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Chapter 17: ACC-4800-001

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ACC-4800

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Chapter 17

Chapter 17
Instructions:
Questions 62 Questions Limits No Time Limit Unlimited Attempts Points 62 pts possible Due Date Jun 19 at 11am Availability Always available

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Score for this attempt: 0 out of 62 Submitted Jun 19 at 11am This attempt took about 3 hours. Question 1: 1 pts A valuation professional who holds a CVA has the credentials of a: Continuous valuation analyst. 0% of points Cost valuation of assets. 0% of points Certified valuation analyst. 100% of points None of the above is correct. 0% of points 0/1 Question 2: 1 pts Common reasons for needing valuations of closely held businesses are: Estate or gift tax reporting. 0% of points Divorce case distributions. 0% of points The buyout of one or more shareholders. 0% of points Death of a shareholder. 0% of points All of the above are correct. 100% of points 0/1 Question 3: 1 pts The most common measure of value is: Fair market value. 100% of points Intrinsic value. 0% of points Historical cost value. 0% of points Majority stockholder value. 0% of points None of the above is true. 0% of points 0/1 Question 4: 1 pts If a shareholder in a closely held business sells his or her stock, the valuation professional typically would: Increase the value somewhat to get the minority owner out of the business. 0% of points Do a standard professional valuation in which the minority interest issue is ignored. 0% of points Discount the value somewhat to reflect the diminished value of being a minority interest holder. 100% of points

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Always use a historical cost basis analysis to take conservatism into account. 0% of points None of the above is correct. 0% of points 0/1 Question 5: 1 pts A major challenge in doing valuations in a divorce case is: Dealing with all of the strife and bickering that goes on in divorce cases. 0% of points Dealing with the child custody issues. 0% of points Figuring out what assets to sell and what assets to keep. 0% of points Searching for hidden assets that a spouse may try to hide from the court. 100% of points None of the above is correct. 0% of points 0/1 Question 6: 1 pts One type of agreement that can have a direct impact on the valuation of parts of a closely held business is a: Bankruptcy agreement. 0% of points Medical malpractice agreement. 0% of points Buy-sell agreement. 100% of points Discounted cash flow agreement. 0% of points None of the above is correct. 0% of points 0/1 Question 7: 1 pts The most commonly accepted methods of business valuation use some form of: Balance sheet analysis. 0% of points Historical cost basis. 0% of points Book value method. 0% of points Income statement approach. 100% of points 0/1 Question 8: 1 pts The Indy Company experiences the following annual incomes over the last five years: $60,000, $70,000, $110,000, $150,000, $160,000. A firm like Indy Company commands a 10% discount rate and a price earnings ratio of 10. Using a non-weighted earnings model, what is the value of the firm? $550,000. 0% of points $770,000. 0% of points $1,100,000. 100% of points $1,600,000. 0% of points None of the above is correct. 0% of points 0/1 Question 9: 1 pts The Indy Company experiences the following annual incomes over the last five years: $60,000, $70,000, $110,000, $150,000, $160,000. A firm like Indy Company commands a 10% discount rate and a price earnings ratio of 10. Using a weighted earnings model that weights the more recent earnings more heavily, what is the value of the firm?

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$550,000. 0% of points $770,000. 0% of points $1,100,000. 0% of points $1,286,667. 100% of points None of the above is correct. 0% of points 0/1 Question 10: 1 pts A favorite method of business valuation is the use of free cash flows. With this approach, free cash flows are discounted to their present value. A major challenge with this method is: It is hard to determine the correct discount factor. 0% of points There is not a consensus on the definition of free cash flows. 100% of points Cash flows are not as good a predictor of value as reported net income. 0% of points The Fed keeps changing the discount rate. 0% of points None of the above is correct. 0% of points 0/1 Question 11: 1 pts The Statement of Financial Accounting Standards No. 157 deals primarily with: Fair value measurements used in financial statement reporting. 100% of points Using multiple concepts of the measurement of value. 0% of points Addressing unexplained differences in using various valuation methods. 0% of points Superseding all other authoritative pronouncements relating to valuations. 0% of points None of the above. 0% of points 0/1 Question 12: 1 pts The conclusions presented in FASB No. 157 support which FASB Conceptual Framework? FASB Conceptual Framework No. 2. 0% of points FASB Conceptual Framework No. 6. 0% of points FASB Conceptual Framework No. 7. 0% of points All of the above. 100% of points None of the above. 0% of points 0/1 Question 13: 1 pts According to FASB No. 157, the changes made to the Statement will improve financial reporting by: Expanding the number of acceptable methods of valuation. 0% of points Creating a single formula for performing any kind of valuation. 0% of points Providing a single definition of fair value, together with a framework for measuring fair value. 100% of points Eliminating any possibility for interpretations of value measurements. 0% of points

