CPA REVIEW EXAM #6
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1. 72. Valuation techniques for fair value that include the Black-Scholes-Mer-
ton formula, a binomial model, or discounted cash flows are example of which
valuation techniques?: a. Income approach.
b. Market approach.
c. Cost approach.
d. Exit value approach.
2. 72.a. The income approach uses valuation techniques to convert future
amounts to a single present value amount. Therefore, Black-Scholes-Merton,
binomial models, or discounted cash flow models are examples of the income
approach.: Answers b. and c. are incorrect because these approaches do not use
present value techniques. Answer d. is incorrect because there is no exit value
approach.
3. 73. The market approach valuation technique for measuring fair value re-
quires which of the following?: a. Present value of future cash flows.
b. Prices and other relevant information of transactions from identical or comparable
assets.
c. The price to replace the service capacity of the asset.
d. The weighted-average of the present value of future cash flows.
4. 73.b. The market approach valuation technique uses prices and other rel-
evant information generated by market transactions involving identical or
comparable assets or liabilities.: Answer a. is incorrect because it refers to the
income approach. Answer c. is incorrect because it refers to the cost approach.
Answer d. is incorrect because it is not a technique for any of the permissible
valuation techniques.
5. 74. A change in valuation techniques used to measure fair value should be
reported as: a. A change in accounting principle with retrospective restatement.
b. An error correction with restatement of the financial statements of previous
periods.
c. A change in accounting estimate reported on a prospective basis.
d. An extraordinary item on the current year's income statement.
6. 74.c. A change in valuation technique used to measure fair value should
be reported as a change in accounting estimate.: The change is reported on a
prospective basis; however, the disclosure for change in accounting estimate are
not required for a change in valuation technique. Answer a. b. and d are incorrect.
7. 75. When measuring fair value, which level has the highest priority for
valuation inputs?: a. Level 1.
b. Level 2.
c. Level 3.
d. Level 4.
, CPA REVIEW EXAM #6
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8. 75.a. The fair value hierarchy prioritizes the inputs to valuation techniques
into three levels: Level 1, Level 2, and Level 3.: The highest priority is given to
Level 1 inputs, which are quoted prices in active markets for identical assets and
liabilities. Answer b. and c. are incorrect, because these levels are lower priority than
Level 1. Answer d is incorrect because there is no Level 4 input.
9. 76. Which of the following are observable inputs used for fair value mea-
surements?: I. Bank prime rate.
II. Default rates on loans.
III. Financial forecasts.
a. I only
b. I and II only
c. I and III only
d. I, II and III.
10. 76.b. The bank prime rate and the default rates are both observable inputs.
A financial forecast is developed by an entity and is an unobservable input or
Level 3 input. Therefore, answers a. c. and d. are incorrect.: ####
11. g. Development stage enterprise accounting: should follow generally ac-
cepted accounting principles. The only additional disclosure required is that
cumulative amounts from inception of losses, revenue, expenses, and cash
flows should be shown in the income statement and statement of cash flows.-
: Furthermore, the stockholders' equity section of the balance sheet should include
cumulative net losses termed "deficit accumulated during development state." These
statements should be identified as those of a development stage enterprise.
12. h. Constant Dollar Accounting: The accounting standards encourage, but
do not require, a business enterprise that prepares its financial statements in
US dollars and in accordance with: US generally accepted accounting principles
to disclose supplementary information on the effects of changing prices. This state-
ment presents requirements to be followed by enterprises that voluntarily elect to
disclose this information.
13. 1. Constant dollar accounting is a method of reporting financial statement
elements in dollars which have the same purchasing power. This method
is often described as accounting in units of current purchasing power.: a.
Purchasing power indicates the ability of a dollar to command goods and services.
14. EXAMPLE: If the inflation rate during a given year for a group of items is
10%, then 110 end-of-year dollars are needed to purchase the same group
of items which cost $100 at the beginning of the year. Similarly, a machine
purchased at the beginning of: that year for $1,000 would be presented in a
year-end constant dollar balance sheet at a restated cost of $1,100. This represents
, CPA REVIEW EXAM #6
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the basic thrust of constant dollar accounting: the adjustment of historical data
[nominal dollars] for changes in the general price level.
