CPCU 540 Final Practice Exam Questions
With Correct Detailed Answers
1. Sean owns a retail men's clothing store. After a recent fire, the insurance adjuster requested copies of the
store's most recent financial statements. The adjuster is more likely to use the statements to - CORRECT
ANSWER ✔ - Estimate the inventory on hand at the date of the loss
2. Why is it so important for a corporation to adopt a code of ethics? - CORRECT ANSWER ✔ - A code of ethics
provides a means of actively managing ethics in the workplace
3. Current Assets include - CORRECT ANSWER ✔ - Inventory
4. When accountants are able to ignore GAAP when recording some insignificant items, they are following
the - CORRECT ANSWER ✔ - Materiality principle
5. Which one of the following best explains how unrealized capital gains have a significant effect on a
company's business operations? - CORRECT ANSWER ✔ - They are a part of the company's economic
income and affect the company's net worth
6. The four primary types of financial statements include the balance sheet, the statement of changes in
shareholders' equity, the statement of cash flows, and the - CORRECT ANSWER ✔ - Income Statement
7. Home Housewares, Inc. is a retail store applying for commercial coverage with ABC Insurance. The
underwriter requested a copy of Home Houseware's more recent financial statements. The underwriter
will use the balance sheet to determine - CORRECT ANSWER ✔ - Home Housewares financial position as of
the balance sheet date
8. The FASB requires organizations to report comprehensive income. Comprehensive income includes an
organization's net income and - CORRECT ANSWER ✔ - Unrealized gains on securities available for sale
pg. 1
CPCU 540
©®
, 9. Which one of the following describes a section of the statement of cash flows? - CORRECT ANSWER ✔ -
Cash flows from operating activities
10. An insurer's balance sheet lists unearned premium as - CORRECT ANSWER ✔ - Liabilities
11. On an insurer's balance sheet, incurred but not reported (IBNR) losses are - CORRECT ANSWER ✔ - A
category of reserves
12. CES Brokers is considering purchasing several shares of Tylo Industries to diversify their investment
portfolio. Prior to the purchase, CES would like detailed information on long-term debt issued by Tylo that
is nearing maturity. CES should look for this information in the - CORRECT ANSWER ✔ - Notes to the
financial statements
13. Publicly traded companies must file a Form 10-K annually with the SEC. Which one of the following best
describes the information contained in the 10-K - CORRECT ANSWER ✔ - It is similar to the annual report
but contains more detailed information about the company
14. When evaluating the price of equities, the stock market relies on which one of the following that is not
assigned a value on the financial statements? - CORRECT ANSWER ✔ - The entity's reputation int he
marketplace
15. Morgan Taylor is Vice President of Underwriting with Solid Rock Insurance Company. The president of her
company announced that he wants to reduce expenses and will meet with the vice presidents of each
area. In preparation for her meeting with the president, Morgan calculated two ratios for the last five
years. First, she calculated underwriting expenses as a percentage of direct premiums written. Second, she
divided direct premiums written by the number of underwriters. Over the last five years, underwriting
expenses as a percentage of direct premiums written have declined, while the direct premiums written per
underwriter has increased. The type of analysis Morgan performed is called - CORRECT ANSWER ✔ - Trend
Analysis
16. Which one of the following statements about vertical analysis based on common-size statements is true? -
CORRECT ANSWER ✔ - Its focus is on the relative size of each reported item to a common item for each
year considered
pg. 2
CPCU 540
©®
, 17. Which one of the following is an example of an efficiency ratio? - CORRECT ANSWER ✔ - Accounts