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None of the above. 0% of points 0/1 Question 14: 1 pts The major business valuation organization that has developed rigorous business valuation standards is: The National Association of Business Valuation Analysts (NACVA). 0% of points The American Society of Appraisers (ASA). 0% of points The Institute of Business Appraisers, Inc. (IBA). 0% of points All of the above. 100% of points None of the above. 0% of points 0/1 Question 15: 1 pts The creation of business valuation standards has led to: Fewer lawsuits than before. 0% of points Greater professionalism within the valuation community. 100% of points Higher fees for business valuation professionals. 0% of points Greater understanding among the public of the results of business valuation reports. 0% of points None of the above. 0% of points 0/1 Question 16: 1 pts All of the items listed below are elements of business valuation standards except: Independence. 0% of points Possession of a master's degree in business by the business valuation analyst. 100% of points Fee not contingent on appraised value. 0% of points List the information sources used. 0% of points None of the above. 0% of points 0/1 Question 17: 1 pts The main sections of a business valuation report usually number: 7. 100% of points 4. 0% of points 3. 0% of points 8. 0% of points 5. 0% of points 0/1 Question 18: 1 pts In a typical business valuation report, one exhibit that is seldom used is: Limiting conditions. 0% of points Definitions of valuation terms.

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0% of points Ratio analysis of the company. 0% of points Common size balance sheets of the company. 0% of points None of the above. 100% of points 0/1 Question 19: 1 pts Generally speaking "book value" is considered to be: Not really a valuation method. 100% of points The best measure of value because it reflects actual accounting measurements. 0% of points A good valuation method but it usually provides a conservative measure of value. 0% of points The same thing as market value. 0% of points None of the above. 0% of points 0/1 Question 20: 1 pts "Equitable distribution" in divorce cases is driven by: The Uniform Commercial Code nationally. 0% of points Individual state laws. 100% of points Supreme Court rulings. 0% of points Professional standards. 0% of points None of the above. 0% of points 0/1 Question 21: 1 pts "Buy-sell agreements" relate to: Most divorce cases. 0% of points All business valuation cases. 0% of points Agreements made by owners of closely held businesses. 100% of points Bankruptcy cases. 0% of points None of the above. 0% of points 0/1 Question 22: 1 pts "Investment value" is: The general market value of a business. 0% of points The market value of a listed company. 0% of points The value of the business to the current owner. 0% of points The value of the business to a specific buyer. 100% of points None of the above. 0% of points 0/1

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Question 23: 1 pts A "minority interest" in a business: Technically is less than a 50-percent ownership in the business. 0% of points Might be worth less than a pro-rata share of the business value. 0% of points May have limited influence in the operations of the business. 0% of points All of the above. 100% of points None of the above. 0% of points 0/1 Question 24: 1 pts Dissenting minority stockholders may have to take their dispute to the court. If so, such cases are covered by: NY Stock Exchange rules and guidelines. 0% of points Applicable state laws. 100% of points Federal code. 0% of points International rules of stock law. 0% of points None of the above. 0% of points 0/1 Question 25: 1 pts IRS Rev. Rul. 59-60: Was promulgated in 1959. 100% of points Deals with companies that are listed on major stock exchanges. 0% of points Requires that all people over 59-60 must start drawing retirement funds. 0% of points Seldom applies to business valuation issues. 0% of points None of the above. 0% of points 0/1 Question 26: 1 pts IRS Rev. Rul. 59-60: Deals with the valuation of closely held businesses. 0% of points Provides a list of eight factors that should be considered in valuing a closely held business. 0% of points Is particularly useful for valuing closely held businesses in estate and gift tax situations. 0% of points All of the above. 100% of points None of the above. 0% of points 0/1 Question 27: 1 pts In trying to determine how many years of data are necessary to perform a business valuation, a commonly used starting point is: 20 years. 0% of points 5 years. 100% of points 10 years. 0% of points 8 years.

