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Question 1Valuation Principles and Professional Standards

Under the income approach, the value of an asset is best described as:

  1. The sum of the asset's historical acquisition costs
  2. The current replacement cost of the asset's components
  3. The price paid for a comparable asset in an orderly transaction
  4. The present value of expected future economic benefits Correct answer.

Explanation

The income approach converts expected future cash flows or earnings into a single present value using a discount rate that reflects risk and timing. It rests on the principle that value equals the present worth of anticipated benefits.

Question 2Valuation Principles and Professional Standards

Which valuation approach derives value by reference to prices of identical or similar assets traded in active markets?

  1. Cost approach
  2. Market approach Correct answer.
  3. Summation approach
  4. Income approach

Explanation

The market approach estimates value from observed prices of comparable assets in actual transactions. It relies on the economic principle of substitution, whereby a buyer will not pay more than the price of an equivalent substitute.

Question 3Valuation Principles and Professional Standards

In the cost approach, physical deterioration is best characterized as:

  1. A loss in value from internal functional inadequacy
  2. A loss in value from wear and tear over time Correct answer.
  3. A loss in value from a change in the highest and best use
  4. A loss in value from external market or economic forces

Explanation

Physical deterioration reflects the wearing out, decay, or damage of an asset through use and exposure. It is distinct from functional and external obsolescence, which arise from design or market factors.

Question 4Valuation Principles and Professional Standards

The economic principle stating that a rational buyer will pay no more for an asset than the cost of acquiring an equally desirable substitute is known as:

  1. The principle of conformity
  2. The principle of anticipation
  3. The principle of contribution
  4. The principle of substitution Correct answer.

Explanation

The principle of substitution holds that value is set by the cost of the best alternative available to the buyer. It underpins all three valuation approaches and constrains the price a rational buyer will accept.

Question 5Valuation Principles and Professional Standards

A discount rate used to convert future cash flows to present value is intended to reflect:

  1. The asset's original purchase price relative to its current cost
  2. The time value of money and the risk of the expected cash flows Correct answer.
  3. The average coupon rate on the entity's outstanding debt
  4. The historical volatility of the asset's reported book earnings

Explanation

A discount rate compensates an investor for deferring consumption and for bearing uncertainty in the cash flows. It therefore combines a risk-free time-value component with a risk premium appropriate to the asset.

Question 6Valuation Principles and Professional Standards

Which statement best describes the concept of highest and best use?

  1. The use that minimizes the asset's ongoing maintenance obligations
  2. The use that the local planning authority most prefers for the site
  3. The use that produces the greatest value and is legally permissible, physically possible, and financially feasible Correct answer.
  4. The use that the current owner has historically made of the asset

Explanation

Highest and best use is the reasonably probable use that maximizes an asset's value while satisfying the tests of legal permissibility, physical possibility, financial feasibility, and maximum productivity. It may differ from the current use.

Question 7Valuation Principles and Professional Standards

The professional standards that govern the conduct, competence, and objectivity of valuation analysts are best described as:

  1. Regulatory capital adequacy rules
  2. Generally accepted accounting principles
  3. Actuarial reserving conventions
  4. Valuation professional and ethical standards Correct answer.

Explanation

Professional valuation standards set requirements for ethics, competence, independence, documentation, and reporting. They exist to protect the public and users of valuation reports.

Question 8Valuation Principles and Professional Standards

In valuation practice, the term 'going concern value' refers to:

  1. The book value of an entity's equity as reported
  2. The value of an entity's net tangible assets only
  3. The liquidation proceeds from selling assets piecemeal
  4. The value of an assembled, operating business in excess of the sum of its individual assets Correct answer.

Explanation

Going concern value reflects the additional worth of an operating enterprise with assembled assets, workforce, and customer relationships beyond the sum of individual asset values. It assumes continued operation rather than liquidation.