15. 2. The adjustment of nominal dollar data is facilitated by the use of the
Consumer Price Index, which reflects the average change in the retail pries
of a wide variety of consumer goods. The adjustment is made by multiplying
historical cost by the To/From ratio.: Historical Cost (nominal dollars) x Price level
adjusting to/ Price level adjusting from = Restated historical cost (constant dollar)
16. 3. The preparation of constant dollar financial statements requires the
classification of balance sheet items as either monetary or nonmonetary.
a) Items are monetary if their amounts are fixed by statute or contract in terms
of: numbers of dollars. Examples include cash, accounts and notes receivable,
accounts and notes payable, and bonds payable.
1] By contract or statute, these items are already stated in current dollars and require
no restatement.
17. b) Nonmonetary items, on the other hand, do require restatement to current
dollars. Inventory, property, plant, and equipment, and unearned service rev-
enue are examples of nonmonetary items.: 1] Under some increasingly popular
loan arrangements, when the repayment of loan principal is adjusted by an index,
the receivable/payable is classified as a nonmonetary item.
18. NOTE: The holding of a nonmonetary asset such as land during a period
of inflation need not result in a loss of purchasing power because the value
of that land can "flow" with the price level [hence, the need for restatement].-
: However, if a monetary asset such as cash is held during a period of inflation with
no interest, purchasing power is lost because the cash will be able to purchase less
goods and services at year-end than at the beginning of the year.
19. This type of loss is simply called a "purchasing power loss." Holding a
monetary liability has the opposite effect.: Therefore, if a firm's balance sheet
included more monetary liabilities than monetary assets throughout a give year, a
purchasing power gain would result, since the firm could pay its liabilities using cash
which is "worth less" than the cash it borrowed.
20. c) A simple example can illustrate both the restatement process and the
effect of holding monetary assets. Assume that the Static Company has the
following balance sheet at the beginning of period 1::
21. What if the entity had acquired equipment costing $1,000 at the beginning
of the year by issuing a $1,000 note payable? At the end of the year, under
constant dollar accounting, the equipment would be carried at $1,100 and the
note payable would be still reported at $1,000.: What would be the net purchasing
power gain [loss] be? The answer is zero because the loss of $100 is offset by a
$100 gain from holding the note payable.
Study online at https://quizlet.com/_zudjm
1. 72. Valuation techniques for fair value that include the Black-Scholes-Mer-
ton formula, a binomial model, or discounted cash flows are example of which
valuation techniques?: a. Income approach.
b. Market approach.
c. Cost approach.
d. Exit value approach.
2. 72.a. The income approach uses valuation techniques to convert future
amounts to a single present value amount. Therefore, Black-Scholes-Merton,
binomial models, or discounted cash flow models are examples of the income
approach.: Answers b. and c. are incorrect because these approaches do not use
present value techniques. Answer d. is incorrect because there is no exit value
approach.
3. 73. The market approach valuation technique for measuring fair value re-
quires which of the following?: a. Present value of future cash flows.
b. Prices and other relevant information of transactions from identical or comparable
assets.
c. The price to replace the service capacity of the asset.
d. The weighted-average of the present value of future cash flows.
4. 73.b. The market approach valuation technique uses prices and other rel-
evant information generated by market transactions involving identical or
comparable assets or liabilities.: Answer a. is incorrect because it refers to the
income approach. Answer c. is incorrect because it refers to the cost approach.
Answer d. is incorrect because it is not a technique for any of the permissible
valuation techniques.
5. 74. A change in valuation techniques used to measure fair value should be
reported as: a. A change in accounting principle with retrospective restatement.
b. An error correction with restatement of the financial statements of previous
periods.
c. A change in accounting estimate reported on a prospective basis.
d. An extraordinary item on the current year's income statement.
6. 74.c. A change in valuation technique used to measure fair value should
be reported as a change in accounting estimate.: The change is reported on a
prospective basis; however, the disclosure for change in accounting estimate are
not required for a change in valuation technique. Answer a. b. and d are incorrect.
7. 75. When measuring fair value, which level has the highest priority for
valuation inputs?: a. Level 1.
b. Level 2.
c. Level 3.
d. Level 4.
, CPA REVIEW EXAM #6
Study online at https://quizlet.com/_zudjm
8. 75.a. The fair value hierarchy prioritizes the inputs to valuation techniques
into three levels: Level 1, Level 2, and Level 3.: The highest priority is given to
Level 1 inputs, which are quoted prices in active markets for identical assets and
liabilities. Answer b. and c. are incorrect, because these levels are lower priority than
Level 1. Answer d is incorrect because there is no Level 4 input.