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0% of points None of the above. 0% of points 0/1 Question 28: 1 pts Preparing common-sized financial statements and performing ratio analyses of financial statements are examples of: "Customizing" financial statements. 0% of points "Downsizing" financial statements. 0% of points "Spreading" financial statements. 100% of points "Simplifying" financial statements. 0% of points None of the above. 0% of points 0/1 Question 29: 1 pts Probably the most comprehensive source of information on financial statements and credit analysis by industry is: The American Institute of Certified Public Accountants (AICPA). 0% of points The Association of Certified Fraud Examiners (ACFE). 0% of points The Institute of Management Accounting (IMA). 0% of points The Risk Management Association (RMA). 100% of points None of the above. 0% of points 0/1 Question 30: 1 pts The "cost approach" to business valuation involves: Adjusting a company's assets and liabilities up or down to reflect their "fair value." 100% of points Adjusting all accounts to their incurred "historical cost." 0% of points Using only income statement accounts. 0% of points A method that is no longer used in business valuations. 0% of points None of the above. 0% of points 0/1 Question 31: 1 pts The "capitalization of excess earnings method" is: One of the market approach methods of business valuation. 0% of points Requires additional investment by the seller. 0% of points Is actually a hybrid of the cost and income approaches to business valuation. 100% of points Is also called the discounted future cash flow method. 0% of points None of the above. 0% of points 0/1 Question 32: 1 pts "Fair market value" is the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have knowledge of the relevant facts. This is the definition provided by: The American Institute of Certified Public Accountants (AICPA).

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0% of points The Association of Certified Fraud Examiners (ACFE). 0% of points The Institute of Management Accounting (IMA). 0% of points The Risk Management Association (RMA). 0% of points None of the above. 100% of points 0/1 Question 33: 1 pts A 100-percent controlling interest in a business: Seldom happens. 0% of points Often includes a valuation premium for control. 100% of points May be investigated by the Securities and Exchange Commission (SEC). 0% of points Has the same valuation impact as having a minority interest in the business. 0% of points None of the above. 0% of points 0/1 Question 34: 1 pts One/some of the most important IRS guidelines for gift and estate tax purposes: Are the regulations for research and experimentation tax credits. 0% of points Is the 2006 Tax Simplification Act. 0% of points Is the IRS publication on the Sale of Closely Held Businesses. 0% of points Is IRS Rev. Rul. 59-60. 100% of points None of the above. 0% of points 0/1 Question 35: 1 pts In litigating bankruptcies: Business valuations make no sense. 0% of points The court might direct the valuation expert to ignore the company's excessive debt and value the company as if it had a normal debt level. 100% of points The court prohibits many types of business valuation methods. 0% of points The valuation expert must be very conservative in his/her valuation amounts. 0% of points None of the above. 0% of points 0/1 Question 36: 1 pts

Westwood Manufacturing Company has experienced the following earnings record over the last five years. Year 1 Revenue Year 2 Year 3 Year 4 Year 5

$6,500,000 $6,800,000 $7,300,000 $ 7,500,000 $9,500,000 6,000,000 3,500,000 2,600,000 $ 900,000

Cost of goods sold 3,700,000 3,900,000 4,300,000 4,400,000 Gross profit 2,800,000 2,900,000 3,000,000 3,100,000

Operating expenses 2,350,000 2,400,000 2,450,000 2,500,000 Net income $ 450,000 $ 500,000 $ 550,000 $ 600,000

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Westwood is a closely held company with five family members owning stock. The stock is not traded on any stock exchange and none of the shares have ever been sold after the initial sale of the stock from the company to the shareholders. One shareholder wants to sell her stock back to the company and cease any activities with the company. She owns 20 percent of the outstanding shares of the company stock. Similar companies stock has traded with price/earnings (PE) ratios of 8, 9, 10, 11, and 9 over the past five years. The average earnings for the five year period are:
$600,000 100% of points $550,000 0% of points $650,000 0% of points $500,000 0% of points None of the above 0% of points 0/1 Question 37: 1 pts

