For stakeholders to arrive at an informed judgement?
Interpreted and analysed
51
As stakeholders are becoming more socially aware, companies are now placing emphasis on how they are meeting?
Social obligations.
52
As people will want to know how an organisation has been doing in the last year, financial statements often contain narrative about the organisations activities, outlining areas of particular...
Success or failure, and covering new or discontinued projects, as well as directors assessment of risk and objectives for the current and future management of the company.
53
Many companies now provide information on how they undertake their ???? Responsibilities to the wider community?
Social e.g how they are addressing environmental issues or helping to reduce the impacts of climate change.
54
In very very simplistic terms, what is the short definition of profitability?
The company's ability to make money.
55
A company will have made a profit if?
There is a positive amount of money left over when all costs and expenses are subtracted from all of the organisations income.
56
When does a company "break even"?
If the amount left over when all costs and expenses are subtracted from a companies income is exactly zero (expenditure matches income exactly).
57
Managers will want to know if the company is profitable so they know...
How well they have managed the business.
58
Rising profits may reflect rising dividends for shareholders, management may instead however...
Retain profits to fund future expansion.
59
Why would a life assurance policyholder be concerned with a company's profitability?
Will want to know the company's record for bonuses, as it may affect their decision to enter a long term policy.
60
What is cash position (liquidity)?
The amount of cash a business has, or has access to, is known as its liquidity.
61
Why is cash position (liquidity) important?
Cash is vital to a business as this is what pays its costs and expenses. If it cannot manage its liquidity then by running out of cash it will not be able to pay its bills. This can lead to difficulty in trading leading to failure of the business. This can happen even if a business is profitable.
62
Why is income and expenditure important?
Helps build up a picture of the volume of sales from one year to the next, to see if they have gone up or down overtime.
63
One measure of an insurers size is?
Premium income
64
A measure of a brokers size may be?
Amount of premium income it managers, it's fee income or a combination of both.
65
Information on wages, raw materials, rent or company cars can all be gathered under the heading?
Expenditure
66
Net claims, reinsurance premiums, acquisition costs and operating costs are all examples of?
An insurance companies expenditure.
67
Give examples of how a company's wealth may be held
Non current assets such as property, equipment and investments, and in current assets such as its debtors and cash.
68
Working capital is?
Difference between current assets and current liabilities.
69
When a company has a decreasing working capital, this could be a short term problem or an indication of?
Poor management
70
Working capital can also show
Result of growing business
71
Whereas liquidity is a measure of the cash available to a company, solvency is a measure of?
The excess of an organisations assets compared to its liabilities.
72
If a company's liabilities exceed its assets it is technically...
Insolvent, and with some exceptions be required to cease trading.
73
The PRA require insurance companies in the UK to meet a solvency margin, this is the amount...
The value of the insurers assets should exceed the amount of its liabilities.
74
What is the difference between a trading company to an insurance company regulated by the PRA in terms of becoming insolvent?
In a trading company, if it's liabilities exceeds it assets, it is technically insolvent, however in an insurance company regulated by the PRA, if the insurance company's net assets falls below its solvency margin, that can also be classed as insolvent.
75
The amount of regulatory capital a company holds in excess to its solvency margin is an indication of the company's...
Financial strength and ability to pay claims to its customers.
76
What is income? And what can this also be known as?
Income is all of the amounts of money earned by the organisation from any source, including sales, rentals, interest payments and investments. Income generated from sales (excluding vat) is sometimes called revenue or turnover.
77
What is expenditure?
All the amounts of money incurred to pay for goods or services.
78
What is profit?
In accounting terms, any excess of income over expenditure incurred in running the business that earns that income.
79
What is shareholders equity?
This is the stake the shareholders have in a company. It is calculated as the total value of all the assets in the business less the total value of all the liabilities.
80
What is capital?
Sum of the equity and long term debt used to finance the business.
81
Long term debt in an insurance company can only be classed as regulatory capital if?
It meets stringent rules set out by the PRA.
