Deck 24: Accounting for Financial Institutions

Question 1

The Income statement of a bank should show its assets:

A) all listed in order of liquidity
B) divided under the headings of current assets and non-current assets
C) all as current assets
D) all as current assets except for property, plant and equipment

Answer 1

A

Question 2

At July 1,20X2 UR Covered Insurance Co had investments integral to its general insurance activities with a net market value of $60 million.During the year,UR Covered received dividends and interest of $8 million with accrued interest receivable of $800 000.UR Covered acquired additional investments at a cost of $9.5 million and sold some investments for $7 million.The investments that were sold were carried at $8 million.At the end of the year,the investment portfolio had an estimated market value of $6.1 million.In accordance with AASB 1023,UR Covered should show their total investment revenue for the year as

A) $7.3 million
B) $7.8 million
C) $7.0 million
D) $8.8 million

Answer 2

A

Question 3

'Long-tail business' and 'short-tail business' are terms usually associated with companies involved in:

A) investment banking
B) life insurance
C) general banking
D) general insurance

Answer 3

D

Question 4

The main revenue item for a bank is usually:

A) net interest income
B) profit on foreign exchange dealing
C) fees charged for granting loans or altering the terms and conditions of loans
D) interest on loans and investments

Question 5

A general insurer should usually record as liabilities at the end of each reporting period the estimated amounts of:

A) claims not yet lodged but arising from events occurring before the end of the reporting period
B) claims lodged but not yet paid
C) claims lodged but the amount of the liability is uncertain
D) all of the above

Question 6

Banks often classify investments held by them as either trading assets or available for sale investments.Initially,these investments are required to be measured at:

A) lower of cost and net market value
B) market value for trading securities and cost for investment securities
C) market value for trading securities and amortised cost for investment securities
D) fair value

Question 7

Under AASB 1023,the revenue from the premium for a general insurance policy should be recorded as earned:

A) when the policy is signed by both parties
B) from the attachment date, allocated to the reporting periods to which the premium relates
C) on the attachment date, when the insurer accepts the risk
D) when the premium is paid in full by the insured

Question 8

At the beginning of the current financial year,Ratchett Insurance Ltd had investments integral to its general insurance activities with a net market value of $100 million.During the financial year,Ratchett received dividends and interest of $12 million and at the end of the year estimated that accrued interest receivable was $1 200 000.Also during the year,Ratchett acquired additional investments at a cost of $15 million and sold some investments for $14 million.The investments sold had been carried in its books at $13 million.At the end of the year,the investment portfolio had an estimated net market value of $110 million.In accordance with the requirements of Australian Accounting Standard AASB 1023 'Financial Reporting of General Insurance Activities',Ratchett should show total investment revenue for the year of:

A) $13.2 million
B) $14.2 million
C) $12.0 million
D) $22.2 million

Question 9

An insurance risk:

A) is a financial risk
B) results in risk being transferred from the policy holder to the insurer
C) both A and B
D) none of the above

Question 10

Under the requirements of Australian Accounting Standard AASB 1038 'Life Insurance Contracts',the assets of a life insurer must be measured at:

A) net present value
B) fair value
C) historical cost
D) replacement cost

Question 11

The date when earning the premium for a general insurance policy begins should normally be taken as the date when:

A) the insurer accepts the risk, the attachment date
B) a cover note is issued
C) the premium is paid in full by the insured
D) the policy is signed by both parties

Question 12

What is the essential purpose of a general insurance policy? List and briefly explain the nature of each of the main items of (a)income and (b)expense for a general insurance business.Similarly,list and briefly explain the nature of each of the major (c)assets and (d)liabilities of a general insurance business.

Question 13

Under AASB 4 'Insurance Contracts' the insurer at each reporting date must determine whether its insurance liabilities are understated; if they are,the amount should:

A) be recorded a liability
B) be charged as an expense
C) be disclosed in the notes
D) be disclosed as a provision

Question 14

Which of the following is not a characteristic of financial institutions?

A) Their profit is generally made up of bank charges
B) They facilitate the flow of funds from entities with a cash surplus to those with a cash deficit
C) Their profit is generally the difference between the interest rates paid to creditors and that charged to debtors
D) Their assets are primarily cash or claims to cash

Question 15

The main expense item for a bank is usually:

A) bad and doubtful debts
B) losses on foreign exchange dealings
C) staff salaries, wages and on-costs
D) interest paid on borrowings

Question 16

Where a bank has approved a loan but the borrower has not yet drawn it down,the usual practice in the financial statements of the bank is to:

A) include the undrawn amount as a liability in the Balance Sheet
B) include the undrawn amount as a contingent liability in the financial statements
C) make no specific disclosure of the details of this type of item
D) disclose the amount expected to be drawn down in the following twelve months

Question 17

A general insurer invests the cash received from premiums because of the time between the collection of premiums and the payment of claims.Their primary objective in managing this investment portfolio is:

A) liquidity - the insurer needs readily available cash to pay claims
B) solvency - the insurer is legally obliged to maintain minimum solvency levels
C) profitability - the insurer must maximise its profit to be a commercial success
D) all of the above

Question 18

'Underwriting' by an insurer involves:

A) assessment of risks
B) settling claims
C) collection of premiums on insurance policies
D) all of the above

Question 19

'Reinsurance' occurs when:

A) a person insures property with several different insurers
B) an insurer insures their own risks with other insurers
C) a person reinstates their insurance policy after making a claim
D) an insurer accepts a claim and writes a new policy for the same customer

Question 20

The three broad categories of insurance do not include:

A) life insurance
B) fixed fee service contracts
C) fixed insurance services
D) general insurance

Question 21

Life insurance activities can be divided into two main categories.Identify these categories and explain the different types of activities which are classified under these categories.Illustrate with examples where possible.

Question 22

Explain what is meant by reinsurance.In your answer,discuss inwards and outwards reinsurance.

Question 23

Discuss the required treatment of Goodwill under AASB 3 'Business Combinations'.Previously,banks departed from this treatment in their accounting practices.Explain their justification and provide reasons why this justification is inadequate.