Using the facts in question 86, using the weighted values to assign more weight to the more recent years would yield a value for the five year period of:
$600,000 0% of points $900,000 0% of points $666,667 100% of points $533,333 0% of points None of the above 0% of points 0/1 Question 38: 1 pts

Using the facts in question 86, u sing the average earnings model and using the average price/earnings ratio for similar companies for the five year
period, the value of Westwood Manufacturing at the end of year five is:
$3,500,000 0% of points $5,013,333 0% of points $6,266,667 0% of points $5,640,000 100% of points None of the above 0% of points 0/1 Question 39: 1 pts

Using the facts in question 86, giving more weight to the most recent years earnings and using the average price/earnings ratio of similar companies for the five year period, the value of Westwood Manufacturing at the end of year five is:
$3,500,000 0% of points $5,013,333 0% of points $6,266,667 100% of points $5,640,000 0% of points None of the above 0% of points 0/1 Question 40: 1 pts

Using the facts in question 86, u sing the average earnings model and using the price/earnings ratio for similar companies for the last two years, the
value of Westwood Manufacturing at the end of year five is:

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$6,000,000 100% of points $5,013,333 0% of points $6,266,667 0% of points $5,640,000 0% of points None of the above 0% of points 0/1 Question 41: 1 pts

Using the facts in question 86, u sing the average earnings model and using the average price/earnings ratio for similar companies for the five year
period, the value of the stock that the shareholder wants to sell to the company is:
$1,253,333 0% of points $1,200,000 100% of points $6,266,667 0% of points $5,640,000 0% of points None of the above 0% of points 0/1 Question 42: 1 pts

Using the facts in question 86, assume for this question that the computed value of the 20 percent share of the company is $1,400,000. Because the
share being sold is 20 percent of a closely held company, the value of the stock:
Might be higher than $1,400,000 because the shareholder is one of only a few shareholders in the company. 0% of points Might be lower than $1,400,000 because the shareholder owns a minority share of stock in a closely held company without a regular market in which to make a sale. 100% of points Might be subject to special SEC regulations before the stock can be valued and sold. 0% of points Is completely unrelated to the fact that the stock is a minority interest in a closely held company. 0% of points 0/1 Question 43: 1 pts

An investment group is considering the acquisition of a well known and respected construction business. In evaluating the business, the investment group estimates annual free cash flows of $10,000,000 per year for the next 10 years. Free cash flows for years 11-30 are estimated to be $15,000,000 per year. Below are some selected values for the present value of an ordinary annuity: Period 9% 1 2 3 4 5 10 15 20 10% 11% 12%

.91743 .90909 .90009 .89286 1.75911 1.73554 1.71252 1.69005 2.53130 2.48685 2.44371 2.40183 3.23972 3.16986 3.10245 3.03735 3.88965 3.79079 3.69590 3.60478 6.41766 6.14457 5.88923 5.65022 8.06069 7.60608 7.19087 6.81086 9.12855 8.51356 7.96333 7.46944

Assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be based on an average price/earnings ratio that ranges between 9 and 11. The estimated value of this investment is:
$96,980,550 100% of points $104,839,950 0% of points

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$90,003,800 0% of points $83,790,500 0% of points None of the above 0% of points 0/1 Question 44: 1 pts

Using the facts in question 93, assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be
12 percent. The estimated value of this investment is:
$96,980,550 0% of points $104,839,950 0% of points $90,003,800 0% of points $150,000,000 100% of points None of the above 0% of points 0/1 Question 45: 1 pts

Using the facts in question 93, if the price/earnings ratio used by the investment group to value the investment opportunity changed from a P/E ratio of 9
to a P/E ratio of 11, the estimated value of the investment would:
Increase. 0% of points Decrease. 100% of points Could go up or down. 0% of points Cannot be determined from the data given. 0% of points None of the above. 0% of points 0/1 Question 46: 1 pts