Question 9Valuation Principles and Professional Standards

A company is expected to generate a perpetual cash flow of $500,000 per year, with the first flow occurring one year from today. Using a 10% discount rate and assuming no growth, what is the indicated value under the perpetuity formula?

  1. $4,500,000
  2. $5,500,000
  3. $50,000,000
  4. $5,000,000 Correct answer.

Explanation

A level perpetuity beginning one period from now is valued as cash flow divided by the discount rate: $500,000 / 0.10 = $5,000,000. No growth adjustment is required because the flows are constant.

Question 10Valuation Principles and Professional Standards

A property generates net operating income of $120,000, and comparable properties sell at a 8% capitalization rate. Using direct capitalization, the indicated value is:

  1. $1,200,000
  2. $1,440,000
  3. $1,500,000 Correct answer.
  4. $960,000

Explanation

Direct capitalization divides net operating income by the capitalization rate: $120,000 / 0.08 = $1,500,000. The cap rate converts a single year's income into an indication of value.

Question 11Valuation Principles and Professional Standards

An analyst estimates a terminal value at the end of year 5 of $2,000,000. The discount rate is 12%. What is the present value of that terminal value today?

  1. $1,134,900 Correct answer.
  2. $1,600,000
  3. $1,800,000
  4. $1,200,000

Explanation

The present value is $2,000,000 divided by 1.12 raised to the fifth power (approximately 1.7623), giving about $1,134,900. Terminal values must be discounted from the end of the projection period back to the valuation date.

Question 12Valuation Principles and Professional Standards

A firm's free cash flow to the firm is $800,000 next year, expected to grow at 3% annually forever. The weighted average cost of capital is 11%. Using the Gordon growth model, the enterprise value is:

  1. $8,000,000
  2. $10,000,000 Correct answer.
  3. $6,400,000
  4. $7,272,727

Explanation

The Gordon growth model values a growing perpetuity as the next period's cash flow divided by the difference between the discount rate and growth rate: $800,000 / (0.11 - 0.03) = $10,000,000.

Question 13Valuation Principles and Professional Standards

A valuation analyst is engaged to value a private company for a shareholder dispute. The analyst's client is one of the disputing shareholders. To maintain independence, the analyst should:

  1. Advocate for the client's position in the report
  2. Withhold the engagement details from the other parties
  3. Adjust conclusions to match the client's expectations
  4. Disclose the relationship and remain objective in the analysis Correct answer.

Explanation

Professional standards require independence and objectivity, and where a relationship exists that could impair objectivity, it must be disclosed. The analyst's conclusions must rest on evidence rather than advocacy for a party.

Question 14Valuation Principles and Professional Standards

Which of the following best describes the difference between a valuation premise of 'in-use' and 'in-exchange'?

  1. In-use reflects liquidation value; in-exchange reflects going concern value
  2. In-use reflects value in a business context; in-exchange reflects value on a standalone disposal basis Correct answer.
  3. In-use applies only to real property; in-exchange applies only to financial assets
  4. In-use reflects fair value; in-exchange reflects investment value

Explanation

The in-use premise assumes the asset is used with other assets in a business or combined group, while the in-exchange premise assumes the asset is valued on a standalone basis as exchanged between market participants. The premise affects which cash flows and synergies are included.

Question 15Valuation Principles and Professional Standards

An analyst values a building using the cost approach. Reproduction cost new is $2,000,000; physical deterioration is $300,000; functional obsolescence is $200,000; external obsolescence is $100,000. The indicated value is:

  1. $1,400,000 Correct answer.
  2. $1,800,000
  3. $1,700,000
  4. $1,600,000

Explanation

The cost approach subtracts all forms of depreciation from cost new: $2,000,000 - ($300,000 + $200,000 + $100,000) = $1,400,000. Physical deterioration, functional obsolescence, and external obsolescence are all deducted.

Question 16Valuation Principles and Professional Standards

Which of the following is the most appropriate treatment of a control premium in a valuation?

