NACVA 5: Quantitative Analysis
2.37 Which of the following is NOT considered a tangible asset?
Patient
4.39 The independent variables in regression analysis can be both quantitative and/or categorical data.
True
4.3 Which is true about the use of financial ratios in business valuation?
a. Strengths and weaknesses will be more easily identified b. Ratios make it easier to compare with other similar businesses d. Both a and b
2.17 Major categories of financial ratios include:
b. Activity ratios c. Performance ratios e. Both b and c
4.9 Most discounted cash flow models generally define net cash flow as:
b. That amount that could be extracted from the business without impairing the present or prospective operations of the business
5.29 When calculating benefit streams, which method utilizes a capitalization rate?
b. Unweighted average c. Weighted average d. Both band C
5.1 A benefit stream is ___________ when the estimated future benefits are expected to grow or decline at a constant rate (for instance grow or decline by 3% per year) .
exponential
1.3 Assuming that Chianti Corp reports Net Income of $5,200 and that its Average Total Equity is $49,000, what is Chianti's Return on Equity?
10.61%
4.27 What is the median of 25, 30, 20, 31, 31, 32, 26 and 28
29
5.43 Which of the following is NOT a component of net cash flows to invested capital?
Deduction for dividends on preference shares
3.10 For purposes of generating an economic income statement, which of the following is true?
Extraordinary and non-recurring items are usually removed from the historical income statements.
2.14 Financial statement audits provide absolute assurance the financial statements contain no material errors or misstatements .
False
4.13 Ratio analysis is a useful tool for business valuations, but it is NOT an integral tool in trend analysis
False
4.19 The law of diminishing marginal returns reflects a situation in which adding more and more of a variable input, such as labor, to a fixed plant results in larger and larger amounts of additional output produced.
False
1.16 Accounts Payable turnover should:
Be calculated by dividing cost of goods sold by the average of beginning and ending accounts payable
2.25 The most conservative ratio in measuring a company's solvency is the:
Cash ratio
2.11 Earnings per share is calculated as:
Net income lass preferred stock dividends divided by the number of common shares outstanding
4.1 AZ-score (or standard score) is the:
Number of standard deviations that a particular value is above the mean of what is being measured
5.41 Which of the following is an example of an economic benefit?
a. A future right measured in dollars b. After-tax earnings c. After-tax future cash flow e. All of the above
4.30 When performing a ratio analysis comparing the subject company to other peer group companies, which ratios are commonly computed?
a. Activity and performance ratios b. Leverage and liquidity ratios c. Return on investment and profitability ratios d. All of the above
4.23 The valuation analyst uses historical performance data in order to:
a. Analyze and compare various years of the company's history b. To identify trends, strengths, and/or weaknesses c. To look for potential adjustments to normalize if adjustments are deemed appropriate d. All of the above
4.43 Analysis of financial ratios is a useful tool in business valuations because:
a. It identifies strengths and weaknesses of the business b. It compares the company's own ratios over time c. It helps to identify risk areas e. All of the above
5.49 "Net cash flow to equity" is also:
a. Net cash flow available to equity owners b. Cash flow available to service interest bearing debt d. Both a and c
3.33 What are the most common normalization adjustments for closely-held companies?
a. Non-recurring items b. Owner compensation c. Depreciation e. All of the above
1.2 A thorough analysis of financial data requires
a. Normalization adjustments lo the financial statements c. and trend analysis and discussion d. Both a and c
3.52 Which of the following is NOT usually one of the adjustments needed to make the subject company and comparable company more similar?
Revenue mix adjustment
4.42 When the sample does NOT represent the target population, the error is called
Sampling error
5.13 If a company has uneven or asymmetric cash flows, which of the following should be used to determine the cash flows?
Simple average
1.10 The flow of capital through the organization for operational, investing, and financing activities is shown on which statement?