Using the facts in question 93, assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be
11 percent. Additionally, new estimated cash flows increase from $15,000,000 per year to $20,000,000 per year for years 11-20, and estimated cash flows for years 1-10 decrease to $8,000,000 per year. If the investment can be acquired for $95,000,000 the investment group should:
Acquire the investment because the present value of the investment is $1,980,550 more than the cost of the investment. 0% of points Cannot be determined from the information given. 0% of points Pass on the investment because the present value of the investment is $6,404,160 less than the cost of the investment. 100% of points Acquire the investment because the cost is $95,000,000 and the estimated total value of the cash inflows over the next 20 years is $280,000,000. 0% of points 0/1 Question 47: 1 pts

The first several sections in a valuation report usually contains:


Exhibits, summary, and introduction. 0% of points Company information, valuation methodology, and financial condition of the company. 0% of points Front pages, introduction, and company information. 100% of points Valuation methodology, valuation conclusions, and exhibits. 0% of points 0/1

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Question 48: 1 pts

Common features of standards for valuation professionals includes all of the items listed below except:
Independence. 0% of points A disclosure of limiting conditions. 0% of points A listing of professionals participating in the valuation. 0% of points A statement that the fee may be contingent upon the results of the valuation. 100% of points 0/1 Question 49: 1 pts

It is sometimes stated the use of book value in valuations:


Is logical and appropriate because the values in the balance sheet are based on incurred historical costs. 0% of points Is not really a valuation method. 100% of points Always acceptable if the valuation expert uses adjusted book value. 0% of points Always omits intangible assets. 0% of points 0/1 Question 50: 1 pts

The three main valuation methods include all of the following except:
The income approach. 0% of points The cost approach. 0% of points The market approach. 0% of points The appraisal approach. 100% of points 0/1 Question 51: 1 pts

You are an expert witness preparing for testimony in a valuation case. As such, you should do all of the following except:
Review every aspect of the expert report of the opposing expert witness. 0% of points Read the most recent opinions of the judge that is presiding over the case. 100% of points Be certain that you understand and can discuss the facts in the case. 0% of points Carefully check your resume to be certain it is correct and up to date. 0% of points 0/1 Question 52: 1 pts

You are an expert witness in a case preparing to testify at deposition. To help you prepare, your attorney:
Will go over the questions he/she plans to ask you on direct examination during the deposition. 0% of points Will explain trial rules and procedures, particularly if it is a federal court trial. 0% of points Will offer you advice on how to avoid answering questions. 0% of points Will explain the deposition process and requirements and tell you whatever information he/she has about the questioning style and strategy used by the deposing attorney. 100% of points 0/1 Question 53: 1 pts

Because business valuations can be very complex, it is essential that when testifying the forensic accounting expert witness:
Uses all of the correct accounting terminology so that the court does not misunderstand the key issues in the case. 0% of points Includes a discussion of FASB No. 157 in the testimony with reference to applicable earlier FASBs.

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0% of points Provides testimony that is clearly understandable to the court regardless of the complexity of the case. 100% of points Uses fair market value as the foundation for the opinions in the case. 0% of points 0/1 Question 54: 1 pts

The stated objective for issuing FASB No. 157 included all of the following except:
To establish a framework for measuring fair value. 0% of points To define fair value. 0% of points To simplify and codify related guidance within GAAPs. 0% of points To eliminate the cost basis as a method of valuation. 100% of points 0/1 Question 55: 1 pts

A forensic accountant has been asked to send a resume to an attorney that is contemplating hiring the person as an expert witness in a case. The forensic accountant should review his/her vita and be sure to:
Add stuff to make the vita look better. 0% of points

Be certain that the vita is current and that it does not include any statements that exaggerate experiences and accomplishments.
100% of points Make the vita look very professional by rounding up to the nearest whole year all statements about work and educational experiences. 0% of points List charitable works no matter how minor so the expert looks caring and thoughtful. 0% of points 0/1 Question 56: 1 pts