82
What tier of capital does equity count of and why is this better?
Tier 1 and this is the best sort of capital because it gives the greatest protection to policyholders.
83
Depending on the structure of the debt, particularly repayment terms, long term classified debt may be either?
Tier 1 or tier 2
84
The PRA impose what on tier 1 and 2 debt?
Limits on the amount this can be classified as regulatory capital.
85
If debt is classified as regulatory capital, what will this improve for an insurance company and why?
Will improve the solvency margin because this debt does not count as a liability for regulatory purposes.
86
What is the advantage of having regulatory debt capital in addition to equity?
The cost of regulatory debit capital is normally lower than the cost of equity.
87
What would shareholders expect if the company has tier 1 and tier 2 debt compared to only holding equity?
Higher earnings per share
88
What is an asset?
Resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
89
What is a tangible asset?
One that is physical and real such as cash, land, buildings, machinery or investments.
90
What is an intangible asset?
One that is not physical such as a trademark, a copyright or goodwill.
91
When machinery or equipment for example loses its value of time, in accounting terms, their loss of value is called?
Depreciation
92
What is purchased goodwill?
Difference between the amount paid for acquiring a business and the value of the net assets of that business when acquired.
93
In accounting language, what is a liability?
An amount owed by an organisation.
94
In insurance terminology, what can a liability refer to?
An insurers acknowledged commitment to pay an amount of money arising out of a claim under a policy, or to a class of business or subsection of a policy.
95
What is cash?
Money that is available to the business and includes money deposited at the bank or cash retained on the premises e.g petty cash.
96
What is a creditor?
An individual or organisation to whom a debt is owed, e.g a supplier.
97
What is a debtor?
Any organisation or person who owes a debt to a company.
98
Debt owed to a company is considered as what on the balance sheet?
Current assets
99
When adjustments are made to the value of assets over their useful lives to reflect that they will deteriorate or become obsolete, this is known as?
Depreciation
100
Why does an assets full cost not come under expenditure in the year of purchase?
Reported profits would fluctuate widely from year to year.
101
What do accountants do to take into account depreciation?
They write down the cost of an asset over time, using a recognised method, leaving a notional value of the asset in the organisations balance sheet at any one point in time.
102
What is depreciation in reality and what is it important to note with regards to cash flow?
A book keeping entry with the company setting up a depreciation provision account. It is important to note no cash actually leaves the organisation as depreciation is incurred so it does not affect cash flow.
103
It is important to recognise that the amount recorded as a non current asset in the balance sheet is not necessarily (regarding deprecation)...
The amount that would be realised should the item be sold.
104
What is the formulae for straight line depreciation?
Coat of asset - scrap or residual value (both) / the life of the asset
105
Assets = equity + liabilities is what?
The accounting equation
106
The accounting equation is a logical way of?
Looking at financial transactions and explaining how the income and expenditure relate to the value of the company.
107
The accounting equation forms the basis of the accounting entries that make up the?
Income statement and balance sheet
108
Paper based book keeping has been replaced mostly by what and how can this be obtained?
Electronic book keeping systems and accounting packages can be bought of the shelf which include these systems.
109
Not all transactions are for immediate cash, this can be classed as being bought on?
Credit
110
Organisations require systems for recording transactions such as buying items and such on credit. The nature of the system will depend on?
The type of business.
111
What are raised to show amounts owed to the business?
Invoices
112
Invoices show when a transaction has occurred and record details such as...
Amount of debt incurred, who owes the money, organisation to whom debt is owed, date when debt was incurred, when payment is due, way debt was calculated, ancillary information such as VAT.
113
To keep records of expenditure, what will be retained?
Receipts
114
Money received and cash payments made are recorded in a ...
Cash book. A balance will be calculated frequently to monitor liquidity.
115
All financial transactions are recorded in the books of account using which principle?
Double entry principle
116
What does the double entry principle show?
Two fold effect on the accounting equation by reflecting that the business both receives and gives value in each transaction
117
The balance sheet is a statement of the...