receivable turnover ratio
18. In financial statement analysis, leverage ratios measure which one of the following? - CORRECT ANSWER ✔
- The extent to which a company has borrowed money
19. An underwriter is conducting ratio analysis and determines that a company has a current ratio of 1.2.
Which one of the following adjustments to the calculation should the underwriter make to ensure that the
company is able to meet its short-term obligations - CORRECT ANSWER ✔ - Subtract the company's
inventory from the calculation
20. An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the
company has $8 million in sales, $5 million in gross profit, and $2 million in net income. Which one of the
following conclusions can the underwriter reach by calculating the company's net profit margin? -
CORRECT ANSWER ✔ - 25% of the company's sales is left after all expenses are paid
21. The role of PHS is to - CORRECT ANSWER ✔ - Provide a cushion to ensure the insurer has enough resources
to meet obligations to its policyholders
22. Which one of the following statements concerning insurer financial relationships is true? - CORRECT
ANSWER ✔ - Immediately recognizing policy acquisition costs while deferring recognition of the associated
revenue causes surplus to decrease
23. The largest asset for many insurance companies is their investment in bonds. Under SAP, how is a bond
valued on an insurance company's balance sheet? - CORRECT ANSWER ✔ - At the bond's amortized cost
24. Which one of the following statements about various schedules to the NAIC Annual Statement is true? -
CORRECT ANSWER ✔ - Schedule F provides information about the insurer's reinsurance arrangements,
including reinsurance assumed and reinsurance ceded
25. When premiums earned during any specific accounting period are less than incurred losses plus
underwriting expenses there will be an - CORRECT ANSWER ✔ - Underwriting loss
pg. 3
CPCU 540
©®
With Correct Detailed Answers
1. Sean owns a retail men's clothing store. After a recent fire, the insurance adjuster requested copies of the
store's most recent financial statements. The adjuster is more likely to use the statements to - CORRECT
ANSWER ✔ - Estimate the inventory on hand at the date of the loss
2. Why is it so important for a corporation to adopt a code of ethics? - CORRECT ANSWER ✔ - A code of ethics
provides a means of actively managing ethics in the workplace
3. Current Assets include - CORRECT ANSWER ✔ - Inventory
4. When accountants are able to ignore GAAP when recording some insignificant items, they are following
the - CORRECT ANSWER ✔ - Materiality principle
5. Which one of the following best explains how unrealized capital gains have a significant effect on a
company's business operations? - CORRECT ANSWER ✔ - They are a part of the company's economic
income and affect the company's net worth
6. The four primary types of financial statements include the balance sheet, the statement of changes in
shareholders' equity, the statement of cash flows, and the - CORRECT ANSWER ✔ - Income Statement
7. Home Housewares, Inc. is a retail store applying for commercial coverage with ABC Insurance. The
underwriter requested a copy of Home Houseware's more recent financial statements. The underwriter
will use the balance sheet to determine - CORRECT ANSWER ✔ - Home Housewares financial position as of
the balance sheet date
8. The FASB requires organizations to report comprehensive income. Comprehensive income includes an
organization's net income and - CORRECT ANSWER ✔ - Unrealized gains on securities available for sale
pg. 1
CPCU 540
©®
, 9. Which one of the following describes a section of the statement of cash flows? - CORRECT ANSWER ✔ -
Cash flows from operating activities
10. An insurer's balance sheet lists unearned premium as - CORRECT ANSWER ✔ - Liabilities
11. On an insurer's balance sheet, incurred but not reported (IBNR) losses are - CORRECT ANSWER ✔ - A
category of reserves
12. CES Brokers is considering purchasing several shares of Tylo Industries to diversify their investment
portfolio. Prior to the purchase, CES would like detailed information on long-term debt issued by Tylo that
is nearing maturity. CES should look for this information in the - CORRECT ANSWER ✔ - Notes to the
financial statements
13. Publicly traded companies must file a Form 10-K annually with the SEC. Which one of the following best
describes the information contained in the 10-K - CORRECT ANSWER ✔ - It is similar to the annual report
but contains more detailed information about the company
14. When evaluating the price of equities, the stock market relies on which one of the following that is not
assigned a value on the financial statements? - CORRECT ANSWER ✔ - The entity's reputation int he
marketplace
15. Morgan Taylor is Vice President of Underwriting with Solid Rock Insurance Company. The president of her
company announced that he wants to reduce expenses and will meet with the vice presidents of each
area. In preparation for her meeting with the president, Morgan calculated two ratios for the last five
years. First, she calculated underwriting expenses as a percentage of direct premiums written. Second, she
divided direct premiums written by the number of underwriters. Over the last five years, underwriting
expenses as a percentage of direct premiums written have declined, while the direct premiums written per
underwriter has increased. The type of analysis Morgan performed is called - CORRECT ANSWER ✔ - Trend
Analysis
16. Which one of the following statements about vertical analysis based on common-size statements is true? -
CORRECT ANSWER ✔ - Its focus is on the relative size of each reported item to a common item for each
year considered
pg. 2
CPCU 540
©®
, 17. Which one of the following is an example of an efficiency ratio? - CORRECT ANSWER ✔ - Accounts
receivable turnover ratio
18. In financial statement analysis, leverage ratios measure which one of the following? - CORRECT ANSWER ✔
- The extent to which a company has borrowed money
19. An underwriter is conducting ratio analysis and determines that a company has a current ratio of 1.2.
Which one of the following adjustments to the calculation should the underwriter make to ensure that the
company is able to meet its short-term obligations - CORRECT ANSWER ✔ - Subtract the company's
inventory from the calculation
20. An underwriter is attempting to conduct ratio analysis on a company. The underwriter notices that the
company has $8 million in sales, $5 million in gross profit, and $2 million in net income. Which one of the
following conclusions can the underwriter reach by calculating the company's net profit margin? -
CORRECT ANSWER ✔ - 25% of the company's sales is left after all expenses are paid
21. The role of PHS is to - CORRECT ANSWER ✔ - Provide a cushion to ensure the insurer has enough resources
to meet obligations to its policyholders
22. Which one of the following statements concerning insurer financial relationships is true? - CORRECT
ANSWER ✔ - Immediately recognizing policy acquisition costs while deferring recognition of the associated
revenue causes surplus to decrease
23. The largest asset for many insurance companies is their investment in bonds. Under SAP, how is a bond
valued on an insurance company's balance sheet? - CORRECT ANSWER ✔ - At the bond's amortized cost
24. Which one of the following statements about various schedules to the NAIC Annual Statement is true? -
CORRECT ANSWER ✔ - Schedule F provides information about the insurer's reinsurance arrangements,
including reinsurance assumed and reinsurance ceded
25. When premiums earned during any specific accounting period are less than incurred losses plus
underwriting expenses there will be an - CORRECT ANSWER ✔ - Underwriting loss
pg. 3
CPCU 540
©®