Statements of Cash Flows
5.45 Which of the following mistakes would be considered the most obvious when determining future cash flows?
The analyst uses pretax earnings with an after-tax discount rate
5.11 Generally, estimated future benefits are based on historical economic income when
The future benefits are linear in nature
5.18 The type of earnings to use in a valuation will generally depend upon which of the following:
The level of earnings the analyst believes provides the greatest level of stability and reliability
1.8 The Altman Z-Score is a means of predicting:
The likelihood that a business will go bankrupt within the next two years
1.5 Materiality of financial data often means:
The magnitude of an omission or misstatement of facts that, in light of surrounding circumstances, makes it probable that a person who relies on the information would have been influenced by the omission
3.19 A typical search for normalization adjustments would NOT identify:
Unrecorded revenue
1.4 Financial risk is a component of:
Unsystematic risk
4.37 Which of the following methods are used when providing a likely proxy of income using the Capitalization of Earnings Method?
Unweighted average, weighted average, trend line static
2.27 The objectives to be accomplished when adjusting or normalizing historical financial information include all of the following EXCEPT:
Verification on that the historical financial statement data has been entered correctly
3.23 The objectives to be accomplished when adjusting or normalizing historical financial information include all of the following EXCEPT:
Verification that the historical financial statement data has been entered correctly
1.9 The conversion of the balance sheet and income statement line items to percentages based on total assets or total sales is often referred to as
common-size
4.22 The valuation analyst needs historical performance data in order to:
Analyze and compare various years in the company history lo identify trends, strengths, weaknesses, and to look for potential adjustments to normalize if adjustments are necessary and/or deemed appropriate
2.20 The analyst needs historical performance data in order to
Analyze and compare various years in the company history to identify trends, strengths, and weaknesses
2.12 Economic financial statements:
Are necessary to project future earnings
2.1 "Control adjustments" would include the following:
Entries related to perquisites
4.35 Which of the following is generally NOT a category of ratios used to analyze financial statements for M&A valuation purposes?
Equity ratios
5.3 A business value indication produced by focusing on unadjusted financial information and income usually relates to:
A non-controlling interest
3.1 "Normalizing'' financial statement adjustments would include possible adjustments to all of the following EXCEPT
Accounts payable
4.41 When deriving the net working capital and capital spending needs, the following accounts would be typical elements in the working capital analysis
Accounts receivable, inventory, and prepaid expenses
3.17 Nearly every valuation requires normalization adjustments to
Adjust for transactions of a non-recurring, non-operational, or non-market nature
3.11 A company purchases a new operating press costing $300,000 and elects Section 179 depreciation for this piece of equipment. An appropriate normalization adjustment would be:
Adjust the income statement to add back the Section 179 depreciation and adjust the balance sheet to reflect the Fair Market Value of the asset
3.58 When making adjustments to corporate income taxes for the increases or decreases in income due to other normalizing adjustments, you should use the
Company's actual tax rate
3.2 A pending lawsuit, unrecorded pension liabilities, and capital gains tax on unrealized appreciation of assets are what type of normalized adjustments?
Contingent liability adjustments
3.9 Current assets divided by current liabilities calculates:
Current ratio
4.31 Which of the following are a liquidity ratio?
Current ratio and quick ratio
3.26 The term "excess cash" includes all of the following EXCEPT:
Excess cash is generally that amount that is segregated and allocated to a sinking fund.
4.16 RMA's "Annual Statement Studies" are most appropriate for analyzing which of the following:
Financial ratios
2.23 The formula for calculating operating margin percentage is
Income from operations divided by net sales
4.26 Risk Management Association Industry Ratios is a good source for what?
Industry average operating ratios and trends
5.38 Which of the following elements are added to pre-tax net income in the discretionary earnings calculation (assuming all are applicable in the enterprise you are valuing)?
Interest
5.25 Value equals the benefit stream divided by a required rate of return is an example of what principle?
Investments value principle
4.15 Ratio analysis requires the use of industry data because:
It is useful to compare the subject company's ratios with the ratios of other entities in the same industry
