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Finance and accounting terms for FIL 382.05

What is the overall accounting identity behind the structure of the balance sheet? assets = liabilities + equity
What is the overall accounting identity behind the structure of the income statement? revenue - expenses = profit
Name the four basic financial statements balance sheet, income statement, cash flow statement, statement of shareholders equity
Name the three sections of a cash flow statement cash from operating activities, cash from investing activities, cash from financing activities
Working Capital A liquidity measure that is calculated by subtracting current liabilities from current assets. It is used to determine a company's ability to finance immediate operations( to buy inventory, finance growth, and obtain credit)
Statutory accounting principles (SAP) The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurer's must follow
Fair Value The market value, either actual or estimated, of an asset or a liability
Balance sheet The financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date
Current assets A balance sheet asset classification that includes cash and other assets that are expected to be converted into cash, sold, or exchanged within the business's normal operating cycle, usually one year.
Marketable securities An asset classification that includes temporary investments that can easily be converted into cash
Receivables An asset classification that consists of the amounts owed to a company by customers and other outsiders
Inventory An asset classification that consists of goods available for sale to customers; for a manufacturing company, also includes raw materials and finished goods
Current liabilities A balance sheet liability classification that includes obligations whose payments are reasonably expected to require the use of cash or the creation of other current liabilities within one year.
retained earnings The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization's operations.
Revenue The inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services to customers.
Gross profit An income statement value that represents sales or operating revenue minus the cost of goods sold.
Gross margin (Gross profit margin) The percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales
Operating income An income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as gross profit less selling, general, and administrative expense
Comprehensive income A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses.
Statement of changes in shareholders' equity The financial statement that explains any changes that have occurred in the organization's capital accounts during a specific period.
Paid-in capital The total amount invested in an organization by the owners.
Treasury stock A corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes
Statement of cash flows The financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period.
Depreciation expense An accounting method that spreads out the expense of a purchase over the life expectancy of the item
Generally accepted accounting principles (GAAP) A common set of accounting standards and procedures used in the preparation of financial statements to ensure consistency of presentation and reported analysis
Vertical analysis The use of common-size statements to highlight basic relationships among items within a single set of financial statements
Common-size statement A financial statement in which amounts are reported as a percentage of a base figure
Trend analysis An analysis that identifies patterns in past data and then projects these patterns into the future
Trend analysis A comparison of financial statement data across two or more periods
Net profit margin The percentage of sales remaining after deducting all expenses
Accounts receivable turnover ratio An efficiency ratio that indicates how quickly a business collects the amounts owed by its customers
Days sales outstanding A measure of the number of days it takes, on average, for a company to collect its accounts receivable
Fixed assets Resources that cannot be expected to be sold or consumed within the business's normal operating cycle and that are usually considered to be long lived
Inventory turnover ratio An efficiency ratio that indicates how quickly inventory is sold, generating either cash (from cash sales) or accounts receivable (from credit sales)
Net profit margin A profitability ratio that measures the percentage of sales remaining after deducting all expenses that indicates how effective an insurer is at cost control; uses income statement data and is calculated by dividing net income after taxes by sales
Return on assets (ROA) A profitability ratio that shows how well a company has used its resources by comparing net income to the assets invested to generate that income.
Return on equity (ROE) A profitability ratio expressed as a percentage by dividing a company's net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholder's equity, or policyholder's surplus
DuPont identity An analysis of ROA and ROE by breaking them down into their component ratios
Leverage ratio A financial ratio that indicates the relationship between the amount of funds supplied by creditors and the funds supplied by the owners of the company
Current ratio A liquidity ratio that indicates the company's ability to meet its short-term financial obligations; calculated by dividing current assets by current liabilties
Acid-test ratio (quick ratio) A liquidity ratio that provides a measure of a company's ability to meet its current obligations if it cannot sell its inventory
Debt-to-equity ratio A leverage ratio that measures the extent to which a company is financed using borrowings rather than its own funds (owners' equity)
Debt-to-assets ratio A leverage ratio that shows the extent to which a company's assets are financed by debt; uses balance sheet data and is calculated by dividing total liabilities by total assets
Asset turnover A ratio that emphasizes the efficiency of the company's use of its assets.
