Financial Statements Test 1 Review Questions
Assuming a discount rate of 10%, which of the following has the highest cash value?
$85,000 cash purchase ($125,000 purchase financed over 5 years, $150,000 purchase financed over 7 years, $200,000 purchase financed over 10 years)
Which of the following is a disadvantage of a CPA who performs business valuations?*
Accountants are used to working with financial statements and concepts that are either GAAP-oriented or tax-oriented
Which of the following statements is true in regard to fair value?
Applicable to minority blocks
A member's independence may be impaired in a valuation engagement for which of the following clients?
Attest client
Which of the following is not a group that generally performs business valuation services?
Attorneys (accountants, college professors, investment bankers)
If valuation services are performed for a client whom the valuation analysts firm also performs attest services, the valuation analyst should consult with which AICPA Professional Standard to ensure compliance?
ET section 1.200.001 -- Independence Rule
In most states, which standard of value is used to value stockholder disputes?
Fair Market
"The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts" is a common definition of:
Fair market value
Which standard of value applies to all federal tax valuations?
Fair market value
"The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date" is the definition of which of the following?**
Fair value
Which of the following statements is correct?
Fair value considers the concept of fairness to the seller
A publication best known for current national economic data is:
Federal Reserve Bulletin
Which of the following is published by the Board of Governors of the Federal Reserve System?
Federal Reserve Bulletin
Which of the following is not a source of industry data?
Federal Reserve Statistical Release
In most states, stockholder disputes have the same standard of value as which of the following?
Financial Reporting
All of the following valuation purposes are prepared using fair market value except:
Financial Reporting (estate and gift taxes, employee stock ownership plans, ad valorem taxes)
Which of the following is the least likely reason for a business to be valued?
Marriage of the owner.
Which of the following assignments may require more than one valuation?
Merger
The detailed report should include all of the following sections except:
Reconciliation of calculations of value (financial statement analysis, valuation adjustments, sources of information)
The exemption for certain controversy proceedings applies to which provision of the SSVS?
Reporting Provisions
Which Revenue Ruling modified 59-60 by making it applicable to income and other taxes, as well as to estate and gift taxes?
Revenue Ruling 65-192
Which Revenue Ruling discusses what is known as the formula approach or excess earnings method of valuation?
Revenue Ruling 68-609
Which Revenue Ruling was intended "to provide information and guidance to taxpayers, IRS personnel, and others concerned with the valuation, for Federal tax purposes, of securities that cannot be immediately resold because they are restricted from resale pursuant to Federal security laws"?
Revenue Ruling 77-287
Which Revenue Ruling allows appropriate minority discounts to be applied when minority interests of family members in a closely held corporation are valued?
Revenue Ruling 93-12
In valuing a commercial printer with sales of $4 million, which source of industry performance date would be most useful?
Risk Management Association (RMA) Annual Statement Studies
the three common valuation approaches include all of the following except:
Rule of Thumb (income approach, market approach, asset approach)
Which of the following is generally the best source of industry data for small industries?
Trade Associations
Which of the following is not a source of economic data?
US Industry and Trade Outlook (Wall Street Journal, Federal Reserve Bulletin, Economic Report of the President)
Which of the following is not one of the components included in the definition of fair market value?
Value to a particular buyer
In developing a buy-sell agreement provision for the withdrawal of an owner of a closely held business interest, the best basis for the buyout price is:
a valuation done by a qualified valuation analysis
In determining whether one can reasonably expect to complete the valuation engagement with professional competence, the valuation analyst should consider all of the following except:
capital structure (subject interest, valuation date, scope of the engagement)
Which of the following is true regarding subsequent events?
certain subsequent events may warrant disclosure as long as they are informational only
Determining whether the firm currently has the resources and capabilities to deal with the identified key success factors is an example of which? (Palepu)
competitive strategy analysis
According to Revenue Ruling 59-60, all of the following are factors that should be considered in valuing a business EXCEPT:
lack of control of the ownership interest ( earning capacity of the company, economic outlook and the condition and outlook of the specific industry, nature of the business and history of the enterprise)
In the five-forces analysis, factors which one of the following increases competitive rivalry in industry? (Palepu)
large number of competitors
Which of the following is the best and most readily available source of internal information when one is analyzing publicly traded firms?
listening to and/or participating in the firm's public Earnings Conference Calls
Which of the following is NOT considered financial information that should be obtained?
