Short Essay Questions 1.State laws generally require insurance companies to maintain certain debt and solvency ratios. Those companies who fail to maintain minimum levels, are subject to severe...

Short Essay Questions

1.State laws generally require insurance companies to maintain certain debt and solvency ratios. Those companies who fail to maintain minimum levels, are subject to severe penalties, most often affecting the insurance company’s continuation as a going concern. How may regulatory requirements such as these impact management decisions?

2.A major airline issues frequent flyer credits that allow the passenger to receive credit toward future flights. For every ticket sold the customer receives a credit which, when 40 are collected, can be exchanged for a free ticket. During the year, the airline company recorded revenues of $60 million, which represented 100,000 tickets. The airline did not recognize the flyer credits on its income statement or its balance sheet. In the context of contingent liabilities, comment on the airline’s accounting procedures.

3.What concerns might exist when a company's debt ratio increases?

4.What concerns might management have with additional debt on its balance sheet?

5.What three characteristics should all liabilities that appear on the balance sheet have in common?