Five years ago, Judy started the Piece of Cake bakery shop in New York City. The bakery specializes in specialty cupcakes baked and decorated in a variety of popular and unique flavors. The bakerys business has grown steadily during the five-year period. Income for the bakery has been $25,000, $38,000, $45,000, $60,000, and $70,000 respectively. In addition, Judy has paid herself a salary of $35,000, $35,000, $40,000, $45,000, and $50,000 respectively during the five-year period. Although Judy loves the business, she has decided to sell the Piece of Cake bakery and move to San Francisco where she plans to start a new and different business. Two of Judys trusted employees are thinking about buying the shop from Judy, and there are several other potential buyers considering this investment. The big question is what is the value of the business? The business has a twenty-year lease, and the ovens, display cases, and other business assets have a net book value of $95,000 and an appraised value of $105,000. Most businesses of this type sell for about six times earnings. Using the average income approach, the value of the business is:
$531,600. 100% of points $285,600. 0% of points $246,000. 0% of points $592,400. 0% of points None of the answers above is correct. 0% of points Year Earnings 1 2 3 4 5 Judy's Salary Total Business Income

$25,000 $35,000 $60,000 $38,000 $35,000 $73,000 $45,000 $40,000 $85,000 $60,000 $45,000 $105,000 $70,000 $50,000 $120,000

Totals$238,000$205,000$443,000

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Average business earnings = $443,000 / 5 years = $88,600 Business valuation using weighted earnings =$88,600 6 = $531,600
0/1 Question 57: 1 pts

Using the same facts as in 106 above, using the weighted average income approach, the value of the business is:
$531,600. 0% of points $330,400. 0% of points $262,000. 0% of points $592,400. 100% of points None of the answers above is correct. 0% of points Year Earnings 1 2 3 4 5 Judy's Salary Total Total Business Weighting Income Income $60,000 $146,000 $255,000 $420,000 $600,000 $1,481,000

$25,000 $35,000 $60,000 1 $38,000 $35,000 $73,000 2 $45,000 $40,000 $85,000 3 $60,000 $45,000 $105,0004 $70,000 $50,000 $120,0005

Totals$238,000$205,000$443,00015

Average weighted business earnings = $1,481,000 / 15 = $98,733 Business valuation using weighted earnings = $98,733 6 = $592,400
0/1 Question 58: 1 pts

Using the same facts as in 106 above, Judy offers to sell the business for $550,000 to a person that operates a restaurant next door to the bakery. If
the restaurant owner is interested in buying this type of business, is Judys offer a good deal?
Yes, it is right next door and Judys asking price is less than its value. 0% of points No, a bakery and a restaurant are not compatible businesses. 0% of points It depends; Judys price is higher than the average income valuation, but it is lower than the weighted average income valuation. 100% of points In order to make an intelligent decision, the potential buyer should have another appraiser value the assets of the business. 0% of points 0/1 Question 59: 1 pts

Assume for this question that the average income valuation of the business is $480,000. Judy has offered to sell the business to one of her employees for $525,000. She explains to her employees that the price is a good deal for them because they should add the $105,000 appraised value of the business assets to get to the real value of the business. What is your advice to the employees about Judys offer to sell at $525,000?
It is a good deal because the true value of the business would be its average income valuation plus $105,000 of assets or $585,000. 0% of points The average income method values the expected future earnings of the business and therefore the assets are already considered in the valuation. 100% of points Judys offering is good because the assets should be included in the valuation, but we should use the net book value because it included depreciation on the assets. 0% of points Although it is true that the assets are worth about $100,000, it is clear the assets income producing value is much greater than the appraised value. Therefore, it is clearly a good investment. 0% of points 0/1 Question 60: 1 pts

Under the market approach to valuation, there are three methods that can be used. Included are all of the following except:
The guideline method. 0% of points The past transaction method.

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0% of points The weighted average method. 100% of points The market data method. 0% of points 0/1 Question 61: 1 pts

Buy-sell agreements are most commonly associated with:


Divorce cases. 0% of points Bankruptcy cases. 0% of points Hospital medical plans. 0% of points Closely held companies. 100% of points 0/1 Question 62: 1 pts

When preparing to testify in a case, an expert witness would seek advice from his/her attorney about:
What accounting documents should be used in analyzing data and preparing the expert report. 0% of points The characteristics, apparent strategies, and questioning style of the opposing attorney who will depose and cross examine the expert. 100% of points The key accounting/fi nancial concepts that the expert should use in the analysis and testimony to be used in the expert report. 0% of points How to avoid answering tough questions during deposition testimony. 0% of points 0/1

Quiz Score: 0 out of 62

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