9. 76. Which of the following are observable inputs used for fair value mea-
surements?: I. Bank prime rate.
II. Default rates on loans.
III. Financial forecasts.
a. I only
b. I and II only
c. I and III only
d. I, II and III.
10. 76.b. The bank prime rate and the default rates are both observable inputs.
A financial forecast is developed by an entity and is an unobservable input or
Level 3 input. Therefore, answers a. c. and d. are incorrect.: ####
11. g. Development stage enterprise accounting: should follow generally ac-
cepted accounting principles. The only additional disclosure required is that
cumulative amounts from inception of losses, revenue, expenses, and cash
flows should be shown in the income statement and statement of cash flows.-
: Furthermore, the stockholders' equity section of the balance sheet should include
cumulative net losses termed "deficit accumulated during development state." These
statements should be identified as those of a development stage enterprise.
12. h. Constant Dollar Accounting: The accounting standards encourage, but
do not require, a business enterprise that prepares its financial statements in
US dollars and in accordance with: US generally accepted accounting principles
to disclose supplementary information on the effects of changing prices. This state-
ment presents requirements to be followed by enterprises that voluntarily elect to
disclose this information.
13. 1. Constant dollar accounting is a method of reporting financial statement
elements in dollars which have the same purchasing power. This method
is often described as accounting in units of current purchasing power.: a.
Purchasing power indicates the ability of a dollar to command goods and services.
14. EXAMPLE: If the inflation rate during a given year for a group of items is
10%, then 110 end-of-year dollars are needed to purchase the same group
of items which cost $100 at the beginning of the year. Similarly, a machine
purchased at the beginning of: that year for $1,000 would be presented in a
year-end constant dollar balance sheet at a restated cost of $1,100. This represents
, CPA REVIEW EXAM #6
Study online at https://quizlet.com/_zudjm
the basic thrust of constant dollar accounting: the adjustment of historical data
[nominal dollars] for changes in the general price level.
15. 2. The adjustment of nominal dollar data is facilitated by the use of the
Consumer Price Index, which reflects the average change in the retail pries
of a wide variety of consumer goods. The adjustment is made by multiplying
historical cost by the To/From ratio.: Historical Cost (nominal dollars) x Price level
adjusting to/ Price level adjusting from = Restated historical cost (constant dollar)
16. 3. The preparation of constant dollar financial statements requires the
classification of balance sheet items as either monetary or nonmonetary.
a) Items are monetary if their amounts are fixed by statute or contract in terms
of: numbers of dollars. Examples include cash, accounts and notes receivable,
accounts and notes payable, and bonds payable.
1] By contract or statute, these items are already stated in current dollars and require
no restatement.
17. b) Nonmonetary items, on the other hand, do require restatement to current
dollars. Inventory, property, plant, and equipment, and unearned service rev-
enue are examples of nonmonetary items.: 1] Under some increasingly popular
loan arrangements, when the repayment of loan principal is adjusted by an index,
the receivable/payable is classified as a nonmonetary item.
18. NOTE: The holding of a nonmonetary asset such as land during a period
of inflation need not result in a loss of purchasing power because the value
of that land can "flow" with the price level [hence, the need for restatement].-
: However, if a monetary asset such as cash is held during a period of inflation with
no interest, purchasing power is lost because the cash will be able to purchase less
goods and services at year-end than at the beginning of the year.
19. This type of loss is simply called a "purchasing power loss." Holding a
monetary liability has the opposite effect.: Therefore, if a firm's balance sheet
included more monetary liabilities than monetary assets throughout a give year, a
purchasing power gain would result, since the firm could pay its liabilities using cash
which is "worth less" than the cash it borrowed.
20. c) A simple example can illustrate both the restatement process and the
effect of holding monetary assets. Assume that the Static Company has the
following balance sheet at the beginning of period 1::
21. What if the entity had acquired equipment costing $1,000 at the beginning
of the year by issuing a $1,000 note payable? At the end of the year, under
constant dollar accounting, the equipment would be carried at $1,100 and the
note payable would be still reported at $1,000.: What would be the net purchasing
power gain [loss] be? The answer is zero because the loss of $100 is offset by a
$100 gain from holding the note payable.