1.15 Which of the following is NOT true about a company's debt to equity ratio?
It's a good indicator of fiscal responsibility
3.34 What is the best way to determine if a normalizing adjustment should be made to accounts receivable?
Look at accounts receivable aging
5.23 Total Invested Capital (TIC) is defined as
Markel value of equity plus market value of debt
3.49 Which of the following is NOT a type of adjustment commonly made to historical financial statements?
Marketability adjustments
2.26 The net profit margin may be the most basic profitability ratio that measures how much:
Percentage of each revenue dollar the company is able to retain
2.24 The formula to calculate the percentage growth in sales is:
Period 2 net sales less period 1 net sales divided by period 1 net sates
4.5 For a set of data, the mean is $44.50, median $44.20, and mode $40, the distribution of this data is:
Positively skewed
4.10 Normalized financial statements should allow the valuator to:
Present a financial picture which represents market values
5.36 Which capitalization or discount rate should be used to capitalize net income before taxes?
Pretax net income capitalization rate
4.28 When forecasting cash flows, which of the following is LEAST likely to be considered by the analyst?
Prior accounting method changes
3.15 In the course of a business valuation. the valuator most often will obtain an independent tangible asset appraisal on:
Real estate
4.24 The Altman Z-Score analysis:
Tests the probable prospects of future insolvency
3.5 An economic-adjusted balance sheet would reflect which of the following items listed:
The Fair Market Value of any intangible assets
3.50 Which of the following is NOT considered a factor that ultimately contributes to value?
The ratio trend analysis showed that the company's inventory turnover increased from four to five in the current year
3.12 In a closely-held business, it is not unusual to find a debt to the owner (sometimes even repaid by the owner to the business) to build a personal house:
This is best treated as a dividend to the owner and outside of earnings
4.6 If cash flow is expected to grow in perpetuity at a consistent growth rate, the model most commonly used would be
The single-period model using only a capitalization rate
4.32 Which of the following criteria is used to determine the future benefit stream?
The type of benefits that will be used as a measurement of economic income
1. 7 The "amortization benefit" relates to
The value created from recognizing amortization expense on intangible assets for tax purposes
2.30 What is the purpose of dividing the inventory turnover ratio by 365?
To determine the number of days it takes to convert the inventory into cash
4.38 Which of the following is considered a financial leverage ratio?
Total liabilities/Total assets
2.16 Generally Accepted Accounting Principles (GAAP) prescribes the way transactions are to be recorded with the purpose being to make the financial statements of one company comparable to another.
True
2.9 Capitalized leases are assets which have the character of a purchased asset and are recorded based on the premise of substance over form.
True
3.29 Two most commonly used methods to estimate future benefits based on a linear benefit stream are:
Weighted Average Method and Unweighted Average Method
4.34 Which of the following is a type of sampling method?
a. Probabilistic b. Systematic c. Stratified d. Cluster e. All of the above
3.61 Given there is a reasonable foundation for each, which of the financial statement adjustments below would be the LEAST appropriate when valuing a non-controlling interest in a business using the Fair Market Value standard?
b. Adjustments for excess owner's compensation
5.6 An acceptable benefit stream to use in the application of the income approach in valuing a closely-held business is:
b. Cash flows c. Net income after-tax e. Both b and c
4.21 The sales growth rate:
b. Measures the change in company sales for two different periods c. Is used to indicate positive or negative earnings growth Both b and c
2.21 The following is an inherent barrier to generating economic financial statements
b. time consuming c. Information needed is not always available e. Both b and c
2.7 After making the "normalization adjustments" by removing the interest expense related to a firm's indebtedness, we can prepare a forecast on a ________ or _______ basis.
debt-free; invested capital
4.18 The correlation coefficient ranges between what values?
-1 and +1
1.14 Assuming that Chianti Corp reported annual sales of$100,000, Cost of Goods sold of $65,000, its Average Receivables are $5,600, its Average Inventories is $3,800, and its Average Payables are $5,700 What is Chianti's Inventory Turnover? Average Inventory Processing Period?
17.11, 21.3
2.10 Chianti Corp reports the following items in their Balance Sheet: $70,000 fixed assets, $3,500 cash, $1,200 short-term marketable securities, $4,500 in accounts receivables, $6,000 in inventories, $1,000 in prepaid expenses, $4,000 accounts payable, and $2,100 in current notes payable. What is Chianti Carp's Current Ratio?
2.65
4.4 Company X has a five-year weighted average income of $15,000,000 The weighted average shares outstanding were 1,000,000, which are currently selling for $75.00 per share. The weighted average price/earnings (P/E) ratio is which of the following:
5
2.15 For the purpose of developing a trend analysis, how many years of historical financial statements are recommended to be used?
