CPCU 540 Practice Exam

1. Which of the following represents the use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to business or government agencies?

2. Which one of the following statements is correct regarding the capital needs relating to an insurance company?

3. The National Association of Insurance Commissioners (NAIC) has developed a system to determine the minimum capital required for an insurer to continue its existing operations based on its level of risk. The system developed by the NAIC is the:

4. What is the main reason liability insurers generally have a greater rate of return on their investments than the return received by property insurers?

5. A company’s dividend policy decision considers several factors. Which one of the following factors would most likely cause a company to retain earnings as opposed to paying a dividend?

6. Which one of the following ratios measures the extent to which an insurer can meet its obligations as they come due?

7. The profitability of a company is calculated on which one of the following financial statements?

8. Which one of the following represents the rate of return earned by a bond, adjusted for inflation?

9. In which of the following situations would a company be required to file Form 8-K with the SEC?

10. Which one of the following investments would be best to match an insurer’s investment portfolio maturity to the insurance company’s expected loss payments?

11. A mutual insurance company is owned by:

12. Which one of the following sets of ratios addresses the risk of mismatched cash flow from assets and liabilities?

13. Which one of the following represents a consideration relating to a company’s dividend policy?

14. Which one of the following represents a main goal of corporate finance?

15. A city in California is issuing bonds to build a toll bridge. Interest payments made by the city on the bonds will be payable from the tolls collected from the bridge. Which one of the following types of bonds were issued by the city?

16. A measure of the total rate of return a bondholder will receive if they hold the bond until it is worth its $1,000 par value is referred to as its:

17. Which one of the following statements is correct regarding the A. M. Best rating scale applicable to insurers?

18. The concept of converting a known future value and converting it into a present value is referred to as:

19. Comprehensive income is a measure of income that goes beyond that reported on the income statement by including items such as:

20. Which one of the following ratios is considered an efficiency ratio?

21. Which of the following represents the ratio of a company’s dividends to the company’s earnings?

22. The controller of a corporation is responsible for which of the following functions?

23. Which one of the following statements is correct regarding municipal bonds?

24. A main goal of corporate finance is maximizing shareholder wealth. Which one of the following best describes this goal?

25. A.M. Best’s Financial Strength Rating (FSR) begins with a detailed review of several key rating factors. Which one of the following represents a key rating factor?

26. Under statutory accounting principles, which one of the following would be considered an admitted asset on an insurance company’s balance sheet?

27. If an insurance company changed its financial statements to report items at their fair market value rather than their historical cost, what would be the effect on the company’s balance sheet and income statement?

28. Under the Risk-Based Capital System, which one of the following risks pertains to changes in an asset’s price on an insurer’s balance sheet?

29. Which one of the following bond provisions permits the issuing company to pay off the bond prior to maturity if interest rates fall?

30. Which one of the following best describes the difference between financial statements prepared under generally accepted accounting principles (GAAP) and those prepared using international financial reporting standards (IFRS)?

31. What accounting standards does a publicly-traded property and casualty insurance company follow for its financial statements?

32. A difference between an insurance company’s investment income ratio and its investment yield ratio is that the investment yield ratio:

33. Which one of the following represents a risk that is avoided with zero-coupon bonds?

34. Which one of the following reports is submitted to the SEC on an annual basis?

35. Chuck has determined that there is a 90% chance he will not lose more than $150,000 in one day on his investment. What measure is being used for Chuck’s investment?

36. IMW Insurance Company recently issued bonds to bond investors with the provision that the payment of interest will be suspended in the event of a hurricane. IMW Insurance Company has issued:

37. ABC Insurance has excessive long-term debt as a liability on their balance sheet. When can this be a positive?

38. Which one of the following types of risk best describes the risk of holding an individual security?

39. An insurer experiences an increase in their loss reserves during the year. What impact will this have to the insurer?

40. Which one of the following statements is correct regarding cumulative preferred stock?

41. A company will issue $2,000,000 of bonds, paying a 7% coupon rate. The issue of these bonds will decrease the cost of capital due to the:

42. Which of the following statements is correct regarding the comparison of corporate bonds and Treasury bonds?

43. Where would a premium that is 90 days late in being paid by the insured be reflected on an insurance company’s statutory financial statements?

44. The Risk-Based Capital System was developed by the National Association of Insurance Commissioners (NAIC) for what purpose?