  1. It is ignored because control never affects value
  2. It is applied to the value of a controlling interest to reflect the benefits of control Correct answer.
  3. It is deducted from a controlling interest to derive a minority value
  4. It is added to the value of a minority interest to reflect the ability to direct the entity

Explanation

A control premium reflects the additional value a buyer will pay for the ability to direct the entity's affairs. It is typically applied to a controlling interest or derived from comparable acquisition prices.

Question 17Valuation Principles and Professional Standards

A discount for lack of marketability is most likely applied to:

  1. A minority interest in a closely held company Correct answer.
  2. A controlling interest in a publicly traded company
  3. A controlling interest in a company with freely traded shares
  4. An interest in a liquid exchange-traded fund

Explanation

A discount for lack of marketability reflects the difficulty of selling an interest quickly at a fair price. It is most relevant to closely held interests that cannot be readily traded.

Question 18Valuation Principles and Professional Standards

A valuation report must be clear about the standard of value being used. Which of the following is an example of a standard of value?

  1. Weighted average cost of capital
  2. Discounted cash flow
  3. Fair market value Correct answer.
  4. Capitalization rate

Explanation

A standard of value defines the type of value being measured, such as fair market value or fair value. Discounted cash flow, capitalization rates, and WACC are methods or inputs, not standards of value.

Question 19Valuation Principles and Professional Standards

An analyst projects cash flows for five years and then applies a terminal value. The present value of the terminal value typically represents:

  1. A small fraction of total value and can safely be ignored
  2. An amount that is unaffected by the assumed growth rate
  3. A large portion of total value and must be carefully justified Correct answer.
  4. An amount that is always equal to the final year's cash flow

Explanation

In most discounted cash flow valuations, the terminal value captures all cash flows beyond the projection period and often constitutes the majority of total value. Its assumptions, including growth and discount rates, therefore require careful support.

Question 20Valuation Principles and Professional Standards

A company has earnings before interest and taxes of $1,000,000 and a tax rate of 25%. Depreciation is $100,000 and capital expenditures are $150,000. Assuming no change in working capital, free cash flow to the firm is:

  1. $700,000
  2. $750,000 Correct answer.
  3. $850,000
  4. $800,000

Explanation

Free cash flow to the firm equals EBIT times (1 minus tax rate), plus depreciation, minus capital expenditures: $1,000,000 x 0.75 = $750,000, plus $100,000, minus $150,000 = $700,000. Careful arithmetic confirms the result.

Question 21Valuation Principles and Professional Standards

An analyst values a controlling interest in a private company and separately values a minority interest in the same company. Which adjustment sequence is most consistent with accepted practice?

  1. Value the entity, apply a control premium to derive the controlling value, and apply a marketability discount to the minority value Correct answer.
  2. Apply a marketability discount to the controlling interest, then a control premium to the minority interest
  3. Apply a marketability discount only to the controlling interest
  4. Apply a control premium to both the controlling and minority interests

Explanation

The controlling interest value typically reflects control, while the minority interest reflects lack of control and reduced marketability. A common sequence is to value the entity, apply a control premium for the controlling interest, and apply a discount for lack of control and marketability to the minority interest.

Question 22Valuation Principles and Professional Standards

An analyst uses the market approach with guideline public companies. Which adjustment is most commonly required to make the guideline multiples comparable to the subject company?

  1. An adjustment for the historical cost of the subject's assets
  2. A control premium to reflect the subject's controlling position
  3. A discount for lack of marketability for the subject's illiquid shares
  4. An adjustment for size and growth differences between the subject and the guideline companies Correct answer.

Explanation

Guideline company multiples must be adjusted for differences in size, growth, profitability, and risk between the guideline companies and the subject. Without such adjustments, the multiples may not be comparable.

