Diploma in Insurance

1. Diploma in Insurance M92 Insurance Business and Finance Chapter 6: Accounting principles and practices

4. Learning objectives By the end of this module, you should be able to: • Explain the purpose and function of financial accounting • Distinguish between financial and management accounting • Describe the users of financial information and their information requirements • Apply the basic financial concepts and the accounting equation • Describe accounting for receipts and payments • Interpret a balance sheet and an income statement (profit and loss account) • Explain the uses, format and presentation of cash flow statements • Explain the principles of management accounting • Interpret management accounts

5. What sets out income, expenses, tax and profit (or loss)?  A.  Balance sheet B.  Cash flow statement C.  Income statement D.  Solvency statement

6. What provides a snap shot of the company’s assets and liabilities? A.  Balance sheet B.  Cash flow statement C.  Income statement D.  Liquidity statement

7. What is an indicator of a company’s liquidity? A.  Balance sheet B.  Cash flow statement C.  Income statement D.  Solvency statement

8. What type of accounting looks forward rather than back?  A.  Financial B. IFRS accounting C.  Management D.  Statutory

9. Which of these comments about financial accounting is the only one that is true?  • Not based on historical information • Do not have to be published • No regulatory constraints • Structured around the accounting equation

10. Which of these comments about management accounting is the only one that is true?  • Based on historical information • Framework is subject to regulatory constraints • Must be audited to comply with the IFRS • Must be published

11. What is described as all of the money earned by the organisation from any sources?  • Current assets • Income • Gross profit • Net profit

12. What is described as the stake that shareholder’s have in the company? • Shareholder assets • Shareholder’s equity • Shareholder’s profit • Shareholder’s retention

13. Which tier of capital does shareholder’s equity and retained profit fall within? • 1 • 2 • 3 • 4

14. What is an example of an intangible asset? • Cash • Goodwill • Investment in shares • Land

15. What is this formula used for? • Calculating equity • Calculating losses • Straight line depreciation • The accounting equation

16. Vehicle bought for £16,500 to be kept for 5 years. Scrap value estimate at £1,500. What is the missing figure? • £3000 • £7500 • £9000 • £12000

17. What is Assets = Equity + Liabilities? • Accounting equation • Income statement • Shareholder’s equity • Straight line depreciation

18. Equity £3500 = Assets x - Liabilities £2000What is the value of x? • £1500 • £2000 • £3500 • £5500

19. Equity x= Assets £10,000 - Liabilities £4,000What is the value of x? • £4000 • £6000 • £10,000 • £14,000

20. Equity = Assets - Liabilities £1000 + = £300 cash+ - £0 £500 £1000 cash taken today+ £200 stall Day Four The company buys a second hand van for £2000 on credit. Equity = Assets - Liabilities £1000 + = £300 cash+ - £2000 £500 £1000 cash taken today+ £200 stall £2000 van So the final equation is: Equity £1500 = Assets £3500 - Liabilities £2000 What happens if Jack and Jill pay themselves £100 each?

21. Equity = Assets - Liabilities £1000 + = £300 cash+ - £0 £500 £1000 cash taken today+ £200 stall Day Four The company buys a second hand van for £2000 on credit. Equity = Assets - Liabilities £800 + = £300 cash+ - £2000 £500 £800 cash taken today+ £200 stall £2000 van So the final equation is: Equity £1300 = Assets £3300 - Liabilities £2000 What happens if Jack and Jill pay themselves £100 each?

