Financial Analysis & Reporting Flashcards

An appraiser is valuing a specialty machine with no active resale market. Which valuation approach is most appropriate?

Answer: Cost approach based on reproduction cost less depreciation

For specialty equipment with no comparable market, the cost approach — reproduction or replacement cost new less all forms of depreciation — provides the most reliable value indicator.

Which type of depreciation reflects a loss in value due to external factors outside the property itself, such as neighborhood decline or zoning changes?

Answer: Economic (external) obsolescence

Economic obsolescence arises from external forces beyond the property owner's control and is generally incurable because the owner cannot eliminate the external condition.

A business files a claim for loss of business income. The policy has a 72-hour waiting period (deductible). The restoration period lasts 30 days. For how many days is the insured compensated?

Answer: 27 days

The 72-hour (3-day) waiting period acts as a time deductible; the insured is compensated for 30 − 3 = 27 days.

Under GAAP, insurance companies are required to maintain which type of reserves to cover the estimated cost of settling all claims that have occurred but not yet been paid?

Answer: Loss and loss adjustment expense (LAE) reserves

Loss and LAE reserves represent the insurer's best estimate of future payments for all incurred claims, including allocated and unallocated adjustment expenses.

An insured submits financial records showing $2,000,000 in annual revenue. After applying a 40% variable cost ratio and deducting $300,000 in fixed costs, what is the business income (gross profit available to cover fixed charges)?

Answer: $900,000

Business income = Revenue × (1 − Variable Cost %) − Fixed Costs = $2,000,000 × 0.60 − $300,000 = $1,200,000 − $300,000 = $900,000.

When reviewing financial statements for potential fraud in a large property damage claim, which analytical technique compares each line item as a percentage of a base figure within the same period?

Answer: Vertical (common-size) analysis

Vertical analysis expresses each financial statement line as a percentage of a base (e.g., total revenue or total assets), making it easy to spot anomalous proportions within a single period.

An appraiser reviewing a manufacturer's claim discovers that the company uses LIFO inventory accounting. During a period of rising prices, LIFO results in:

Answer: Lower ending inventory values and lower net income compared to FIFO

Under LIFO in a rising price environment, the most recently purchased (higher-cost) items are expensed first, resulting in higher COGS, lower net income, and lower ending inventory values than FIFO.