Net wealth of a business at a particular time.
118
The difference between a companies total assets and total liabilities is called its...
Shareholders equity
119
Who does shareholders equity belong to?
Owners of the business
120
Assets are normally classified into which two groups?
Current and non current assets
121
What are non current assets?
Items of wealth that are controlled by the business that the company intends to keep for more than one year.
122
Give examples of non current assets
Goodwill and other intangible assets, property and investments. These intangible assets include parents, brands and licenses. Property includes freehold and leasehold property and land uses by the business for trading. Investments include property if held for investment rather than used by the business for trading, equities, government bonds and corporate bonds.
123
What are current assets?
Items of wealth that the business controls and intends to use within the next twelve months.
124
Give examples of current assets
Cash in hand and cash held in the business bank accounts including deposits held up for to to three months from the balance sheet date. Stock, such as raw materials, works in progress and finished goods. Finally debtors, these are an item of wealth as customers owe them money and are expected to pay.
125
If a liability has to paid out within 12 months what is it classed as and similarly what is is classed as if it has to pay outside of 12 months?
Current liability If required to pay within 12 months and non current liability if have over 12 months to pay.
126
What are examples of current liabilities?
Bank overdrafts as these have to be paid within 12 months and banks usually have the right to call in an overdraft at 24 hours notice. Also trade creditors, these arise when the business has bought goods or services from a supplier but has yet to pay the suppliers invoice.
127
Give examples of non current liabilities
Bank loans, mortgages and bond issues.
128
In addition to bank loans, mortgages and bond issues, businesses may raise long term finance from?
Issuing shares as well as retaining profits as reserves.
129
Limited liability companies can sell shares in order to raise long term finance, the amount raised is always owed to ???? And in this way share capital can be seen as an item of wealth that the business effectively owes to the ????
Shareholders/owners
130
Reserves are the accumulated profits of the business that have been...
Reinvested into the business.
131
Any profit that a business makes (after tax and liabilities have been discharged) belongs to the owners of that business. Because of this, profits of the business are owned by...
The shareholders and not the business itself.
132
How do share capital and reserve differ from liability?
No requirement to repay these amounts
133
What is working capital?
Money used to finance day to day trading activities. Working capital is used to pay for wages and raw materials and overheads such as utility bills.
134
On the balance sheet, how is working capital calculated?
Subtracting current liabilities from current assets. Working capital is known as net current assets.
135
What are assets employed?
Calculated by adding non current assets to working capital (net current assets)
136
On the balance sheet, current and non current assets as well as current and non current liabilities are usually shown?
Separately
137
A purchaser of a business may pay more or less than the total?
Equity
138
On the balance sheet, to make things balance, total assets are shown to equal total equity and liability. An alternative format may be shown as?
Net assets (total assets less liabilities) balancing with the shareholders equity
139
On the income statement, profit calculation is usually subject to ????????. This is particular for insurance companies because profit figure is highly sensitive to the estimate of the amount which needs to be ...
Estimations. And because profit is highly sensitive of the amount that needs to be set aside for claims.
140
Some companies on the income statement will also show what type of profit? Also explain why.
Operating profit. This is not required by IFRS however the meaning of operating profit must be shown if included. Operating profit shows measure of profit typically used internally to asses the financial performance of the business units.
141
Gross profit is calculated by subtracting...
Cost of sales from turnover
142
With regards to gross profit. Costs should be matched against the revenues generated within the same accounting, as a consequence of this unsold stock is...
Not included as stock on the income statement
143
What is revenue?
This is the total value of all sales invoiced during the year. Also known as turnover.
144
Why is revenue not always the same as the business's annual cash inflow from sales?
This is because revenue includes both cash and credit sales.
145
What is cost of sales?
This is the cost of the stock bought in during the year that has subsequently been sold. Cost of sales does not include money spent on stock that has yet to be sold.
146
Which 4 items will either be added or subtracted to achieve the profit for the year?