45. Which one of the following statements is correct regarding financial intermediaries?

46. Which one of the following represents a reason why the National Association of Insurance Commissioners (NAIC) requires insurers to produce an Own Risk and Solvency Assessment (ORSA)?

47. Which one of the following items may not be fairly represented on a company’s balance sheet due to the cost principle of accounting?

48. ABC Company reports the value of their office building on their balance sheet at historical cost less depreciation. This is consistent with the GAAP concept of:

49. Asset classes are organized into two broad categories on the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement. These are:

50. Which one of the following is evaluated when A.M. Best is reviewing an insurer’s business profile?

51. Insurtech data storage is enabled by:

52. RonCo recently raised capital by selling their common stock in an initial public offering. They also issued debt securities. After the issue, the stock and debt securities trade in the:

53. KLM Insurance Company had the following information from their most recent financial statements:

• Earned Premiums – $5,800,000
• Written Premiums – $6,000,000
• Underwriting Expenses – $1,100,000
• Incurred Losses and LAE – $5,700,000

What was KLM Insurance Company’s combined ratio?

54. Stayco, a small company, experienced a fire that completely destroyed inventory and current accounting records. A recent report issued by the company immediately before the fire revealed the following:

• Sales – $400,000
• Gross profit percentage – 25%
• Beginning inventory – $50,000
• Additions to inventory during the year – $370,000

What is the amount of their ending inventory destroyed by the fire?

55. A company’s stock experienced the following rates of return:

• Year 1: 10.5%
• Year 2: 18%
• Year 3: 12%
• Year 4: -5% F

or purposes of calculating the variance and standard deviation of the stock, the average return for this stock is:

56. XYZ Company has the following:

• Sales – $400,000
• Cost of Goods Sold – $300,000
• Inventory – $200,000
• Accounts Receivable – $50,000

What is the inventory turnover ratio for XYZ Company?

57. Janice is interested in purchasing preferred stock to add to her investment portfolio. She has identified a preferred stock that pays a $2.50 annual dividend per share. If Janice has an 8% required rate of return on her investment, what would she be willing to pay to purchase one share of the preferred stock?

58. XYZ Company has the following:

• Cash – $300,000
• Marketable Securities – $200,000
• Accounts Receivable – $100,000
• Inventory – $800,000
• Long-term Investments – $2,000,000
• Current Liabilities – $750,000

What is the quick ratio for XYZ Company?

59. An investor currently has an investment in only one stock (Stock A). He would like to build a diversified portfolio to minimize risk and is considering purchasing a second stock (Stock B) and/or buying bonds. Which one of the following would be the best strategy for the investor?

60. An insurance company has historically sold property and casualty insurance but will begin selling liability insurance. How will the sale of liability insurance affect the company’s leverage?

61. ABC Company has the following income and expenses:

• Sales - $400,000
• Cost of Goods Sold – $300,000
• Operating Expenses – $50,000
• Investment Income – $15,000
• Investment Expenses – $12,000
• Income Taxes – $18,000

What is the gross profit for ABC Company?

62. An investor sold his entire portfolio of individual stocks and used the sales proceeds to purchase index funds. Based on this investment strategy, the investor believes in:

63. If a company purchases its own stock as treasury stock, how will this affect the company’s financial statements?

64. Marybeth would like to accumulate $5,000 at the end of 12 months. Assuming she can earn a 5% rate of return on her savings, compounded quarterly, how much does she need to set aside today to achieve her goal?

65. Company X and Company Y both have a return on assets (ROA) of 15%, and they both have the same amount of total assets. However, the net profit margin for Company Y is higher than the net profit margin for Company X. The probable reason for this is because:

66. ABC Company has the following assets and liabilities:

• Cash – $50,000
• Accounts receivable – $125,000
• Inventory – $2,000,000
• Equipment – $15,000,000
• Accounts payable – $1,500,000
• Long-term debt – $8,000,000

What is the amount of working capital for ABC Company?

67. Which one of the following expenses would most likely be the highest on the cash flow statement of a consulting firm?

68. Sitwell Industries has the following information:

• Sales – $30,000
• Cost of Goods Sold – $22,000
• Selling, General, and Administrative Expenses – $6,000
• Income Taxes – $1,000

What is the net profit margin percentage for Sitwell Industries?

69. Which one of the following would result in the highest effective rate?

70. A company issued stock as follows:

• 1,000 shares issued.
• $10 per share issue price.
• $1 per share par value.

What is the amount of Additional Paid-in Capital that will be reported on their balance sheet?