23. Book keeping • Electronic nowadays • Accurate records of financial transactions. • Caters for all types of transactions (i.e. cash or credit) • Invoices • Cash book – money received and paid

24. What information would you expect to see recorded in an invoice? • Amount of the debt incurred • Individual or organisation owing the money • Organisation to whom debt owed • Date debt incurred • Date payment is due • How the debt is calculated • Goods services supplied • Ancillary information • e.g. vat and vat number

25. Double entry book keeping Something lost Something gained Cash account balance increases Stock account reduces

27. The Balance Sheet • The accounting equation is the basis of the balance sheet • Shows the net wealth of a business on a particular date. • Snapshot in time • Labilities subtracted from assets - anything remaining is shareholders equity

28. Assets

29. Liabilities

30. Other sources of long term finance

31. Other balance sheet terms

32. Equity = Assets - Liabilities £1000 + = £300 cash+ - £0 £500 £1000 cash taken today+ £200 stall Day Four The company buys a second hand van for £2000 on credit. Equity = Assets - Liabilities £1000 + = £300 cash+ - £2000 £500 £1000 cash taken today+ £200 stall £2000 van So the final equation is: Equity £1500 = Assets £3500 - Liabilities £2000

33. J & J Potts Balance Sheet How would this change if we bought £500 of stock on 30 days credit?

34. J & J Potts Balance Sheet How would this change if we bought £500 of stock on 30 days credit?

35. It is a requirement of the International Financial Reporting Standards (IFRS) that current and non-current assets and liabilities are shown separately. Insurer’s balance sheets are an exception to this rule as we will see later. Note how Total Assets and Total Liabilities and Equity balance. Note that an alternative format for a balance sheet may be used showing net assets – total assets less liabilities.

36. Now it’s your turn to construct a simple balance sheet. Using the entries below, construct a balance sheet for ABC Enterprises at the end of their first year of trading Cash £900 Profit and loss reserve £2700 Corporation tax £3,600 Land £1800 Ordinary shares £1800 Stock £4500 Long-term loan £900 Trade creditors £7,200 Debtors £9,000 If you want feedback, email wolfganghalliwell@outlook.com with your answer

39. The Income Statement (Profit and Loss Account) • Another major financial statement that is included in the annual report • Shows the amount of profit (or loss) made by the business during the last financial year • Profit = Total income – Total Expenses • Note that the Income Statement does include some estimations. Why do you think that this is particularly the case for insurance companies? • Highly sensitive to the money set aside to pay claims

40. Operating profit Definition: ‘The profit earned from a firm's core business operations. It does not include profit earned from the firm's investments (such as earnings from firms in which the company has a partial interest) and the effects of interest and taxes. Also known as earnings before interest and taxes (EBIT).’ Not required by IFRS. However, some companies show this because it is used internally to assess the financial performance of its business units. If shown then IFRS require that the meaning of operating profit is made clear in the financial statements

41. Gross Profit

42. Example Source: http://www.ciihost.co.uk/Study-Texts/GI/M92_Study_text_201819/page_152.html

43. Revenue • Revenue is the total value of all of the sales that the business has invoiced during the period covered by the income statement. • Sometimes referred to as turnover • Does not include VAT Revenue may not be the same as the actual cash received by the business. Why do you think that this is the case?

44. Cost of sales

45. Profit Source: http://www.ciihost.co.uk/Study-Texts/GI/M92_Study_text_201819/page_153.html

46. J&J Pots Ltd Income Statement for Y/E 31 Dec 20XX

47. Source http://www.ciihost.co.uk/Study-Texts/GI/M92_Study_text_201819/page_153.html

48. Now it’s your turn. Produce an income statement for J&J Pots Ltd based on this information. J&J Pots Ltd buy £10,000 pots at £1.50 each. They sell 9,000 pots for £2.75. Jack and Jill are each paid £1000 in wages. Bank interest charges amount to £200. The company also buys insurance for a total cost of £600. They invest some of their capital in shares and receive a dividend of £400. Your income statement is for a 12 month period ending 31 December 2017. If you want feedback, email wolfganghalliwell@outlook.com with your answer

50. Insurance broker accounts • Look a little different but are essentially similar. • Main revenue is commission (brokerage) • Main expenses are running costs • Balance sheet • Main non-current assets will be office equipment and property. • Main current assets will be liquid assets – mainly money in the bank. • Biggest single liability is likely to be premiums owed to insurers. • May be loans to finance the business and provision for liabilities or charges they have to meet (e.g. rent).