Cpcu 540 Chapter 2

Front 1

Financial statement

Back 1

A document that quantitatively presents an organizations financial activities or status.

Front 2

Purpose of a financial statement

Back 2

To communicate information about an organizations financial activities and the results of those activities. Used to make informed business decisions are their areas of responsibility.

Front 3

Accounting

Back 3

The classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organizations financial statements.

Front 4

What are the four primary financial statements.

Back 4

1. Balance sheet
2. Income statement
3. Statement of changes in shareholders equity
4. Statement of cash flows

Front 5

Balance sheet

Back 5

The financial statement that reports the assets, liabilities and owners equity of an organization as of a specific date.

Front 6

The accounting equation, also known as the balance sheet equation.

Back 6

Relates assets and liabilities to the shareholders equity.

Front 7

Shareholders equity calculation, also known as owners equity.

Back 7

Assets - liabilities

Front 8

Current assets

Back 8

Cash, inventory, accounts receivable & marketable securities.

Assets to be used within one year.

Front 9

Non-current assets

Back 9

Assets that will be used over a period greater than one year.

Front 10

Tangible assets

Back 10

Land, buildings & equipment

Front 11

Intangible assets

Back 11

Cannot be touched. Leaseholds, patents, copyrights and trademarks.

Front 12

Goodwill

Back 12

Classified as an intangible asset. Usually generated as part of an acquisition. When an organization pays more than the book value for an acquired organization. Listed on the balance sheet.

Front 13

Liabilities

Back 13

Debts and obligations that represent claims against an organizations assets.

Front 14

Current liabilities

Back 14

Accounts payable, short-term debt, or the current position of long-term debt.

Front 15

Retained earnings

Back 15

The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organizations operations.

Front 16

Income statement

Back 16

Provides stakeholders with information regarding the profitability of an organization over a given period of time.

Front 17

Revenue

Back 17

Inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services.

Front 18

Expenses

Back 18

Assets relinquished or consumed in the process of delivering goods or rendering services to customers.

Front 19

Cost of goods sold

Back 19

Retail: Cost to purchase merchandise and for shipping.

Manufacturing: Cost of the materials to make the product, labor and overhead.

Service: No physical product is being sold.

Front 20

Cost of goods sold formula

Back 20

Beginning inventory + additions to inventory = amount that could have been sold - ending inventory.

Front 21

Gross profit

Back 21

Sales or operating revenue - cost of goods sold.

An income statement value.

Front 22

Gross margin

Back 22

Gross profit / sales

The percentage of sales remaining after deducting the costs of goods sold from sales.

Front 23

Operating income

Back 23

Gross profit - selling, general and administrative expenses.

An income statement value that results from the normal operations of the business during the period covered by the statement.

Front 24

Capital expenditures

Back 24

Larges purchases of land, buildings or equipment.

Capital expenditures and investments are not included on the income statement as one lump sum as they are no considered part of the operations and would skew the information. It does appear on the balance sheet as a negative to cash and an addition to real estate.

Front 25

Net income

Back 25

Revenue - expenses (incl. depreciation) + gains - losses - taxes

Front 26

Comprehensive income

Back 26

The change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

Ex. Unrealized gains and losses.

Front 27

Statement of changes in shareholders equity

Back 27

Explains increases or decreases in capital accounts

Front 28

Statement of cash flows

Back 28

Summarizes the cash effects of an organizations operating, investing and financing activities.

Front 29

Four major components of shareholders equity

Back 29

1. Paid-in capital
2. Retained earnings
3. Accumulated other comprehensive income
4. Treasury stock

Front 30

Paid-in capital

Back 30

The total amount invested in an organization by the owners.

Front 31

Use of retained earnings

Back 31

Funding capital expenditures, research & development, or debt repayment.

Front 32

Components of other comprehensive income

Back 32

1. Change in unrealized appreciation or depreciation of investments.
2. Foreign currency translation gains or losses
3. Changes in minimum pension liability

Front 33

Treasury stock

Back 33

A corporate stock issued as fully paid to a stockholder and subsequently required bu the corporation to use for business purposes.

When a corporation buys back its own stock.

