Question 1

Which of the following would not represent an acquisition cost to be added to the purchase price of building:

Accepted Answer

Grading the land is not considered an acquisition cost as it is a cost incurred before the building is obtained. Acquisition costs are costs incurred to obtain the building, such as sales tax, capital repairs, and renovations.

Question 2

Valuation methods that reflect current values or a combination of historical and current values include all of the following except:

Accepted Answer

The valuation methods that reflect current values or a combination of historical and current values include fair value for assets and liabilities, current replacement cost for assets, and net realizable value for assets. Adjusted acquisition costs for assets reflect historical values and do not consider current market conditions or events.

Question 3

Firms may not include all income taxes for a period on the line for income tax expense in the income statement.Other places that income tax expenses may occur include all of the following except:

Accepted Answer

Income tax expenses would not occur in the Common Stock section of the financial statements. The other options listed are all possible locations where income tax expenses may occur.

Question 4

Present value methods are often used with receivables and liabilities:

Accepted Answer

Present value methods, such as discounted cash flow analysis or net present value analysis, are usually employed when payment schedules are more than one year. This is because the value of future cash flows depends significantly on the time value of money, and discounting those cash flows to their present value helps in determining their true worth at the current point in time. For payment schedules of less than one year, using present value methods may not yield a substantial difference in value, so simpler accounting methods such as accrual accounting could be used.

Question 5

Reporting financial assets and liabilities at fair values also is referred to as:

Accepted Answer

Reporting financial assets and liabilities at fair values using current market prices is called mark-to-market (MTM) accounting. This means that the value of an asset or liability is adjusted to reflect its current market value or fair value. MTM is used to ensure that financial statements provide an accurate representation of a company's financial position.

Question 6

If a portfolio manager had to estimate the fair value of investments in timber,which of the following would he/she most likely identify as the level of inputs to determine this?

Accepted Answer

The most appropriate level of inputs to determine the fair value of investments in timber is Levels 2 or 3. Level 1 inputs refer to quoted prices in active markets for identical assets, which may not be readily available in the case of investments in timber. Level 2 inputs are observable market data for similar assets or inputs derived from observable market data. Level 3 inputs are unobservable inputs and rely on management's assumptions and estimates, which may be more applicable in the case of timber investments. Therefore, Levels 2 or 3 would be most relevant in estimating the fair value of investments in timber.

Question 7

What level are inputs for estimating fair values are those inputs include quoted prices for similar assets or liabilities in active or inactive markets,other observable information such as yield curves and price indexes,and other observable data such as market-based correlation estimates?

Accepted Answer

Inputs for estimating fair values that include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates are considered Level 2 inputs. Level 1 inputs are quoted prices for identical assets or liabilities in active markets, while Level 3 inputs are unobservable inputs that require significant judgment or estimation.

Question 8

What level are inputs for estimating fair values based on a firm's own assumptions about the fair value of an asset or a liability,such as using various data to estimate present values?

Accepted Answer

Level 3 inputs are unobservable inputs for the asset or liability, reflecting the entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.

Question 9

The accounting equation is represented by Assets= Liabilities + Stockholders' Equity which of the following would cause a change in the stockholders' equity accounts:

Accepted Answer

Purchasing an asset for cash and issuing 10,000 shares of preferred stock would cause an increase in both assets (the purchased asset) and stockholders' equity (the issuance of preferred stock). The other options would either only affect assets (selling land for cash and a note receivable, purchasing inventory on account) or only affect liabilities (collection of an account receivable reduces the accounts receivable liability).

Question 10

Historical costs include all of the following except:

Accepted Answer

Net realizable values for assets are not historical costs as they represent the estimated selling price of an asset less any selling costs, and are therefore forward-looking estimates. Historical costs are the actual costs incurred to acquire and prepare assets for their intended use, as well as any subsequent costs incurred to improve or maintain them, and do not take into account any changes in the asset's value over time. Choices A, C, and D all represent different aspects of historical costs.

Question 11

When recognizing deferred tax assets and liabilities,the income statement approach and the balance sheet approach yield identical results:

Accepted Answer

Both (a) and (b) are correct. The income statement approach and the balance sheet approach will yield identical results only if the enacted tax rates applicable to future periods do not change and the firm recognizes no valuation allowance on deferred tax assets.

Question 12

The existence of subjectivity in an asset valuation does not necessarily mean the valuation will not be reliable.All of the following are examples of this except:

Accepted Answer

Historical cost for internally generated intangible assets is not reliable because these assets often lack a clear market value and their costs do not necessarily reflect their current or future economic benefits.

Question 13

What level are inputs for estimating fair values are based on inputs that are readily available via prices for identical assets or liabilities in actively traded markets such as securities exchanges?

Accepted Answer

Level 1 inputs are based on prices for identical assets or liabilities in actively traded markets, which are readily available.

Question 14

If a portfolio manager had to estimate the fair value of illiquid mortgage-backed securities,which of the following would he/she most likely identify as the level of inputs to determine this?

Accepted Answer

Level 3 inputs are used when determining the fair value of illiquid securities, as these securities have no active market and require significant judgement and estimation to value them. Level 1 and Level 2 inputs are typically used for more liquid securities that have an active market with observable prices. Therefore, the most appropriate level of inputs for determining the fair value of illiquid mortgage-backed securities would be Level 3.

Question 15

If a portfolio manager had to estimate the fair value of real estate,which of the following would he/she most likely identify as the level of inputs to determine this?

Accepted Answer

The answer of If a portfolio manager had to estimate...

Question 16

U.S.GAAP,IFRS,and other major accounting standards are best characterized as:

Accepted Answer

U.S.GAAP, IFRS, and other major accounting standards use a mixed attribute accounting model. This means they use a combination of historical cost and fair value accounting. Historical cost accounting uses the original cost of an asset, while fair value accounting uses current market values to measure assets and liabilities. Therefore, these standards use a mix of different accounting models, making them mixed attribute accounting models.

Question 17

Relevant asset valuations refer to all of the following except:

Accepted Answer

The statement "they are always subjective" is incorrect. While asset valuations can be subjective, they are not always subjective. Therefore, D is the correct answer. A, B, and C are all true statements about relevant asset valuations.

Question 18

If a portfolio manager had to estimate the fair value of private equity funds invested in a young,privately-held start-up company,which of the following would he/she most likely identify as the level of inputs to determine this?

Accepted Answer

The fair value of private equity funds invested in a young, privately-held start-up company would most likely be determined using Level 3 inputs because these are unobservable inputs and would require significant judgement and estimation. Level 1 inputs are quoted prices in active markets, while Level 2 inputs are observable but not active market prices. Therefore, neither Level 1 nor Level 2 would be appropriate for determining the fair value of an investment in a private start-up company.

Question 19

If a portfolio manager had to estimate the fair value of privately placed bond issues,which of the following would he/she most likely identify as the level of inputs to determine this?

Accepted Answer

Level 2 inputs are used to estimate the fair value of privately placed bond issues because they are not actively traded in a public market.

Question 20

All of the following can be used to describe reliability of accounting information except:

Accepted Answer

Biased information cannot be considered reliable as it is influenced by personal opinions or beliefs. The other three choices (credible, verifiable, supported by source documents) are all characteristics of reliable accounting information.

Quiz 2: Asset and Liability Valuation and Income Recognition