5 years
4.20 The preferred time period covered by a ratio analysis is
5 years or more
3.56 Which of the following statements describes a trend analysis?
A trend analysis is a way of analyzing financial statements by presenting dollar value or common-size items relative to a base-year amount and examining the change in items over time.
3.24 The requirements for adjusted or normalized financial statement information include all of the following EXCEPT
Adjusted financial statements must be normalized by using average industry ratios.
2.41 The formula to calculate the cost of sales/sales ratio is:
C. Cost of sales divided by sales
3.39 When making normalization adjustments, an adjustment made to a balance sheet item:
C. Could, but does not always require, a corresponding adjustment to either an income statement item or balance sheet item
4.11 Of the following sources of industry operating ratios, which, if any, use s information compiled from tax returns?
CCH's Almanac of Business and Industrial Financial Ratios
2.28 Under IRC Code Section 1060; assets class #1 includes:
Cash and cash equivalents
3.47 Which of the following is NOT a frequently made adjustment when generating economic financial statements?
Cash value
1.1 A step in the valuation process is to perform a financial review and analysis. All of the following are considered critical to the financial review and analysis EXCEPT
Customer and product mix analysis
4.17 The acid test ratio
Determines yield on investment
3.43 Which of the following are control adjustments?
Discretionary spending and officers' compensations
4.25 To calculate inventory turnover:
Divide the cost of goods sold by the sum of beginning inventory and ending inventory divided by two
3.25 The Selection allows a shareholder to avoid which individual level tax?
Dividend tax
3.45 Which of the following are typical categories to review in normalizing accounts for a valuation?
Doubtful accounts, notes receivable, leases, and taxes
5.12 Given the following measures of calculating profitability, which should be a denominator when the market value of invested capital is the numerator in determining a multiple?
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
2.38 Which of the following provides actual company documents (10-Ks, etc.) for publicly traded guideline companies?
Edga
2.35 Which of the following is a Generally Accepted Accounting Principle (GAAP) that potentially does not distort true economic value?
Fair value reporting
1.12 When an analyst is able to obtain audited Generally Accepted Accounting Principle (GAAP) compliance financial statements, normalizing adjustments will NOT be necessary because of the high level of confidence placed on these financial statements.
False
2.40 The definition of the internal rate, of return is a rate of return added to a risk free rate 10 reflect the additional risk of equity instruments over risk free instruments.
False
2.5 A key Generally Accepted Accounting Principle (GAAP) assumption is, if it looks as if an entity will survive and the values placed on the assets will be realized, it is a going concern .
False
2.6 A requirement of economic financial statements is that they must conform to Generally Accepted Accounting Principles (GAAP) .
False
3.13 In all valuations the analyst should adjust the financial statements in order to derive an accurate benefit stream
False
3.14 In analyzing and adjusting historical financial statements, when an adjustment is made to a balance sheet item, there is NEVER a need to make a corresponding adjustment to the income statement.
False
3.18 Normalizing adjustments to the subject company's financial statements are NOT necessary when applying the market approach using guideline companies.
False
3.3 All normalizing adjustments made to the income statement will have a corresponding adjustment to the balance sheet
False
3.30 Typically, economic adjustments do NOT need to be made to the financial statements of a company being valued.
False
3.36 When a valuator is able to obtain audited Generally Accepted Accounting Principles (GAAP) compliance financial statements, most likely, normalized adjustments will NOT be necessary because of the high level of confidence placed on these issued financial statements.
False
3.40 When normalizing the income of a pass-through entity such as a proprietorship, partnership, or S corporation, a required step in the valuation process is to adjust for applicable federal and state income taxes.
False
3.57 A linear benefit stream is a stream of future benefits that is expected to grow or decline at a variable rate.
False
3.59 Tax methods of depreciation are always the most appropriate methods to use for economic financial statement purposes.
False
4.8 In general, when referring to data that are normally distributed, one standard deviation from either side of the mean contains about 95% of the observations.
False
5.15 Projected net cash flow normally represents the amount needed to sustain operations in the future.
False
3.46 Which of the following is a typical extraordinary or non-recurring item that should always be excluded when generating economic income statements?
Gain or loss on sale of fixed assets
2.36 Which of the following is an extraordinary or non-recurring item that should be adjusted when generating economic income statements?
