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CPCU 540
Chapter 2
49
Other
Not Applicable
05/17/2016

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Term
1. Financial Statement
Definition
1. A document that quantitatively presents an organization's financial activities or status
Term
2. Accounting
Definition
2. The classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organization's financial statements.
Term
3. Generally Accepted Accounting Principles (GAAP)
Definition
3. The rules and procedures to be used in the preparation of an organization's financial statements.
Term
4. Business entity concept
Definition
4. An accounting assumption that an organization's financial records contain only data related to the organization and not data related to its owners
Term
5. Going Concern Concept
Definition
5. An accounting assumption that a business entity will continue to operate indefinitely
Term
6. Money measurement concept
Definition
6. An accounting rule that requires an organization's economic activities to be reported only in money terms.
Term
7. Cost Principle
Definition
7. An accounting rule that requires an organization's assets to be recorded at their purchse price or production price.
Term
8. Revenue recognition principle
Definition
8. An accounting rule that requires revenues to be recognized and recorded at the time services are rendered or goods are sold to customers.
Term
9. Matching Principle
Definition
9. An accounting rule that requires expenses incurred in generating revenues to be matched against those revenues.
Term
10. Accrual Basis Accounting
Definition
10. An accounting basis under which revenues and expenses are recorded as they are incurred rather than when cash is received or paid.
Term
11. Cash Basis Accounting
Definition
11. An accounting basis under which transactions are recorded only as cash is received or paid.
Term
12. Materiality Principle
Definition
12. An accounting rule that allows accountants to ignore generally accepted accounting principles when recording items that are not material if to do so is less expensive and more convenient
Term
13. Substance over form concept
Definition
13. An accounting rule that requires transactions to be recorded in a way that reflects their economic substance and not simply their legal form
Term
14. Accounting period concept
Definition
14. An accounting rule that requires financial statements to be prepared over relatively short time periods.
Term
15. Consistency Principle
Definition
15. An accounting rule tht requires an organization to use the same accounting principles and reporting practices in every accounting period
Term
16. Conservation Principle
Definition
16. An accounting rule that requires transactions to be recorded in a manner such that net assets and net income are not overstated.
Term
17. Balance Sheet
Definition
17. The financial statement that records the assets, liabilities and owners' equity of an organization as of a specific date
Term
18. Accounting Equation
Definition
18. The equation that relates assets to liabilities and owners' equity.
Term
19. Assets
Definition
19. The resources an organization owns or uses to operate its business
Term
20. Liabilities
Definition
20. The debts and obligations that represent claims against an organization's assets.
Term
21. Owners Equity
Definition
21. The net amount of assets after satisfying all of an organization's debts and obligations
Term
22. Income Statement
Definition
22. The financial statement that reports an organization's profit or loss for a stated period.
Term
23. Revenue
Definition
23. The inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services to customers
Term
24. Expenses
Definition
24. The costs uncurred to produce revenues
Term
25. Statement of changes in owners' equity
Definition
25. The financial statement that explains any changes that have occurred in the organization's capital accounts during a specific period
Term
26. Paid-In Capital
Definition
26. The total amount invested in an organization by the owners
Term
27. Par Value
Definition
27. An arbitrary dollar value that an organization assigns to its shares.
Term
28. Retained Earnings
Definition
28. The cumulative net income that an organization has retained after paymetn of dividends, for reinvestment in the organization's operations.
Term
29. Dividends
Definition
29. The portion of an organization's profits that is paid to shareholders
Term
30. Statement of cash flows
Definition
30. The financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period
Term
1. Id activities that are presented quantitatively on an organizations financial statement
Definition
1. activities that are presented quantitatively on an organizations financial statement include sales, purchases, borrowings, repayments, and investments.
Term
2. Describe how financial info typically flows within an organization from the occurrence of financial activity to the reporting on financial statements
Definition
2. financial info typically flows within an organization as follows:
**record activity using bookkeeping
**Classify, analyze, and determine appropriate method of reporting the effects of the bookkeeping records in the financial statements
**Prepare financial statements using standardized accounting concepts and principles.
Term
3. Id the purpose of financial statements
Definition
3. The purpose of financuial statements is to communicate info about an organizations' financial activities and the results of those activities, to indivuduals who need to make informed financial decisions about the organization.
