Question 1

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

Accepted Answer

Biased information cannot be considered reliable. Reliable accounting information is credible, verifiable, and supported by source documents.

Question 2

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 for securities that have no active market and will require the most subjective inputs to determine fair value, such as illiquid mortgage-backed securities. The portfolio manager will need to use unobservable inputs that reflect the market participants' assumptions and estimates to determine the fair value of these securities.

Question 3

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

Accepted Answer

The income statement approach and the balance sheet approach will yield identical results when either the enacted tax rates applicable to future periods do not change or the firm recognizes no valuation allowance on deferred tax assets. The choice of either approach will not affect the recognition of deferred tax assets and liabilities as long as these conditions are met.

Question 4

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 5

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

Accepted Answer

The cost of grading the land is not considered an acquisition cost as it is related to the preparation of the land and not the building itself. Sales tax, capital repairs, and renovations all directly relate to the building and would be considered acquisition costs.

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

Timber investments would most likely fall under Level 2 or Level 3 inputs, as they are not traded on active markets and require more significant assumptions and inputs to estimate their fair value. Level 1 inputs are for assets with readily available market prices, while Levels 1 and 2 would be for assets with observable prices in either active or inactive markets. Therefore, only Level 2 or 3 inputs would be applicable for estimating the fair value of timber investments.

Question 7

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

Level 3 inputs are used for fair value measurements where significant unobservable inputs are used, such as the value of privately-held companies.

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

The answer of What level are inputs for estimating fair...

Question 9

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 expense would not be included in the common stock section of the financial statements. It would only be reported in the income statement or in other comprehensive income, discontinued operations, or extraordinary items if applicable.

Question 10

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

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

Question 11

Relevant asset valuations refer to all of the following except :

Accepted Answer

The statement "they are always subjective" is incorrect as relevant asset valuations can be objective if based on reliable and verifiable information.

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

The answer of The existence of subjectivity in an asset...

Question 13

Historical costs include all of the following except :

Accepted Answer

Historical costs refer to the actual costs incurred to acquire or produce an asset in the past. It includes acquisition costs for assets, adjusted acquisition costs for assets, and initial present value for liabilities, but it does not include net realizable values for assets. Net realizable value is the estimated selling price of an asset minus the estimated cost of completion and disposal.

Question 14

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.

Question 15

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

Accepted Answer

U.S. GAAP, IFRS, and other major accounting standards all use a mixed attribute accounting model, which combines elements of historical cost and fair value accounting. This model allows for a balance between measuring assets and liabilities at their original cost (historical cost) and reflecting changes in market value over time (fair value).

Question 16

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 based on management's own assumptions or estimates.

Question 17

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

Accepted Answer

Reporting financial assets and liabilities at fair values is known as mark-to-market accounting, where the values are adjusted to reflect their current market prices. Historical cost is the original cost incurred to acquire an asset, acquisition cost is the cost to acquire an asset, and mortgage-backed cost is not a recognized accounting term.

Question 18

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 mentioned in choices A, B, and C all reflect current values or a combination of historical and current values. Choice D, adjusted acquisition costs for assets, typically reflects only historical values and does not take into account current market conditions.

Question 19

Present value methods are often used with receivables and liabilities:

Accepted Answer

Present value methods are typically used when payment schedules extend beyond one year, as it allows for the calculation of the current value of the future cash flows. This method may not be necessary for liabilities or receivables with shorter payment schedules. Additionally, present value methods may be used when fair values cannot be easily determined, as it provides a way to estimate the value of an asset or liability. The timing of selling an asset in the middle of the accounting cycle is not relevant to the use of present value methods.

Question 20

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 preferred stock would increase stockholders' equity. Choices A, B, and D all affect assets and/or liabilities but do not directly impact stockholders' equity.

Quiz 2: Asset and Liability Valuation and Income Recognition