Question 23Valuation Principles and Professional Standards

A valuation analyst is asked to value an asset for financial reporting under fair value. The analyst concludes that market participants would use an exit price. This conclusion is most consistent with:

  1. The price originally paid to acquire the asset
  2. The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date Correct answer.
  3. The price that would be paid to replace the asset's service capacity
  4. The price that a specific buyer is willing to pay based on unique synergies

Explanation

Fair value under financial reporting is an exit price in an orderly transaction between market participants at the measurement date. It is a market-based measure, not an entity-specific or historical measure.

Question 24Valuation Principles and Professional Standards

An analyst is reconciling indications of value from the income, market, and cost approaches. Which factor is most relevant in selecting the final value conclusion?

  1. The approach preferred by the client
  2. The quantity and quality of evidence supporting each approach Correct answer.
  3. The approach that produces the highest value
  4. The approach that is simplest to compute

Explanation

The final conclusion should weigh the relevance and reliability of the evidence underlying each approach. The approach with the strongest, most relevant market evidence deserves the greatest weight.

Question 25Valuation Principles and Professional Standards

An analyst estimates that a privately held company's shares would require a 25% marketability discount. The freely traded value of the shares is $4,000,000. What is the indicated value after the discount?

  1. $3,200,000
  2. $3,500,000
  3. $3,000,000 Correct answer.
  4. $1,000,000

Explanation

Applying a 25% discount to $4,000,000 yields $4,000,000 x (1 - 0.25) = $3,000,000. The discount reduces the freely traded value to reflect illiquidity.

Question 26Valuation Principles and Professional Standards

Under the Uniform Standards of Professional Appraisal Practice (USPAP), which of the following best describes the purpose of the Competency Rule?

  1. It requires appraisers to maintain confidentiality of all client information.
  2. It requires appraisers to complete a minimum number of continuing education hours annually.
  3. It mandates that appraisers disclose all prior assignments involving the same property.
  4. It ensures that an appraiser possesses the knowledge and experience to complete an assignment competently before accepting it. Correct answer.

Explanation

The Competency Rule requires an appraiser to determine, before accepting an assignment, whether they have the knowledge and experience to complete it competently. If not, they must take steps to gain competency or decline the assignment. It is not about continuing education, disclosure of prior assignments, or confidentiality.

Question 27Valuation Principles and Professional Standards

A valuation analyst is preparing a report for a client. The analyst has a fee that is contingent on the value conclusion. This arrangement is:

  1. Acceptable if disclosed in the report.
  2. Acceptable if the value conclusion is within a reasonable range.
  3. Prohibited because it creates a conflict of interest and impairs objectivity. Correct answer.
  4. Prohibited only if the client is a lending institution.

Explanation

Contingent fees based on the outcome of a valuation are prohibited because they create a conflict of interest and compromise the analyst's objectivity and independence. Disclosure does not cure the ethical violation. The prohibition applies regardless of the client type.

Question 28Valuation Principles and Professional Standards

Which of the following best describes the concept of 'market value' as defined by the International Valuation Standards (IVS)?

  1. The highest price that a buyer is willing to pay for an asset in a forced liquidation sale.
  2. The value of an asset as recorded in the financial statements, adjusted for inflation.
  3. The value of an asset to its current owner, based on its utility and replacement cost.
  4. The estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently, and without compulsion. Correct answer.

Explanation

The IVS definition of market value emphasizes a willing buyer and willing seller, arm's length transaction, proper marketing, and knowledgeable, prudent, and non-compulsory behavior. It is not a forced sale price, owner-specific value, or accounting book value.

Question 29Valuation Principles and Professional Standards

In the context of valuation, the term 'investment value' is best defined as:

  1. The value of an asset as determined by its cost to replace.
  2. The value of an asset based on its liquidation price.
  3. The value of an asset to a particular investor based on their individual investment requirements and expectations. Correct answer.
  4. The value of an asset in a hypothetical exchange between unrelated parties.

Explanation

Investment value is the value to a specific investor, reflecting their unique circumstances, expectations, and requirements. It differs from market value, which is based on a hypothetical willing buyer and seller. It is not replacement cost or liquidation value.

