Chapter 19 Forensics Questions and answers

Chapter 19 Forensics Questions and answers Which of the following would not be the subject of business valuation? a. Corporations. b. Trusts. c. Plant and equipment. d. All of the above are the subject of business valuation. d. All of the above are the subject of business valuation. Correct. Which of the following is not among the desired characteristics of business valuations? a. Source and use. b. Consistency. c. Defensibility. d. All of these are desired characteristics of business valuations. a. Source and use. Correct. The uniform standards of professional appraisal practice are promulgated by which organization? a. American Society of Appraisers. b. NAVA. c. Appraisal Foundation. d. International Valuation Standards Committee. c. Appraisal Foundation. Correct. CVA is a designation of which of these? a. American Society of Appraisers. b. NAVA. c. The Appraisal Foundation. d. International Valuation Standards Committee b. NAVA. Identifying itself as a "global, professional association that supports the business valuation, litigation consulting, and fraud deterrence disciplines within the CPA and professional business advisory communities," the National Association of Certified Valuation Analysts (NAVA) () issues several certifications, including the Certified Valuation Analyst (CVA). How many standards of value are generally recognized? a. 1. b. 2. c. 3. d. 4. d. 4. Correct. The 4 standards include fair market value, intrinsic (or fundamental) value, investment value, and fair value Which standard of value is most applicable to investors seeking undervalued securities? a. Fair market value. b. Intrinsic value. c. Investment value. d. None of these. b. Intrinsic value. Correct. In business valuation, the going concern assumption helps define which of the following? a. Valuation premise. b. Valuation standard. c. Valuation approach. d. None of these. a. Valuation premise. Correct. The valuation premise involves the degree of synergy and speed of sale. With respect to inventory, exit prices most closely represent which of these? a. Replacement cost prices. b. Wholesale prices. c. Retail prices. d. Inflation-adjusted wholesale prices c. Retail prices. Correct. The value hierarchy is relevant to valuing which of these? a. Individual assets of a business. b. An entire business. c. Both a and b. d. Neither a nor b. c. Both a and b. Correct. Financial reporting as defined by both U.S. and international standards is moving away from and toward which of these? a. From fair value reporting and toward replacement cost reporting. b. From historical cost reporting and toward replacement cost reporting. c. From historical cost reporting and toward fair value reporting. d. None of these. c. From historical cost reporting and toward fair value reporting. Correct. In ongoing businesses, what is normally the highest and best use for nonfinancial assets? a. In use. b. In exchange. c. Both a and b. d. None of these. a. In use. Correct. Which is the approach most commonly used to value businesses? a. The income approach. b. The market approach. c. The asset approach. d. All approaches are used equally often. a. The income approach. Correct. When the asset being valued is a partial, noncontrolling interest in a business, what value is likely to be assigned to it? a. Less that a pro rata value of the total business. b. Close to a pro rata value of the total business. c. More than a pro rata value of the total business. d. The answer depends on the valuation approach. a. Less that a pro rata value of the total business. The single largest area for financial statement fraud involves which of these? a. Revenues. b. Inventories. c. Securities. d. None of these. a. Revenues. Correct. Which of the following is not a major objective in studying and analyzing financial reports when valuing a business? a. Ensuring that all account balances are reasonably stated. b. Adjusting the business's financial statements to make them comparable to the financial statements of other businesses. c. Comparing the business's financial statements with those of other businesses. d. All of these are major objectives. d. All of these are major objectives. Correct. What area does the most common type of financial statement fraud by overstating assets involve? a. Accounts receivable. b. Inventories. c. Securities. d. Plant and equipment. b. Inventories. Correct. Which of these is the basis for the discounted income method estimate of the value of a business? a. Accounting income. b. Cash flows. c. Both a and b. d. Neither a nor b. c. Both a and b. Correct. In applying the discounted income method, which of the following would not normally be used as a surrogate for economic income? a. Dividends. b. Free cash flow available to debt service. c. Debt-free cash flow available to equity. d. All of these could are normally used as a surrogate for economic income. d. All of these could are normally used as a surrogate for economic income. Correct. The capital asset pricing model would likely be most applicable to which of the following general valuation approaches? a. Income. b. Asset. c. Market. d. None of these. a. Income. Correct. The capital asset pricing model could be use to calculate a discount rate to be used in discounting income or cash flows. In applying the capitalized income method, it is common to estimate discount rates and growth rates. Which of the following is true regarding the impact of errors in estimating these two numbers? a. The impact of the estimation error will be the largest when the two numbers are farther from each other. b. The impact of the estimation error will be the largest when the two numbers are the closest to each other. c. The impact of the estimation error will be the largest when both numbers are relatively large. d. The impact of the estimation error will be the largest when the both numbers are relatively small. b. The impact of the estimation error will be the largest when the two numbers are the closest to each other. Correct. In applying the guideline publicly traded company method, comparable companies are selected based on which of these? a. Capital structure. b. Credit status. c. Products. d. All of these. d. All of these. Correct. In which general valuation approach is a price-based ratio most likely to be used by the analyst? a. Income. b. Asset. c. Market. d. All of these. c. Market. Correct. The Guideline Publicly Traded Company Method is an application of the market approach that uses price-based ratios. Which general valuation approach is especially appealing to lenders? a. Income. b. Asset. c. Market. d. All of these. b. Asset. Correct. Lenders like this approach because it produces an understandable balance sheet that shows values for individual assets. Which of the following is not true regarding the capitalized excess earnings method? a. It combines asset-based and market approaches. b. Its computations involve estimating normal income based on net assets as determined by the asset accumulation method. c. Its computation involves capitalizing the normal income. d. All of these are true c. Its computation involves capitalizing the normal income. Correct.