Term
4. List individuals who might use info contained in financial statements to make informed financial decisions regarding an organization
Definition
4. Individuals who might use info contained in financial statements to make informed financial decisions regarding an organization include management, investors, insurers, and employees.
Term
5. Describe the following guidelines used in interpreting and assessing an organization's financial condition and performance.
Definition
5. The following guidelines are used in interpreting and assessing an organization's financial condition and performance:
(a). Accounting concepts: Represent the underlying assumptions and rules of measurement of accounting theory
(b). Accounting principles - Standards or methods for presenting financial information that have been developed through accounting practice or established by industry organizations.
Term
6. Id the categories of concepts and principles encompassed by generally accepted accounting principles (GAAP).
Definition
6. Generally accepted accounting principles (GAAP) encompass the following categories of concepts and principles:
**General accounting concepts
**Concepts and principles affecting the recording of transactions
**Concepts and principles affecting the preparation of financial statements
Term
7. Describe the assumptions made when analyzing financial statements according to the following key accounting concepts:
(a). business entity concept
(b) going concern concept
Definition
7. The following assumptions are made made when analyzing financial statements according to the following key accounting concepts and principles:
(a). business entity concept - Assumes that each organization, or biz entity has an existence separate from its owners, creditors, employees, and other businesses. Financial statements report only resources, obligations, and results of the activities of the biz entity
(b) going concern concept = Assumes that a biz entity will continue to operate indefinitely. This assumption affects the values assigned to assets recorded in an organization's financial statements..
Term
8. Describe the following concepts and principles that help a user of financial statements udnerstand info contained in transaction records:
(a) money measurement concept
(b) cost principle
(c)revenue recognition principle
(d) matching principle
(e)
Definition
8. The following concepts and principles help a user of financial statements understand info contained in transaction records:
(a). money measurement concept-Id's that orgnanizatons must report economic activities in money terms
(b). cost principle - Id's that all organizations record their assets at historical cost
(c). revenue recognition principle - Id's how organizations recognize their revenue
(d). matching principle - Id's that organizations record expenses incurred in generating revenues in the same time period in which those revenues are recorded
(e) materiality principle - Id's that accountants can ignore GAAP when recording items that are not material if to do so is less expensive and more convenient.
(f) substance over form concept - Id's that transactions are recorded in a way that reflects their economic substance and not simply their legal form
Term
9. Compare accrual basis accounting and cash basis accounting regarding the recognition of revenue on financial statements.
Definition
9. Under accrual basis accounting, revenues and expenses are recorded as they are incurred rather than when cash is received or paid. This requires the use of account receivable and account payable accounts. Cash basis accounting records transactions only when cash is received or paid.
Term
10. Describe the following concepts and principles that help an organization prepare conservative and consistent presentation of financial information:
(a). accounting period concept
(b) consistency principle
(c) conservatism principle
Definition
10. The following concepts and principles that help an organization prepare conservative and consistent presentation of financial information:
(a) accounting period concept - Requires financial statements to be pepared over relatively short time periods so users can make valid comparisons of info from period to period
(b) consistency principle - Requires an organization to use the same accounting principles and practices, as long as the change is discolsed, along with the reasons for the change and its affect on current and cumulative prior years' income.
(c). conservatism principle - requires transactions to be recorded in a manner such that net assets and net income are not overstated to ensure that the costs of generating specific revenues are recorded in the same accounting period as the revenues are recorded.
Term
11. Describe the four primary financial statements:
(a) Balance Sheet
(b) Income Statement
(c) Statement of changes in Owners Equity
(d) Statement of Cash Flows
Definition
11. The following four primary financial statements present an organizations overall financial status and results of operations:
(a). Balance Sheet - Pvoides a snapshot of a company's financial position as of a specific dte, and records the assets, liabilities, and owners' equity as of that date.
