CIA Financial Analysis & Reporting 2 — Questions and Answers
Question 1: An insurance appraiser is reviewing a property's income statement. Which metric best represents the property's ability to generate profit after all operating expenses but before interest and taxes?
- Net Income
- EBITDA
- Operating Income (EBIT) (Correct answer)
- Gross Profit
Correct answer: Operating Income (EBIT)
Operating Income (EBIT) measures profitability after operating expenses but before interest and tax deductions, making it the best measure of core operational performance.
Question 2: A commercial property generates $500,000 in gross rental income. After vacancy losses of $25,000 and operating expenses of $175,000, what is the Net Operating Income (NOI)?
- $325,000
- $300,000 (Correct answer)
- $475,000
- $350,000
Correct answer: $300,000
NOI = Gross Income − Vacancy Losses − Operating Expenses = $500,000 − $25,000 − $175,000 = $300,000.
Question 3: When analyzing an insured property's financial statements for a business interruption claim, which document most directly shows daily cash inflows and outflows?
- Balance sheet
- Income statement
- Statement of cash flows (Correct answer)
- Statement of retained earnings
Correct answer: Statement of cash flows
The statement of cash flows directly tracks actual cash inflows and outflows during a period, making it essential for business interruption analysis.
Question 4: A property owner files a loss-of-rents claim. The appraiser finds that comparable properties in the area have a 6% capitalization rate and the property's NOI is $90,000. What is the indicated property value?
- $540,000
- $1,500,000 (Correct answer)
- $900,000
- $1,350,000
Correct answer: $1,500,000
Value = NOI ÷ Cap Rate = $90,000 ÷ 0.06 = $1,500,000.
Question 5: In insurance appraisal, 'accounts receivable coverage' protects a business primarily against which type of loss?
- Customer default on invoices
- Destruction of records making collections uncollectable (Correct answer)
- Employee theft of cash receipts
- Currency fluctuation on foreign receivables
Correct answer: Destruction of records making collections uncollectable
Accounts receivable coverage protects against loss when records are destroyed by a covered peril, preventing the business from proving and collecting amounts owed.
Question 6: Which financial ratio is most useful for an appraiser assessing a manufacturer's ability to meet short-term obligations when inventory is considered illiquid?
- Current ratio
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Return on assets
Correct answer: Quick ratio
The quick ratio (current assets minus inventory, divided by current liabilities) excludes inventory, providing a stricter measure of short-term liquidity.
Question 7: Under US GAAP, how should an insurance company report an incurred but not reported (IBNR) reserve on its balance sheet?
- As a contingent asset
- As a liability in the loss reserve section (Correct answer)
- As a contra-equity account
- As a footnote disclosure only
Correct answer: As a liability in the loss reserve section
IBNR reserves represent estimated future claims obligations and are recorded as liabilities on the insurer's balance sheet under loss reserves.
CIA Financial Analysis & Reporting 2
An insurance appraiser is reviewing a property's income statement.
Which metric best represents the property's ability to generate profit after all operating expenses but before interest and taxes?