Gain or loss on sale of fixed assets if not routine transactions
4.36 Which of the following is NOT true when using historical data to value a business?
Historical data always perfectly predicts the future.
5.9 Fill in the blank: ______________ is equal to the market value of all interest-bearing debt and the market value of all equity, where interest-bearing debt includes short and long-term notes payable, all long-term debt and capital lease obligations, and equity includes preferred stock, common stock, and non-controlling interests.
Market value of invested capital
3.44 Which of the following are generally non-operating assets?
Marketable securities held for investment
5.44 Which of the following is the most preferred measure of economic income to use with a cost of capital analysis?
Net cash flow
5.5 After-tax net income + non-cash charges - capital expenditures - additions to net working capital +/- changes in long-term debt. The preceding formula represents:
Net cash flow to equity
5.10 For most valuation purposes, the preferred economic income measure is:
Net cash flow to equity or net cash flow to invested capital
5.32 When placing a value on a company, which of the following is the most preferred measure of economic income to use in conjunction with the company's weighted average cost of capital?
Net cash flow to invested capital
5.4 After-tax net income + non-cash charges - capital expenditures - additions to net working capital + after tax interest expense. The preceding formula represents:
Net cash flow to invested capital
5.35 When using the income approach to estimate value, what is often the preferred measure of earnings?
Net cash flows
5.19 The type of earnings used with the Price to Earnings Ratio Method is:
Net income after tax
5.16 The factors the analyst should review in order to define the benefit stream (future income) potential of a company include:
Net income after-tax plus non-cash charges, less applicable capital expenditures, less additions to net working capital to support operations plus changes in long-term debt from borrowings required for operations less changes in long-term debt for repayments
2.19 Return on assets is calculated as:
Net income divided by one-half of the sum of the total assets at the beginning of the period and the total assets at the end of the period
2.22 The formula for calculating gross margin percentage is:
Net sales less cost of sales divided by net sales
3.41 When would it NOT be appropriate to analyze a subject company's financial statements in order to identify areas for potential normalization adjustments?
None of the above
3.48 Which of the following is NOT a normalization adjustment for a closely-held business?
None of the above
5.14 Projected earnings are often used to estimate future income when:
None of the above
5.42 Which of the following is NOT a benefit used as a measurement of economic income?
None of the above
5.8 Estimated future benefits generally should be based on historical economic income when:
None of the above
2.2 "Normalizing adjustments" fall into the following three distinct categories
Nonrecurring, extraordinary, excess
3.4 All of the following are examples of normalization adjustments EXCEPT
Normal charges related to the company's annual corporate retreat
3.27 The valuation analyst should:
Normalize data for the subject company and the guideline companies
2.31 What type of ratios may a valuator use to evaluate management performance?
Operating profitability ratios
5.40 Which of the following financial variables is usually considered most relevant when performing a valuation?
Profitability
4.12 Of the following sources of information, which source provides data which can be specifically compared to the subject company?
RMA
4.33 Which of the following databases contain composite financial data supplied solely by financial institutions?
RMA
3.35 What is the technical term for the effective tool used to assist the valuation analyst in answering questions related to the subject company that include how well the company is doing, what are its strengths, and what are its weaknesses?
Ratio analysis
3.51 Which of the following is NOT normally one of the most common adjustments needed for the subject company and comparable company to make them more similar?
Revenue mix adjustment
3.38 When financial information is not adjusted, it is typically considered to represent which of the following:
The book value of a business
4.7 If net income is up and earnings per share have remained constant, which of the following is the likely explanation?
The company issued more shares of stock or stock equivalents during the year.
3.54 Which of the following scenarios is the most likely to require normalizing occupancy costs?
The company owns its own facility and does not pay rent.
5.39 Which of the following factors is noted in Revenue Ruling 59-60 as being "fundamental and require careful analysis in each case?"
The company's dividend-paying capacity
4.29 When performing a comparative analysis of the subject company to other companies, which of the following would NOT be an important factor for the comparison to be meaningful?
The comparable companies must have the same number of owners.
5.46 Which of the following statements is true regarding the use of the mid-year convention of discounting or capitalizing cash flow?
The use of mid-year convention recognizes cash flows received throughout the year and results in a higher present value than the year-end convention.