Finance income, finance costs, overheads and taxation.
147
What is finance income?
Income earned on any investments held during the year
148
What are finance costs?
Cost of loans made to the company such as bank loans, mortgages and corporate bonds.
149
What are overheads?
Expenses incurred by a company such as management, administration staff and office accommodation.
150
All businesses have to pay what tax on their profits?
Corporation tax
151
Reserves will increase by ???? And decrease by ????
Profit for the year, and dividends paid to shareholders.
152
Changes in reserves are changes to equity and IFRS requires these to be shown in either a statement of changes in equity (SOCE) or a statement of...
Recognised income and expense (SORIE)
153
IFRS requires certain other items to be reflected as a movement in equity such as...
Some foreign currency movements and actuarial adjustments to defined benefit pension schemes.
154
The main sources of revenue for insurance brokers are?
Commission and admin fees
155
In insurance broker accounts, the main cost items are?
Cost of the staff and running the office
156
What are the main current and non current assets of insurance brokers balance sheet?
Main non current assets are office equipment and property. The main current assets are liquid assets such as money in the bank (such as premiums held on behalf of insurance companies) and money (commissions) due from insurance companies.
157
What are the biggest liability to insurance brokers?
Premiums owed to insurance companies.
158
What is an associated interest?
Generally one in which the business has a greater than 20% ownership but less than a controlling interest.
159
What is a controlling interest?
Generally greater than 50% ownership of a company - and at this level a company would generally be classed as a subsidiary.
160
Insurance brokers accounts are more similar to what accounts?
Non insurance business.
161
Insurance company accounts will differ from...
Insurance broker accounts and other non insurance businesses
162
Insurers will at a minimum show how many years accounts for comparing results?
2
163
What is gross written premium?
Gross amount payable by the insured to which the insurer is contractually bound within the accounting period, regardless of the period of cover. Gross premiums will be gross of commissions but net of insurance premium tax.
164
Premiums will include:
Renewal premiums, premiums payable by instalments, an estimate of pipeline premiums receivable from binding authorities; and adjustment premiums receivable.
165
What is outward reinsurance premium?
Outward reinsurance (reinsurance purchased to protect the account) should be accounted for in the same period as the premiums for reinsurance business. This gives an indication as to the amount of reinsurance purchased to protect the underwriting book of business.
166
What is net earned premium?
Difference between premiums written and premiums earned? This is all to do with premiums being in the actual year. Premiums earned and premiums written are not the same. In a growing book of business earned premium will be less than written premium. Conversely in a declining book of business earned premium will be greater than written premium.
167
The companies act does not contain regulations on:
(a) board composition and succession planning
(b) the preparation of accounts that show a true and fair view
(c) the keeping of adequate accounting records
(d) the consistency of financial reporting within a group
Correct answer is (a) board composition and succession planning
168
Which component of a company's financial statements is the best indicator of liquidity?
Cash flow statement
169
Working capital is the difference between?
Current assets and current liabilities
170
The main difference between income and revenue is ...
Income includes all monies earned from any source
171
Sunk costs are?
Costs which are the product of past decisions
172
All companies listed on the London stock exchange must prepare their accounts in accordance with ...
IFRS
173
Give 7 differences between management and financial accounting
1. Financial is external whereas management is for internal planning
2. Financial is highly structured for legal regulatory requirements whereas management is formulated in many different ways to shit different purposes
3. Financial looks at and records the financial impact of events on the organisation as a whole, whereas management includes both monetary and non monetary quantitive information broken down by area of responsibility.
4. Financial is based on historical whereas management is largely focused on the future
5. Financial is prepared in accordance with accounting standards, whereas management has no external regulatory constraints
6. Financial must be filed at companies house whereas management is usually not made publicly available
7. Financial must be audited (over a certain company size) whereas management does not have to be externally audited.
174
Net investment return includes...
Realised gains and losses and investment income such as dividends, interest and rent receivables.
175
If the investment is classified as available for sale, unrealised gains and losses are recorded in?