Quick ratio (acid test ratio) A liquidity ratio that provides a measure of a company's ability to meet its current obligations if it cannot sell its inventory
Policyholders' surplus Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities
Matching principle An accounting rule that requires expenses incurred in generating revenues to be matched against those revenues
Nonadmitted assets Types of property, such as office furniture and equipment, that regulators do not allow insurers to show as assets on financial statements because these assets cannot readily be converted to cash at or near their market value
Admitted assets Assets meeting minimum standards of liquidity that an insurer is allowed to report on its balance sheet in accordance with statutory accounting principles
Reinsurance recoverables Amounts for those loss adjustment expenses owed to an insurer under reinsurance agreements covering paid losses
Unauthorized reinsurer A reinsurer that is not licensed or otherwise authorized to do business in the primary insurer's state of domicile
Loss reserve An estimate of the amount of money the insurer expects to pay in the future for the losses that have already occurred and have been reported, but are not yet settled
Loss adjustment expense reserves Estimates of the future expense that an insurer expects to incur to investigate, defend, and settle claims for losses that have already occurred
Surplus note A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholder's surplus rather than as a liability on the insurer's statutory balance sheet
Capacity The amount of business an insurer is able to write usually based on compensation of the insurer's written premiums to its policyholders' surplus
Liquidity The ease with which an asset can be converted to cash with little or no loss of value
Written premiums The total premium on all policies written (put into effect) during a particular period
Unearned premium reserve An insurer liability representing the amount of premiums received from policyholders that are not yet earned
Earned premiums The portion of written premiums that corresponds to coverage that has already been provided
Premium-to-surplus ratio, or capacity ratio A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus
Reserves-to-surplus ratio A financial ratio that provides a measure of the ability of an insurer's surplus to absorb increases in reserves
Ceding commission An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses
Insurance leverage An indication of the extent to which policyholders' surplus can support a given level of reserves
Liquidity ratio A ratio that measures the extent to which an insurer can meet its obligations as they come due; and is the sum of cash plus invested assets (market value) divided by unearned premium reserve plus loss and loss adjustment expenses
Combined ratio A profitability ratio that includes whether an insurer has made an underwriting loss or gain
Loss ratio A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses
Expense ratio An insurer's incurred underwriting expenses for a given period divided by its written premiums for the same period
Operating ratio A ratio that measures an insurer's overall pretax operational profitability from underwriting and investment activities and is calculated by subtracting the investment income ratio from the combined ratio
Investment income ratio Net investment income divided by earned premiums for a given period
vestment yield ratio A profitability ratio that indicates the total return on investments for an insurer's investment operations
Return on policyholders' surplus A profitability ratio that shows the rate of return an insurer is earning on its resources
Solvency The ability of an insurer to meet its financial obligations as they become due, even those resulting from losses that may be claimed several years in the future
Reinsurance The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the fi
Loss portfolio transfer A type of retroactive plan that applies to an entire portfolio of losses
Payout ratio The proportion of a company's earnings or net income paid out as dividends to shareholders
Financial leverage The use of fixed cost funds (debt) to increase returns to shareholders
Underwriting risk A measure of the loss volatility of the types of insurance sold by an insurer
Risk-based capital (RBC) Amount of capital an insurer needs to support its operations, given the insurer's risk characteristics
Market value surplus The fair value of assets minus the fair value of liabilities
Underwriting cycle A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repea
Supply In insurance, the aggregate willingness of insurers to assume risk at a given time
Surplus relief A flow of funds into an insurer's policyholders' surplus when policyholders' surplus has been reduced by the insurer's rapid growth in written premiums
Created by: FIL350
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