Question 30Valuation Principles and Professional Standards

A valuation analyst is valuing a private company and has selected five guideline public companies. The subject company is significantly smaller than the guideline companies. Which adjustment is most appropriate to account for this size difference?

  1. A size premium. Correct answer.
  2. A blockage discount.
  3. A marketability discount.
  4. A control premium.

Explanation

A size premium is applied to reflect the higher risk associated with smaller companies compared to larger guideline companies. Control premiums relate to control, marketability discounts to lack of marketability, and blockage discounts to large blocks of shares.

Question 31Valuation Principles and Professional Standards

When applying the guideline public company method, an analyst typically adjusts the valuation multiples of the guideline companies for differences in:

  1. The size of the guideline companies' management teams.
  2. The geographic location of the guideline companies' headquarters.
  3. The accounting methods used by the guideline companies.
  4. Growth prospects, profitability, and risk relative to the subject company. Correct answer.

Explanation

Valuation multiples from guideline companies must be adjusted to reflect differences between the guideline companies and the subject company in factors such as growth, profitability, and risk. These adjustments ensure comparability. Accounting methods, management team size, and headquarters location are not primary adjustment factors.

Question 32Valuation Principles and Professional Standards

In the income approach, the capitalization rate used to convert a single period's income into value is derived from:

  1. The discount rate minus the expected long-term growth rate. Correct answer.
  2. The discount rate plus the expected long-term growth rate.
  3. The weighted average cost of capital plus the terminal growth rate.
  4. The risk-free rate plus the equity risk premium.

Explanation

Under the Gordon Growth Model, the capitalization rate equals the discount rate minus the expected long-term growth rate. This relationship converts a perpetuity with growth into a single-period capitalization factor. Adding the growth rate or using other components would not yield the correct capitalization rate.

Question 33Valuation Principles and Professional Standards

When using the market approach, the 'guideline transactions method' differs from the 'guideline public company method' primarily because it:

  1. Is based on the subject company's historical cost of assets.
  2. Uses multiples derived from actual transactions involving controlling interests in similar companies. Correct answer.
  3. Relies on publicly traded stock prices of comparable companies.
  4. Uses projected future cash flows discounted to present value.

Explanation

The guideline transactions method uses multiples from transactions involving controlling interests, often including a control premium, whereas the guideline public company method uses trading multiples of publicly traded minority shares. The other options describe different approaches or methods.

Question 34Valuation Principles and Professional Standards

A valuation analyst is estimating the value of a minority interest in a private company. The analyst has determined a control value of $10 million. To derive the minority value, the analyst should:

  1. Use the control value without adjustment.
  2. Apply a discount for lack of control to the control value. Correct answer.
  3. Add a control premium to the control value.
  4. Apply a discount for lack of marketability only.

Explanation

To derive a minority interest value from a control value, a discount for lack of control (minority discount) is applied. A control premium is added to a minority value to obtain a control value, not the reverse. A marketability discount may also apply, but the primary adjustment for minority status is the lack of control discount.

Question 35Valuation Principles and Professional Standards

Which of the following best describes the 'excess earnings method' in valuation?

  1. A method that estimates value by summing the reproduction cost of assets and deducting depreciation.
  2. A method that capitalizes the earnings exceeding a fair return on net tangible assets to value intangible assets. Correct answer.
  3. A method that compares the subject company to guideline public companies using price-to-earnings multiples.
  4. A method that values a business by discounting its projected free cash flows to the firm.

Explanation

The excess earnings method is used to value intangible assets by capitalizing the earnings that exceed a fair return on the net tangible assets employed. The other options describe the income approach (DCF), market approach, and cost approach, respectively.

Question 36Valuation Principles and Professional Standards

An analyst is valuing a company and must select a discount rate. The company has a capital structure of 40% debt and 60% equity. The cost of debt is 6%, the cost of equity is 12%, and the tax rate is 30%. What is the weighted average cost of capital (WACC)?