Equity ( I.e not in the income statement )
176
If an investment is classified as held to maturity, how is it valued?
Valued on a amortised cost basis which means that the return recognised each year in the income statement is the effective return calculated when the asset was purchased up to the date it matures. Investments classified in this way are not fair valued (market value) at the end of each year.
177
If an investment is classified as fair value through profit or loss, then it is ...
Fair valued each year and unrealised gains and losses are recognised in the income statement. This includes assets held for trading.
178
Claims are shown on the income statement as net of...
Reinsurance. There is a gross share, reinsurers share and then net of reinsurance.
179
What are acquisition costs?
Amounts paid to brokers and other intermediaries who have placed business with the company and other direct costs of acquiring the business such as policy issue costs.
180
What are other operating costs?
These will include all the other outgoings needed to run the business including administration expenses.
181
What is the difference between current and deffered tax?
Current is the tax payable as shown in the company's tax return together with adjustments made to provisions established in previous years. Deffered tax is charged or credited to the income statement to deal with timing differences between recognising income, or an expense, that will be recorded in a future tax return.
182
IFRS requires a statement to be shown which reconciles the equity from the previous year to the ...
Current year
183
Reconciliation of changes in equity statement will show...
Dividends due, unrealised gains on investments classified as available for sale and other items such as the effects of changes to the accounting policies.
184
A dividend will not be a liability at the balance sheet date if it still has to be...
Approved by the shareholders
185
An interim dividend approved by the board but not paid will be a...
Liability
186
Balance sheet requires current assets, liabilities as well as non current assets and liabilities to be shown separately. This may be omitted if...
Presentation based on liquidity provides information that is reliable and more relevant. Both banks and insruance companies tend to present their balance sheets on the liquidity of the items rather than show a current/non current split.
187
What will provision for unearned premiums show?
Portion of premiums already entered into the accounts as due which relates to a period of risk subsequent to the balance sheet date.
188
What is the provision for losses and adjustment expenses?
Provision for gross loss should be disclosed in the balance sheet and amounts expected to be recoverable under reinsurance arrangements should be recognised separately in the balance sheet as an asset.the provision for losses are the estimated ultimate cost of all claims incurred but not settled at the date of the balance sheet, whether reported or not, together with the related administrative expenses.
189
Reinsurance liabilities will include...
Amounts due to reinsurers such as reinsurance premiums.
190
Investments shown in the balance sheet will include
Government bonds, property, corporate bonds, and equities.
191
What do reinsurers share of insurance contract liabilities relate to?
Potential reinsurers recoveries available on the technical provisions in the liability section of the balance sheet.
192
What are defend acquisition costs?
Cost of acquiring insurance policies that have been written during the financial year but will be earned in the subsequent year. Hence they are the portion of acquisition costs attributable to unearned premiums
193
What does the cash flow statement record?
Movements of cash in and of cash out that took place during the last financial year. Also shows the company's net cash flow for the year.
194
Cash inflows are different to revenue because
Not all customers pay in cash and not all invoices are paid on time.
195
Cash out flows need not be the same as?
Costs.
196
Lack of cash is more likely to ???? Than lack of profit
Cause a company to cease trading.
197
When assessing a businesses short term survival prospects, the cash flow statement is more relevant than...
the income statement
198
A cash flow statement analyses the cash flows into those arising from...
Operating activities, investing activities and financing activities.
199
What constitutes cash flows from operating activities?
Deals with how much cash the business managed to generate or consume as a direct consequence of its trading activities including tax paid, interest received and paid and dividends received. The financial statements will show a reconciliation of the cash generated from operations to net profit before tax.
200
What does cash flow from investment activities show?
Includes sales of investments including associates and subsidiaries purchased and outflows will include investments made.
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What will cash flows from financing activities show?
Deals with changes to loan and share capital and payment of dividends to shareholders. If business has raised cash by new loans or issuing more shares, an inflow is shown. If the business has paid back some loan capital during the year, an outflow of cash is shown. Cash outflows can also incur when a business decides to redeem or buy back some of its share capital.