organizational structure (income tax returns, owner's compensation and perquisites, prospective financial statements)
to obtain the accreditation of ABV, a candidate must complete all of the following except:
pass two comprehensive business valuation case studies (be a member in good standing of the AICPA, hold a valid and unrevoked CPA certificate or license, pass a comprehensive business valuation examination)
For an intangible asset, the valuation analyst should consider which of the following?
remaining useful life
Which of the following valuation purposes uses investment value as the applicable standard of value?
strategic acquisitions
Which of the following organizations is the author of the Uniform Standards for Professional Appraisal Practice (USPAP)
the appraisal foundation
Which of the following statements is true?*
the attorney acts as an advocate for the client and the valuation analyst acts as an advocate for his or her opinion
Which of the following statements is incorrect?
the conceptual valuation principles are different for companies of different sizes (business valuations are performed for companies and interest of all sizes, the level of data available for the valuation of small and mid-size companies tends to be less than the amount of data available for larger companies, having less data creates a larger risk of not being able to interpret the existing data properly)
Management forecasts include significant growth. Which of the following physical facilities factors is most important to consider in regard to these forecasts?
the current capacity of the plant
Which of the following is not an application of the principle of substitution?
the income approach considers normalization adjustments to eliminate control adjustments
Which of the following statements is incorrect?
the level of data available for the valuation of small and mid sized companies tend to be greater than the amount of data available for larger companies (the purpose of valuation will influence the standard of value, the methodologies used, the level of research performed, and possibly the date of valuation, valuing smaller businesses can be extremely challenging because most of the empirical data that is regularly used by a valuation analyst applies to larger companies and only tangentially applies to smaller ones, it is imperative that the valuation analyst understand the purpose of the asssignment before the process can begin)
Which of the following statements is false?
the ownership of the organization is important to determine what economic information must be obtained (the form of organization is important due to the comparability of information received, the form of organization is important to determine the legal rights applicable to the interest being valued, the ownership of the organization is important to assess considerations such as control, minority or swing vote issues)
The concept that there are three economic reasons that investors will invest in certain stock -- dividends, capital appreciation, or a combination of the two -- is based on what principle?
the principle of future benefits
Which valuation principle states, in essence, that nobody will pay more for something than he or she would pay for an equally desirable substitute?
the principle of substitution
Which of the following is not one of three valuation principles that constitute the foundation of valuation theory?
the principle of supply and demand
Which of the following is not one of the three main principles that constitute the foundations of valuation theory?
the principle of supply and demand (the ones that are are, the principle of substitution, the principle of future benefits, the principle of alternatives)
The value of any financial asset is equal to the net present value of expected future cash flows derived from the asset, discounted at:
the required rate of return demanded by the market
Which of the following comments concerning Revenue Ruling 59-60 is incorrect?
the ruling covers what is known as the formula approach or excess earnings method (according to the author, it is probably the greatest treatise ever issued on valuation, the ruling discussed the eight factors to consider, at a minimum, in valuing closely held businesses, the ruling outlines that valuation is a prophecy about the future)
All of the following is always true about valuation data EXCEPT:*
the valuation date is the same as the date of the valuation report produced (only information that is known or knowable as of the specific valuation date should be incorporated into a business valuation, it is generally easiest if the valuation date coincides with the date of the company's reported financial statements, the valuation date should be specifically defined at the time of engagement)
Which of the following is a disadvantage for a business broker that performs business valuations?
they sometimes use rules of thumb to price businesses
The understanding established between the valuation analyst and the client, whether in writing or oral, should include all of the following except:
types of discounts to be applied (client responsibilities, applicable assumptions and limiting conditions, type of report to be issued)
In determining the investment value of a closely held company that your publicly traded client is considering acquiring, which of the following issues would generally be considered the least important?
understanding the target organization's cost of capital
A detailed report is appropriate for:
valuation engagements
Which of the following is not one of the components included in the definition of fair market value?
value to a particular buyer
All of the following are exceptions from the Statement on Standards for Valuation Services (SSVS) No. 1 except:
valuing publicly traded stock, including consideration of a blockage discount I internal use assignments from employers to employee members not in public practice, engagements that are exclusively for the purpose of determining economic damages, mechanical computations when the member does not apply valuation approaches and methods.)
Which organization is the author of the SSVS No.1?
AICPA
Which of the following is not financial information that the valuation analyst should gather?