  1. 8.88% Correct answer.
  2. 10.08%
  3. 9.60%
  4. 7.20%

Explanation

WACC = (weight of debt × after-tax cost of debt) + (weight of equity × cost of equity). After-tax cost of debt = 6% × (1 - 0.30) = 4.2%. WACC = (0.40 × 4.2%) + (0.60 × 12%) = 1.68% + 7.2% = 8.88%.

Question 37Valuation Principles and Professional Standards

In the context of professional standards, the term 'independence' for a valuation analyst most likely refers to:

  1. The analyst's ability to work without supervision.
  2. The analyst's freedom from bias and conflicts of interest that could affect the valuation conclusion. Correct answer.
  3. The analyst's use of multiple approaches to value.
  4. The analyst's reliance on management's projections without verification.

Explanation

Independence means the analyst is free from influences that could compromise objectivity, such as financial interests or personal relationships. It does not refer to working unsupervised, relying on management, or using multiple approaches.

Question 38Valuation Principles and Professional Standards

A valuation analyst is valuing a privately held company and has applied a discount for lack of marketability (DLOM). Which of the following best supports the use of a DLOM?

  1. The subject company has a large and diversified customer base.
  2. The subject company's shares are publicly traded on a national exchange.
  3. The subject company's shares are not publicly traded and there is no ready market for them. Correct answer.
  4. The subject company has a history of paying consistent dividends.

Explanation

A DLOM is applied when the subject interest is not publicly traded and lacks a ready market, making it less liquid than publicly traded shares. Publicly traded shares, consistent dividends, and a diversified customer base do not inherently indicate a lack of marketability.

Question 39Valuation Principles and Professional Standards

An analyst is valuing a business using the discounted cash flow method. The analyst projects cash flows for five years and calculates a terminal value using the exit multiple method. Which of the following is a key assumption of the exit multiple method?

  1. The terminal value is based on a perpetual growth rate.
  2. The terminal value is based on the book value of assets at the end of year five.
  3. The terminal value is based on a market multiple applied to a terminal-year financial metric. Correct answer.
  4. The terminal value is based on the liquidation value of the business.

Explanation

The exit multiple method estimates terminal value by applying a market-derived multiple (such as EV/EBITDA) to a financial metric in the terminal year. It does not rely on a perpetual growth rate, book value, or liquidation value.

Question 40Valuation Principles and Professional Standards

A valuation analyst is reviewing a valuation report prepared by another analyst. The report concludes a value for a controlling interest but does not disclose the use of a control premium. According to professional standards, the reviewing analyst should:

  1. Ignore the omission because control premiums are not always required.
  2. Assume that a control premium was implicitly included in the discount rate.
  3. Recognize that the report may be deficient and consider the omission as a significant departure from standards. Correct answer.
  4. Accept the report as is because the value conclusion is reasonable.

Explanation

Professional standards require transparency and disclosure of significant assumptions and methods, including the application of a control premium when valuing a controlling interest. Omission of such disclosure may render the report deficient. Accepting, ignoring, or assuming implicit inclusion is not appropriate.

Question 41Financial Reporting and Accounting Concepts

Under IFRS, which basis of measurement is used for the initial recognition of most assets and liabilities in the financial statements?

  1. Current cost
  2. Historical cost Correct answer.
  3. Fair value
  4. Present value

Explanation

IFRS Conceptual Framework identifies historical cost and current value as the two measurement bases, and most items are initially recognized at historical cost, which is the amount paid or received at acquisition. Fair value and present value are current value measures applied selectively.

Question 42Financial Reporting and Accounting Concepts

A company records a sale of goods on credit. Under accrual accounting, when is revenue recognized?

  1. When the invoice is mailed to the customer
  2. When cash is collected from the customer
  3. When the order is received from the customer
  4. When the goods are delivered and control transfers Correct answer.