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The cash flows from operations, investing and financing are totalled to show the...
Increase or decrease in cash and cash equivalents.
203
Why is it important to have a cash flow statement, an income statement and a balance sheet?
Each document measures a different aspect of the businesses financial health
204
What is the primary objective of management accounting?
Help managers take the appropriate decisions to enable the company to achieve its business objectives.
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Management accounting will give information on all aspects of company operation such as...
Procurement, costs and sales
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For an industrial company producing goods the management accounts might give management information on:
- productivity of the factory and possibly the productivity of individual machines
- quality of goods being produced
- cost of goods being produced analysed as appropriate for the factory such as labour costs, machinery costs, wastage costs and costs relating to quality assurance.
- capital absorbed by the business in raw materials, works in progress and finished goods.
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For a service company, the management accounts might give information on:
- customer service
- quality of the service provided
- cost of the service analysed as appropriate for the business
- financial performance of each of the various distribution channels such as direct sales force, outsourced call centres and web
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Management accounting will report on non financial information such as productivity ratios, quality of goods, financial information and...
Customer satisfaction
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What is costing? And how will it be achieved?
Establishing the necessary accounting information for profit and contributions to overhead costs of the various components of the business. To achieve this company's need to have a good costing system which is capable of collecting, storing, and processing data and reporting the information in the required format.
210
Costs can be allocated using activity based...
Costing
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If a profit centre is charged for the number of invoiced raised and the numbers of queries raised, and this technique makes it clear to the business the cost of queries and incentivise mangers to improve the accuracy of their billing and hence the cost to the profit centre, what is this method called?
Activity based costing.
212
When the board sets the budget, what will profit centers do?
Prepare a plan for two to five years in support of the company's strategic aims.
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The annual budget prepared for each profit centre and each cost centre in a company and and are set primarily for
Financial control purposes
214
Revenue budgets are based on the actions planned for in the period and are based on a range of assumptions such as...
Economic environment, expected changes in the competitive landscape and expected customer demand for new products and services.
215
Within each cost centre, budgets are typically prepared by type of ...
Expense and by month
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What is the starting point for preparing a budget and what is an alternative approach to this?
Normally the current level of activity fixed for planned changes. An alternative approach is to use a technique called zero based budgeting.
217
In regards to interpreting management accounting information, what is something that managers have to live with, give an example, and what do they aim for?
Managers have to live with uncertainty. This is because say for example knowing the exact figure a customer is going to want to pay for a service is nearly impossible. Managers will strive to obtain managements accounts from the best possible information.
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What is important to remember when interpreting management accounts? Management accounts should be a basis for ???? And not for ????
Better to regard the information as a basis for making enquiries and understanding how the business is performing rather than expecting the management accounts to present obvious solutions and actions.
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In regards to management accounting, when analysing say gross profit percentage, if the result is low, is action required?
Not necessarily, further enquiry should be had as it may be that for example a new line of business has a lower profit margin and has lowered the overall gross profit percentage.
220
Is it always worth to close down a line of business if not performing for example well?
No because can likely contain elements of fixed costs and other things which need to be taken into account for.
221
What are sunk costs?
Product of past decisions. They have been incurred by the company but are not necessarily relevant to future decisions.
222
Sunk costs should be excluded when...
Not relevant to the decision being made.
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What should be considered when starting a new line of business, based on the example of a individual or team?
If the team works on the new line of business, they will not be able to do other work. These are opportunity costs.
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What are opportunity costs?
The opportunity foregone by not being able to do other work instead.
225
It is not uncommon for opportunity costs to be excluded from an analysis of project costs. Think of opportunity costs as?
Revenue forgone
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If day one investment is 100 and return is 110 in a years time the internal rate of return is?
10%
227
The value of a project expressed in today's money is called
Net present value
228
What would the net present value show, using £100
£100 today is worth more than £100 in one years time. Cashflows in the future are reduced in value to recognise the cost of holding capital to finance the business.