5.24 Using a Weighted Average Method to determine future benefits, a valuator assigns more weight to the most recent years. This indicates:
The valuator has determined that the most recent years are more indicative of the company's expected future performance
3.60 What is the purpose of "financial leverage ratios?"
These ratios are designed to measure the firm's long-term ability to meet its financial obligations and more generally its solvency
1.13 When using the Discounted Future Earnings Method, what is the commonly used and accepted number of periods to forecast the earnings base?
Three to five years
3.22 The main objective for adjusting the financial statements of a closely-held company is:
To adjust the financial statements of a business to more closely reflect its true economic financial position and results of operations on a historical and current basis
2.3 A company can achieve a lower tax liability during periods of inflation by charging more cost against income under a last in first out (LIFO) method of inventory costing
True
2.4 A company's 10-K filed with the Securities and Exchange Commission (SEC) presents the same financial statement data as found in its annual report, but the annual report provides company-specific information not found in a 10-K.
True
3.16 It would be appropriate for a valuator, when adjusting assets to their fair market value, to also make an adjustment for the liability resulting from a built-in capital gains tax.
True
3.21 The Guideline Company Valuation Method calls for the guideline company financials as well as the subject company's financials to be analyzed and adjusted for any needed normalizing adjustments.
True
3.28 To reach an accurate value conclusion, an independent appraisal of tangible assets is often necessary.
True
3.31 Using a tax basis of accounting in generating financial statements often results in a distorted picture of economic reality
True
3.32 When determining future cash flows the analyst must always consider the effects of annual economic growth.
True
3.7 Compensation of owners/managers is one of the most often encountered adjustments when generating economic income statements.
True
4.40 The standard deviation is the square root of the variance.
True
5.20 The valuation analyst should consider both trend analysis and industry data when determining the overall risk of the subject company.
True
3.6 Another name for "asset specific" or "company specific" risk is:
Unsystematic risk
5.27 What is the most appropriate metric to use for calculating future earnings where there appears to be a historical pattern or trend that is expected to continue into the future?
Unweighted average
5.37 Which method of estimating expected future earnings is calculated by taking the sum of a set of values, and dividing the sum by the number of values used in deriving the sum? (Sum of Variables/Number of Variables)
Unweighted average
5.17 The simplest earnings stream to calculate when capitalizing earnings would be the
Unweighted average historical net earnings
5.21 Three commonly used methods to estimate future earnings in a closely-held business are:
Unweighted average, weighted average, and trend-line projection
4.2 After the historical financial statements have been adjusted for economic or normalizing items, the analyst should begin a thorough financial analysis of the adjusted financial statement data. Such analysis helps to identify all of the following trends EXCEPT:
What are the current and future management needs
2.32 When would the valuator most likely NOT adjust excess compensation paid to a key employee?
When the employee has a controlling interest and the valuator is valuing a non-controlling interest where no control over compensation levels exists
5.33 When should a company's earnings be considered for use in measuring economic income?
When the valuator expects that the future earnings will approximate the future net cash flows
5.47 Which statement is correct when earnings are selected as the type of benefits used to measure economic cash flows?
When using earnings as the benefit stream, the analyst must have determined and documented that the future earnings and net cash flow are approximately the same.
1.11 The sales to working capital ratio:
Will often highlight trends missed by the current and quick ratios
2.42 The debt to equity ratio:
Will show if management has judiciously balanced profit and risk
5.2 A benefit stream that can be analyzed in valuing a closely-held business is:
a. Cash flows b. Net income after tax c. Income from operations d. All of the above
5.22 To value equity, which of the following items are included in the cash flow-to-equity calculation?
a. Changes in long-term debt b. Non-cash charges c. Adjustments to net working capital e. All of the above
3.20 The following is an area that is often considered for an adjustment when generating normalized financial statements
a. Depreciation on fixed assets b. Allowance for doubtful accounts inventory variation c. Inventory valuation e. All of the above
3.8 Control adjustments may include:
a. Elimination of operational inefficiencies and excess costs b. An adjustment to owners· compensation and perquisites c. Changes in capital structure e. All of the above
5.30 When computing a market value of invested capital (MVIC) multiple, generally all interest bearing debt is added to the market value of equity because:
a. Excluding short-term debt in the MVIC numerator and including the interest income on it in the denominator distorts the multiple b. It is often difficult to distinguish between short-term and long-term debt on comparable company financial statements c. Many companies (especially small companies) treat short-term debt as a revolving line of credit e. All of the above
2.18 Ratio analysis helps the analyst in addressing basic questions about a business including:
a. Identifying performance levels of the company b. How well the company is doing c. Identifying strengths and weaknesses of the company d. All of the above