(b) Income Statement: Reports an organizations' profit or loss for a stated period and heps ID types of operations the organization is performing and whether they are profitable enough to keep the organizatin in business.
(c) Statement of changes in Owners Equity: Explains any changes that have occurred in the organization's capital accounts during a specific period, and indicates how much of the net income is being reinvested for onging future business needs.
(d) Statement of Cash Flows - Summariezes the cash effects of an organization's operating, investing, and financing activities during a specified period. Used to determine an organizations's ability to generate positive future cash flows, ability to meet financial obligations, need for additional financing, and reasons for any differences between net income and associated cash receipts and disbursements.
Term
12. Describe the elements within an organization's capital accounts as reflected in the statement of changes in owners' equity.
Definition
12. the elements that constitute an organization's capital accounts include:
(a). The total amt invested in the organization by the owners, as represented by paid-in capital.
(b). The cumulative net income tht an organization has retained after paying dividends and reinvesting in the organization's operations, as represented by retained earnings.
Term
13. Describe the three sections of organizational activites summarized in the statement of cash flows
Definition
13. The three sections of organizational activites summarized in the statement of cash flows are:
(a). Operating activies - Reflects operating cash inflows and operating cash outflows. Non-cash income and non-cash expenses are not included.
(b). Investing activities - Reflects actual cash inflows and outflows that have occurred as a result of marketable securities; and receipt of payments on loans made to others.
(c). Financing activities: Reports cash inflows and outflows that have occurred as a result of activities such as issuing or repurchasing stock, bonds, or mortgages.
Term
14. Explain why it is important to analyze an entire set of financial statements together to develop an overall evaluation of an organization's financial status.
Definition
14. It is important to analyze an entire set of financial statements together to develop an overall evaluation of an organization's financial status because, taken together, the financial statements provide the user with a snapshot of the financial condition of the organization at the end of the fiscal year, along with a summary of the financial effects of business activities during the current reporting period.
Term
15. Explain why the accuracy of financial statements is limited.
Definition
15. The accuracy of financial statements is limited because many estimates, assumptions, and compromises are required in the process of preparing the documents.
Term
16.ID the significant limitations in the accuracy of financial statements
Definition
16. The following are significant limitations in the accuracy of financial statements:
(a). they do not measure the economic value of an organizaton's qualitative assets
(b). they do not give the current fair market value of the organization's assets for determining its true worth
Term
17. Explain how an organization's quantitative and qualitative assets are presented in financial statements.
Definition
17. Quantitative economic data are presetned in the financial statements. Qualitative assets typicaly have no measuremetn value assigned and are not presented in financial statements; however, an exception is the value given to assets that ahve ben purchased as part of an acquisition of another organization. These qualitative assets are recorded as goodwill in the finncial statements of the purchasing company.
Term
18. Explain how the cost principle of accounting limits the accuracy of the financial reporting of an organization's current fair market value of assets.
Definition
18. The accuracy of financial reporting of an organization's current fair market value of assets is limtied
(1) because the cost principle of accounting requires assets to be recorded at the price agreed on at the time of exchange, which does not consider inflation, and (2) because of depreciation charges, which relect historical costs, not replacement costs.
Term
19. ID how the following insurance professionals might use the info contained financial statements:
(a). company management
(b). agent or broker
(c). underwriter
(d). claim representative.
Definition
19. The following insurance professionals might use the info contained financial statements:
(a). company management -to help make informed decisions regarding their areas of responsibility and to monitor the results of the decisions with an eye toward fulfilling the goal of maximizing shareholder time
(b). agent or broker - to ID potential loss exposures or financial liabilities that re neither insured nor adequately addressed by risk management techniques and to ID trends in an organization's performance that signal potential problems or growth opportunities.
(c) underwriter = to assess an applicant's fianncial stability in the context of acceptability for coverage
(d). claim representative - to ID the possibility of a moral hazard related to a claim and to calculate the amount of a claim settlement.
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