229
What is the danger in ranking s business project by internal rate of return?
A project with a high IRR may only produce a small profit and it may be better to select a project with a lower IRR if it has a higher net present value and only one project can be selected.
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It is important to not assume that management information will necessarily suggest a straightforward course of action. Instead use management information as a basis for making enquiries and understanding...
How the business if performing, when this has been achieved. Decisions can be made.
231
Reserves are the accumulated profits of the business that have been...
Reinvested into the business
232
Gross profit is calculated by subtracting cost of sales from...
Turnover
233
What is actual capital?
Actual capital chosen by the company taking into account regulatory requirements.
234
Acquisition costs are?
Cost paid to intermediaries to acquire the business such as commission and other direct costs in acquiring the business such as policy issue.
235
What are assets defined as?
Resources controlled by the entity as a result of past events and which future economic b benefits are expected to flow to the entity.
236
How are assets employed calculated?
Calculated by adding non current assets to working capital (net current assets)
237
What is an associated company?
Where a company owns more than 20% share but a 50% or less share in another company it is said to be an associated company.
238
What is capital?
Sum of the equity (shares) plus long term debt (bank loans and financing agreements) used to finance the business.
239
What are claims incurred?
Claims paid in the year plus the cost of outstanding claims carried forward to the next year, minus the cost of outstanding claims brought forward from the year before (can be gross or net of reinsurance contributions)
240
Who/what are creditors?
Organisations or individuals to whom the company owns money.
241
Current assets are?
Items of wealth that the business controls and intends to use within the next twelve months, e,g debtors.
242
What are current liabilities?
Those liabilities that must be paid back within 12 months e.g creditors, overdraft
243
What is a debit or fee note?
Invoice created showing the amount owed to the business by other parties.
244
Who are debtors?
Organisations or individuals that owe money to the company.
245
What are differed acquisition costs?
Cost of acquiring insurance policies that have been written during the financial year but will be earned in a subsequent year. They are the portion of acquisition costs attributable to the unearned premiums and appear as an asset in the balance sheet.
246
What is differed tax?
Tax charged or credited to the income statement to deal with timing differences between recognising income, or an expense that will be recorded in a future tax return. It must be accounted for where the accounting period for the tax year differs from the financial year.
247
What does the double entry principle show?
Two fold effect on the accounting equation which shows businesses both give and and receive value in each transaction.
248
What is economic capital model?
Means by which an insurer decides the appropriate level of capital to hold. In deciding this, the insurance company will seek to maintain an appropriate buffer in excess of the regulatory minimum capital requirement.
249
What is expenditure?
The amounts of money incurred to pay for goods and services.
250
What is fair value through profit and loss?
Valued at the market value each year. The unrealised gains or losses of the investment (I.e the amount the shares have gone up or down.) are recognised in the income statement / profit loss account.
251
What are finance costs?
Costs of loans made to the company I.e the interest. Bank loans corporate bonds etc. cost appears as expenditure on the income statement.
252
What is finance income?
Income earned on any investments held during the year (shows as income on the income statement)
253
What are financing activities?
Cash changes following changes to loan or share capital and / or payment of dividends to shareholders. ( an inflow by issuing more shares or outflow if loan part paid off)
254
What is gross profit?
Difference between revenue / turnover less the cost of sales ( direct cost of making the product before deducting overheads, wages, tax ,interest etc.)
255
What is gross written premium?
Written premiums are the gross amount payable by the insured to which the insurer is contractually bound within the accounting period, regardless of the period of cover (excluding IPT) I,e the premiums relating to policies incepted/renewed in the financial year.
256
What does it mean if a company holds an investment to maturity?
Company intends to hold it until it matures (I.e not intended for trading) on the income statement the value is done on an amortised basis ( the initial cost is written off over a period of time) and are not fair valued.
257
What is IBNR?
