Question 1

It is generally perceived that utilities that have cash flow problem will not be increasing their dividend.

Accepted Answer

Utilities that have cash flow problems may prioritize using their cash to address those issues rather than distributing it to shareholders as dividends. As a result, the perception is that they are unlikely to increase their dividend payments until their financial situation improves.

Question 2

The balance sheets of insurance companies are not classified by current assets and current liabilities.

Accepted Answer

The balance sheets of insurance companies are not typically classified by current assets and current liabilities, as the nature of their business involves long-term obligations and investments. Instead, their balance sheets may be organized by various categories such as policy reserves, investments, and other assets and liabilities.

Question 3

Generally accepted accounting principles for insurance companies developed much sooner than statutory accounting practices.

Accepted Answer

Statutory accounting principles (SAP) for insurance companies were developed to provide a more conservative assessment of an insurance company's financial condition, and these principles have been in place for a longer time than the Generally Accepted Accounting Principles (GAAP) that are more commonly used in other industries. SAP is specifically designed for the insurance industry and is mandated by insurance regulators to ensure the solvency and protection of policyholders, whereas GAAP focuses on providing a fair and consistent representation of a company's financial condition to investors and other stakeholders.

Question 4

Regulation of insurance companies started at the federal level.

Accepted Answer

Regulation of insurance companies primarily started at the state level, following the 1945 McCarran-Ferguson Act, which gave states the authority to regulate insurance.

Question 5

The manner of recognizing revenue on insurance contracts is unique for the insurance industry.In general,the duration of the contract governs the revenue recognition.

Accepted Answer

The duration of the contract is a significant factor in revenue recognition for insurance contracts, and this approach is specific to the insurance industry. Therefore, the statement is true.

Question 6

The regulated utility is building into the cost base an amount for an assumed rate of return on equity funds by increasing the balance sheet account (Construction Work in Progress)for an assumed rate of return on equity funds.

Accepted Answer

Regulated utilities typically include a rate of return on equity funds in their cost base, and this is accounted for by increasing the balance sheet account for Construction Work in Progress. This ensures that the utility is able to earn a reasonable profit while ensuring that the costs of the infrastructure are recovered over time.

Question 7

For insurance companies,unrealized gains and losses,not recognized on the income statement,will be recorded in the account accumulated other comprehensive income.

Accepted Answer

Unrealized gains and losses that are not recognized on the income statement are recorded in the account "accumulated other comprehensive income" (AOCI), which is a component of shareholders' equity on the balance sheet. This allows the company to acknowledge changes in the value of certain assets or liabilities without affecting net income until those gains or losses are realized.

Question 8

Deferred policy acquisition costs represent the cost of obtaining policies.Under statutory accounting practices,these costs are charged to expense as they are incurred.

Accepted Answer

Deferred policy acquisition costs are generally expensed as they are incurred under statutory accounting practices.

Question 9

The stockholders' equity section of an insurance company will usually appear similar to the stockholders' equity section of other industries.

Accepted Answer

The stockholders' equity section of an insurance company will typically include common stock, retained earnings, and additional paid-in capital, which are similar to other industries. However, insurance companies may also have unique items in their equity section, such as unrealized gains or losses on investments or policyholder equity.

Question 10

Insurance companies provide two types of services.One service is an identified contract service-mortality protection or loss protection.The second service consists of investment management service.

Accepted Answer

Insurance companies provide mortality protection or loss protection as well as investment management services.

Question 11

Statutory accounting has emphasized the balance sheet in its concern for protecting the policyholders by focusing on the financial solvency of the insurance corporation.

Accepted Answer

Statutory accounting is designed to ensure that insurance companies are financially solvent and able to fulfill their obligations to policyholders. This is achieved by emphasizing the balance sheet, which provides a snapshot of an insurer's financial condition at a particular point in time. By requiring insurers to meet specific financial ratios and maintain adequate reserves, statutory accounting helps to protect policyholders from the possibility of an insurer's insolvency.

Quiz 12: Special Industries: Banks, utilities, oil and Gas, transportation, insurance, real Estate Companies