Explanation

Accrual accounting recognizes revenue when the performance obligation is satisfied, which for goods generally occurs when control transfers to the customer. Collection of cash is a separate settlement event that does not determine recognition.

Question 43Financial Reporting and Accounting Concepts

Which financial statement reports changes in a company's equity during a period resulting from transactions with owners?

  1. Statement of financial position
  2. Statement of profit or loss
  3. Statement of changes in equity Correct answer.
  4. Statement of cash flows

Explanation

The statement of changes in equity reconciles opening and closing equity and discloses items such as share issues, dividends, and other owner transactions. The other statements report performance, position, or cash movements rather than owner equity transactions.

Question 44Financial Reporting and Accounting Concepts

Which qualitative characteristic requires that financial information be capable of making a difference in users' decisions?

  1. Comparability
  2. Timeliness
  3. Verifiability
  4. Relevance Correct answer.

Explanation

Relevance means information is capable of making a difference in decisions, which includes predictive and confirmatory value as well as materiality. The other options are enhancing characteristics that support useful information but do not define decision-altering capacity.

Question 45Financial Reporting and Accounting Concepts

What is the accounting equation underlying the statement of financial position?

  1. Assets = Liabilities - Equity
  2. Equity = Assets + Liabilities
  3. Assets = Liabilities + Equity Correct answer.
  4. Liabilities = Assets + Equity

Explanation

The statement of financial position is built on the identity that total assets equal the sum of liabilities and equity. This reflects that all resources are financed either by creditors or by owners.

Question 46Financial Reporting and Accounting Concepts

A company purchases equipment for 50,000 with an estimated residual value of 5,000 and a useful life of 5 years. Using straight-line depreciation, what is the annual depreciation expense?

  1. 9,000 Correct answer.
  2. 11,000
  3. 5,000
  4. 10,000

Explanation

Straight-line depreciation equals (cost minus residual value) divided by useful life, so (50,000 - 5,000) / 5 = 9,000 per year. Residual value is excluded because it is expected to be recovered at the end of the asset's life.

Question 47Financial Reporting and Accounting Concepts

Which of the following is classified as a current liability?

  1. Trade payables due within 30 days Correct answer.
  2. A bond maturing in ten years
  3. Share capital issued to investors
  4. A bank loan repayable in five years

Explanation

A liability is current when it is expected to be settled within the normal operating cycle or within twelve months after the reporting period. Trade payables due in 30 days meet that definition.

Question 48Financial Reporting and Accounting Concepts

Which body is responsible for issuing International Financial Reporting Standards?

  1. The International Federation of Accountants
  2. The Financial Accounting Standards Board
  3. The International Accounting Standards Board Correct answer.
  4. The IFRS Interpretations Committee

Explanation

The International Accounting Standards Board develops and issues IFRS Standards. The other bodies either interpret standards, represent the profession, or set national standards in another jurisdiction.

Question 49Financial Reporting and Accounting Concepts

A company sells goods with a right of return. Under IFRS 15, how is the expected return treated at the time of sale?

  1. Revenue is recognized for expected non-returned goods and a refund liability is recorded Correct answer.
  2. Revenue is deferred entirely until the return period expires
  3. Revenue is recognized only when the customer confirms acceptance
  4. Revenue is recognized in full and a receivable is recorded

Explanation

When a right of return exists, the entity recognizes revenue for the consideration it expects to be entitled to, and records a refund liability for the amount expected to be refunded, along with an asset for the right to recover returned goods. Full deferral is not required because the performance obligation is largely satisfied.

Question 50Financial Reporting and Accounting Concepts

An entity's inventory cost is 100,000 and its net realizable value is 92,000. Under IAS 2, at what amount should the inventory be measured?

  1. 92,000 Correct answer.
  2. 108,000
  3. 96,000
  4. 100,000

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realizable value. Since NRV of 92,000 is below cost of 100,000, the inventory is written down to 92,000.