Claims that have occurred but have not yet been reported must be accounted for. An additional percentage is included in the claims cost for this.
258
What is income.?
Amount of money earned by the organisation from any source, including investments, rentals, interest payments and investments.
259
In regards to investment activities on the cash flow statement, what will be the cash inflows and outflows?
Inflows received from sales of investments including subsidiaries or associates, outflows will be result of investments bought/made
260
What is liquidity?
The amount of cash that is held or accessible immediately.
261
What is minority interest?
Where a company does not own 100% of the business ( but the majority share ) the value of the minority share holdings are found as a minority interest in the Balance sheet as a liability.
262
What is net investment returns?
Investment return received including realised gains or losses from selling and investment income from dividends, interest, rent received etc. net investment return excludes unrealised gains or losses If the investment is classified as available for sale.
263
What is net profit or profit for the period?
Gross profit minus all other expenses such as overheads, interest paid and tax.
264
What is net written premium?
Gross written premium minus outward reinsurance premiums.
265
The stake that shareholders have in the business is equal to the value of the assets minus the total value of the...
Liabilities
266
Total equity represents
Book value of the business but not necessarily what the sale price would be.
267
Cash received from operating activities will be...
Cash generated or consumed as a direct consequence of the businesss trading activities(including tax paid, interest paid or received and dividends received.
268
Operating profit is not defined by who? But why will the meaning of this still need to bet set out in the financial statements?
IFRS still needs to be explained in statements. For a broker typically means profit before deduction of finance costs and taxation.
269
What is an organisations wealth?
The amount a business holds in respect of non current and current assets.
270
What is outward reinsurance premium?
Premiums paid to reinsurers for policies written during that financial period.
271
What are overheads?
Other expenses incurred by the company such as cost of management, admin staff, office accommodation (which appears as expenditure on the income statement)
272
What is a realised loss or gain?
A loss or gain that you have made when you seek a share or other investment
273
Reinsurance liabilities will be?
Amounts due to reinsurers for the protection that has not yet been paid.
274
What is reinsurers share of insurance contract liabilities?
Potential recoveries from reinsurers. These go as an asset on the balance sheet.
275
What are retained earnings?
Amount of net income left in a business after dividends have been paid. This appears on the balance sheet as part of equity.
276
Solvency is?
Amount of difference between total assets and total liabilities.
277
IFRS requires that any changes in reserves are shown in ...
SOCE - statement of changes in equity or SORIE - statement of recognised income and expenses.
278
Tax paid on profits appear as what on the income statement?
Expenditure
279
Which of the following does NOT form part of the statutory accounts of a quoted company?
a) directors remuneration report
b) articles of association
c) income statement
d) cash flow statement
(B) articles of association
280
Which companies can prepare their financial statements using UK gaap?
Any company not listed on the London stock exchange
281
A recent addition to the financial statements of many organisations is?
Information on the organisations social responsibilities
282
The difference between current assets and current liabilities is known as?
Working capital
283
Revenue is?
Total value of all sales invoiced during the financial year
284
If a company has paid back some of its loan capital during the year, how will this be shown in its cash flow statement?
A outflow of cash under financing activities
285
Activity based costing is used to...
Charge profit centres for the services of cost centres
286
Which component of a company's financial statements is the best indicator of liquidity?
Cash flow statement
287
The main difference between income and revenue is?
Income includes all monies earned from any source
288
Sunk costs are
Costs which are the product of past decisions
289
All companies on UK stock exchange must prepare their accounts in accordance with?
IFRS
290
What are the cash inflows and outflows for each area?
Operating - inflow is cash from trading activities, profit before tax, and outflow is like tax paid.
Investing - inflow from sale of investments including associates and subsidiaries, and outflow is investments made, e.g equipment and property
Financing - inflows from raising cash by negotiating new loans or by issuing more shares. Outflow shown if paid back some of its loan capital during the year. Also outflow if it decides to buy back some share capital.
291
The internal rare of return is normally used in order to evaluate the c...
Constraits the department are working under
