Answer the following multiple-choice questions related to insurance financial reporting:

Required

a. Which of the following does not represent a basic type of insurance organization?

1. Stock companies

2. Bond companies

3. Mutual companies

4. Fraternal benefit societies

5. Assessment companies

b. Which of these statements is not correct?

1. The balance sheet is a classified balance sheet.

2. The assets section starts with investments.

3. The majority of the investments are typically in bonds.

4. For life insurance companies, the investment in real estate may be much greater than that for property-casualty companies.

5. Real estate investments are reported at cost less accumulated depreciation and an allowance for impairment in value.

c. Generally, the largest liability is for loss reserves. The quantification process is subject to a number of estimates. Which of the following would not be one of the estimates?

1. Investment gains/losses

2. Inflation rate

3. Interest rates

4. Judicial interpretations

5. Mortality estimates

d. The manner of recognizing revenue on insurance contracts is unique for the insurance industry.

Which of the following statements is not true?

1. In general, the duration of the contract governs the revenue recognition.

2. When the risk differs significantly from the contract period, revenue is recognized over the period of risk in proportion to the amount of insurance protection.

3. For long-duration contracts, revenue is recognized when the premium is due from policyholders.

4. Realized gains and losses from investments are reported in operations in the period incurred.

5. For investment contracts, termination fees are booked as revenue over the period of the contract.

e. Which of the following statements is not true?

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

2. All 50 states have insurance departments that require annual statements of insurance companies. These annual reports are filed with the state insurance departments in accordance with SAP.

3. After the annual reports are filed with the individual state insurance departments, a testing process is conducted by the NAIC. If a company’s ratio is outside the prescribed limit, the NAIC brings that to the attention of the company.

4. A.M. Best Company publishes Best’s Insurance Reports, which are published separately for life-health companies and property-casualty companies. The financial data, including the ratios, are based on the data submitted to the state insurance departments and are thus based on SAP.

5. Many stock insurance companies must register with the Securities and Exchange Commission and file the required forms, such as the annual Form 10-K. Reports filed with the SEC must conform with GAAP.

f. Insurance companies tend to have a stock market price at a discount to the average market price (price/earnings ratio). Which of the following is a likely reason for this relatively low market value?

1. Insurance is a highly regulated industry.

2. The insurance industry has substantial competition.

3. The accounting environment likely contributes to the relatively low market price for insurance company stocks.

4. The nature of the industry leads to standards that provide for much judgment and possible manipulation of reported profit.

5. All of the above.