Front 34

Statement of cash flows

Back 34

The financial statement that summarizes the cash effects of an organizations operating, investing and financing activies during a specific period of time.

Identify the sources and uses for cash during the year.

Front 35

Depreciation expense

Back 35

An accounting method that spreads out the expense of a purchase over the life expectancy of the item.

Front 36

Operating activities on the statement of cash flows

Back 36

Operating cash inflows and operating cash outflows.

Front 37

Investing activities on the statement of cash flows

Back 37

Cash inflows and outflows that have occured as a result of activities such as the sale or purchase of property, plany or equipment, the acquisition or disposal of marketable securities and the receipt of payments on loans made to others.

Front 38

Financing activities

Back 38

Cash inflows and outflows that have occured as a result of activities such as issuing or repurchasing stock, bonds, or mortgages.

Front 39

Differences between insured and noninsurer financial statements

Back 39

Insurers do not rely on production facilities, but instead on financial strength to support their products.

Front 40

Insurers financial investments

Back 40

1. Short-term
2. Fixed maturity
3. Equity securities
4. Other invested assets

Front 41

Insurers unique type of assets

Back 41

1. Premium receivables
2. Reinsurance recoverables
3. Deferred policy acquisition costs

Front 42

Insurers unique type of liabilities

Back 42

1. Unpaid losses and LAE
2. Unearned premium

Front 43

Unpaid losses and LAE entry on balance sheet

Back 43

1. Losses and LAE that have been incurred but have not yet been paid.
2. Incurred bu not reported losses and LAE (IBNR)
3. Losses and LAE from claims that may be reopened

Front 44

Insurers unique revenues

Back 44

1. Premium earned
2. Investment income

Front 45

Insurers unique expenses

Back 45

1. Losses
2. LAE

Front 46

Other reports for stakeholders

Back 46

1. Notes to Financial Statements
2. Securities and Exchange Commission filings
3. Company annual reports

Front 47

Notes to Financial Statements

Back 47

1. A brief description of the nature of the companys operations.
2. A summary of significant accounting policies and changes to accountinh policies
3. Detailed list of long-term debt
4. Summary of loss contingencies and other commitments
5. Report of selected financial information by business segment
6. Any other explanations that management deems necessary

Front 48

Loss contingencies in the notes to financial statements

Back 48

1. Current and pending litigation
2. Obligations related to product warranties and product defects
3. Risk of damage to or uninsured loss of company property
4. Hold harmless agreements

Front 49

Form 10K

Back 49

Annual report filed with SEC

Front 50

Form 10Q

Back 50

Quarterly report filed with SEC

Front 51

Form 8K

Back 51

Current report filed with SEC

Front 52

Within how many days must the SEC be notified of a triggering even?

Back 52

4

Front 53

Triggering events for a 8K filing

Back 53

1. Material definitive agreements
2. Release of non-public information about the company's financial condition
3. Creation of a direct financial obligation
4. Change of independent auditor
5. Departure or election of directors or principal officers

Front 54

What sections are included in the annual report?

Back 54

1. Financial statements and notes
2. Auditors report
3. Report of management
4. Managements discussion and analysis of results
5. Selected financial data

Front 55

Report of management

Back 55

Management acknowledges responsibility for the quality and integrity of the financial statements, accuracy and effectiveness of internal controls and that the internal controls have been audited by an independent accounting firm.

Front 56

MD&A: Managements Discussion and Analysis of Results

Back 56

1. Provide a view of the company from managements perspective
2. Improve overall disclosure and provide context within which financial statements should be analyzed
3. Provide informatino of the companys income and cash flow that indicates past and future performance.

Front 57

Letters to shareholders

Back 57

Letter written by the chairman of the board of directors, the chief executive officer or both providing a review and analysis of the significant events of the year.

Front 58

Limitations of financial statements

Back 58

1. They do not measure the economic value of an organizations qualitative assets
2. They do not give the current fair market value of the organizations assets and liabilities for determining the organizations worth.

Front 59

Qualitative assets

Back 59

Reputation in the marketplace, loyal customers of its branded products, strength of its management team, or its productive workforce.