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Free CPA-Financial Exam Braindumps (page: 21)

Page 20 of 41
PDF with 163 Questions

Which of the following statements regarding fair value is/are correct?

  1. The fair value of an asset or liability is specific to the entity making the fair value measurement.
    II. Fair value is the price to acquire an asset or assume a liability.
    III. Fair value includes transportation costs, but not transaction costs.
    IV. The price in the principal market for an asset or liability will be the fair value measurement.
  2. I & II
  3. I & IV
  4. II & III
  5. III & IV

Answer(s): D

Explanation:

Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c" are incorrect, per the above .



Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?

  1. The market approach.
  2. The impairment approach.
  3. The income approach.
  4. The cost approach.

Answer(s): B

Explanation:

Choice "b" is correct. The impairment approach is not used to measure the fair value of an asset or liability. Instead, when an entity is determining whether an asset has been impaired, the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset.
Choice "a" is incorrect. The market approach is an accepted method of fair value measurement in which price and other market information from identical or comparable assets or liabilities is used to measure fair value.
Choice "c" is incorrect. The income approach is an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value. Choice "d" is incorrect. The cost approach is an accepted method of fair value measurement in which current replacement cost is used to determine the fair value of an asset.



Which of the following statements is incorrect regarding the inputs that can be used to measure fair value?

  1. Level I inputs are the most reliable fair value measurements and Level III inputs are the least reliable.
    II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.
    III. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP.
    IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input.
  2. I only.
  3. I, II, IV.
  4. II, III, IV.
  5. I, II, III, IV.

Answer(s): C

Explanation:

Choice "c" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement III is incorrect because a fair value measurement based on management assumptions only is a
Level III measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.



There are multiple active markets for a financial asset with different observable market prices:



There is no principal market for the financial asset. What is the fair value of the asset?

  1. $71
  2. $72
  3. $74
  4. $76

Answer(s): C

Explanation:

Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows:
Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72 Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs.
Choice "d" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.






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