3.42 Which of the following are common types of normalization adjustments in arriving at economic financial statements?
a. Income or expenses related to non-operating assets b. Excess officers' compensation c. Non-business expenses e. All of the above
2.33 Which financial statement is most important for valuations used for M&A purposes?
a. Income statement b. Statement of cash flows c. Balance sheet d. All of the above
3.37 When adjusting for reasonable compensation of owners/managers, information can be obtained from:
a. Industry and trade associations b. Employment agencies c. Risk Management Associates (RMA) e. All of the above
5.34 When using an invested capital benefit stream, which of the following items are included in the cash flow-to-invested capital calculation?
a. Interest expense net of the tax benefit resulting from interest as a tax deductible expense b. Adjustments to net working capital necessary to support projected operations c. Capital expenditures necessary to support projected operations d. All of the above
4.14 Ratio analysis is important for the analysis of
a. Leverage and profitability b. Liquidity and leverage c. Liquidity and profitability e. All of the above
5.48 In valuing a company based on its invested capital (rather than its equity), which of the following adjustments are necessary to reconcile net income to net cash flow?
a. Non-cash charges b. Adjustments to net working capital e. Both a and b
5.26 What factors should be considered when evaluating the reasonableness of a projected future benefit stream?
a. Non-controlling or control ownership b. Reliability of underlying assumptions c. Management ability and experience d. All of the above
3.53 Which of the following may be adjusted to arrive at economic financial statements?
a. Owner's compensation b. Inventory c. Depreciation d. All of the above
5.28 When a company's earnings show no apparent pattern of repeating, either upward or downward, the following method(s) to use to project earnings to capitalize would be
a. Projected Growth Rate in Earnings Method b. Weighted Average Earnings Method c. Trend-Line Method d. All of the above
2.29 Value can be based on Generally Accepted Accounting Principles (GAAP) or Tax Basis Accounting (TBA), but neither may be economic reality for which of the following reasons:
a. Some business owners will choose to take an aggressive approach to financial reporting, while others will lean toward conservatism b. Tax basis accounting is used to save/minimize payment of taxes, not to account for value c. Fixed assets are reported with GAAP on a cost basis, which does not reflect current market value d. All of the above
2.8 Basic economic statements, which may be included in a valuation report, include:
a. Statement of adjusted net cash flows b. Income statement c. Balance sheet d. All of the above
2.34 Which item(s) represent potential problems for a valuator when using financial statement information of closely-held businesses?
a. Tax avoidance motivations b. Relatively weak recordkeeping and bookkeeping controls c. Personal expenses intermingled d. All of the above
2.39 Which of the following statements is true in defining Capitalized Leases?
a. They are leased assets characterized as purchased assets b. They are recorded based on the premise of substance over form d. Both a and b
1.6 Ratio and trend analyses are essential to evaluate small businesses because:
a. They provide a basis for comparison across accounting periods within the current business b. They provide comparative information for comparison to other like companies c. The analyses provide an understanding oi the relationship of the subject to the industry as a whole d. All of the above
5.7 An analyst should know whether he or she is using a pretax or after-tax income stream for which of the following reasons:
a. To properly calculate the discount or capitalization rate b. To adjust and appropriately match market transaction information c. To apply the correct capitalization rate to the benefit stream e. All of the above
2.13 Economic/normalized historical income s1atements are established for what main purpose(s)?
a. To provide Ille analyst information for making comparisons b. To assist the analyst in making projections about future benefit streams c. All of the above
3.55 Which of the following should be taken into account when normalizing a balance sheet?
a. Unfunded pension, vacation, sick leave expenses b. Compliance with regulatory requirements c. Liability for products sold d. All of the above
5.31 When is it best to value a company based on projected financial information?
a. When the company is an emerging business b. When company management has forecasted or can reasonably estimate projected earnings c. When there is a lack of reliable historical data e. All of the above