Legal documents
WalMart's ability to dictate price and delivery terms to manufacturers is an example of:
Bargaining Power of the Customer
Which of the following is NOT frequently used standard of value for business valuations?
Book value
Which one of the following would lead to the highest degree of price competition?
Low Product Differentiation
Which one of the following components of the annual financial report is not audited in the 10k?
Management discussion and Analysis
Which of the following is the least likely reason for a business to be valued?
Marriage of the business owner
Which analysis tool eliminates size differentials between the subject company and its peer group for easier analysis?*
Common Size analysis
An industry displaying a mixture of price competition and product differentiation would be characterized by: (Palepu)
Low industry concentration, high legal barriers to entry, low product differentiation
All of the following is non financial information that the valuation analyst should gather except?
Forecasts or Projections
In which of the following valuation assignments is it not likely that valuations as of multiple dates would be performed?
Gift tax ( divorce, damages litigation, employee stock ownership plans)
Which of the following is an example of a premise of value?
Going concern value
Which of the following is not one of the three frequently used market approach valuation methods for intangible assets?
Guideline public company method (comparable uncontrolled transactions method, comparable profit margin method, relief from royalty method)
Which of the following is NOT one of the four general standards under the AICPA Code of Professional Conduct?
Independence (Professional competence, due professional care, planning and supervision)
Which of the following is not a key economic indicator?
Industry Growth (Gross Domestic Product, Consumer Confidence, Unemployment)
Which standard of value is frequently used by financial analysts based on all of the facts and circumstances if the business or the investment, often ignoring the fluctuations of the stock marker?
Intrinsic Value
In a possible merger of two similar companies, the board of directors of one of the companies has asked the analyst to determine the likely combined profitability and value of the new company, including synergies. Which of the following standards of value is appropriate for this case?
Investment Value
Which standard of value considers value to a particular buyer?
Investment value
Which standard of value is applicable to strategic acquisitions?
Investment value
When applying the capitalization of benefits, the valuation analyst should consider which of the following?
Nonrecurrring revenue
Which of the following statements relating to oral reports is true?
Oral reports are allowed for both valuation and calculation engagements.
Which of the following is considered internal information?
Personnel Data
Which of the following is a proprietary data source that is used to analyze or value small and medium sized firms?*
Pratt's Stats
Which of the following relates to the concept of highest and best use?
Premise of value
Which of the following statements regarding price and value is correct?
Price is what you pay, and value is what you get
Which is not an element or consideration fundamental to the concept of value?
Price paid last year? (value as of "when", value to "whom", and value for what purpose, or "why")
When compared to Real Estate Appraisals, which one of the following is NOT a main difference between Business Valuations and Real Estate Appraisals?
Professional standards are applied in Business Valuations (or appraisals) and they are not applied in Real Estate appraisals.
Which type of report provides an abridged content for a valuation engagement?
Summary report
Which one of the following would lead to the lowest degree of industry price competition? (Palepu)
Supply < Demand, High Legal Barriers to Entry, High First Mover Advantage
Which professional organization offers the ABV designation?
The AICPA
Which organization promulgated the Uniform Standards of Professional Appraisal Practice (USPAP)?
The Appraisal Foundation
Which business organization has not official adopted the definitions in the International Glossary of Business Valuation Terms?
The Appraisal Standards Board of the Appraisal Foundation (ASB)
Which of the following is not one of the eight factors outlined in Revenue Ruling 59-60 for deterring fair market value?
The dividends paid by the company
Which one of the following is a weakness of the Market Approach?
a. it is difficult to find truly similar companies
In performing a calculation engagement, the valuation analyst should consider all of the following except:
all applicable valuation methods (identity of the client, valuation date, purpose and intended use)
According to ASA's Business Valuation Standards and SSVS-1, the three valid scopes for appraisal work are:
appraisal, limited appraisal, and calculation
Which type of report should be issued for a calculation engagement?
calculation report
Which of the following is an example of a service that does not rise to the level of an engagement to estimate value?
determining the value of relatively small blocks of publicly traded stock with a per share price that is readily ascertainable
Nonfinancial information should be obtained to understand the non financial components of the company, including all of the following except:
financial structure (products or services, industry markets, management team)
Which one of the following does would likely have the lowest positive impact in creating corporate value? (Palepu)
investing significant resources to product advertising and marketing activities regardless of the type of industry the firm operates in
