The purpose of this chapter was to give you a very brief history of the valuation profession, explain why businesses are valued, provide some background about who values businesses, and familiarize you with professional valuation organizations.

1. In developing a buy-sell agreement provision for the withdrawal of an owner of a closely held business interest, the best basis for the buyout price is:
   1. A price provision designated in the agreement.
   2. A formula designated in the agreement.
   3. A valuation done by a qualified valuation analyst.
   4. A set of terms recommended by an attorney.
2. In which of the following valuation assignments is it not likely that valuations as of multiple dates would be performed?
   1. Divorce.
   2. Gift tax.
   3. Damages litigation.
   4. Employee stock ownership plans.
3. Which of the following statements is incorrect?
   1. Business valuations are performed for companies and interests of all sizes and types.
   2. The level of data available for the valuation of small and mid-size companies tends to be less than the amount of data available for larger companies.
   3. The conceptual valuation principles are different for companies of different sizes.
   4. Having less data creates a larger risk of not being able to interpret the existing data properly.
4. Which of the following is a disadvantage of a CPA who performs business valuations?
   1. Accountants are educated in financial concepts and terminology.
   2. Accountants are used to working with financial statements and concepts that are either GAAP-oriented or tax-oriented.
   3. Accountants are frequently exposed to revenue rulings and tax laws.
   4. Accountants are skilled in working with numbers.
5. Which organization promulgated the Uniform Standards of Professional Appraisal Practice (USPAP)?
   1. The American Institute of Certified Public Accountants (AICPA).
   2. The American Society of Appraisers.
   3. The Appraisal Foundation.
   4. The National Association of Certified Valuation Analysts.
6. Which of the following statements is incorrect?
   1. The purpose of the valuation will influence the standard of value, the methodologies used, the level of research performed, and possibly the date of valuation.
   2. Valuing smaller businesses can be extremely challenging because most of the empirical data that is regularly used by a valuation analyst applies to larger companies and only tangentially applies to smaller ones.
   3. The level of data available for the valuation of small and mid-sized companies tends to be greater than the amount of data available for larger companies.
   4. It is imperative that the valuation analyst understand the purpose of the assignment before the process can begin.
7. Which of the following is not a group that generally performs business valuation services?
   1. Attorneys.
   2. Accountants.
   3. College professors.
   4. Investment bankers.
8. To obtain the accreditation of ABV, a candidate must complete all of the following except:
   1. Be a member in good standing of the AICPA.
   2. Hold a valid and unrevoked CPA certificate or license.
   3. Pass a comprehensive business valuation examination.
   4. Pass two comprehensive business valuation case studies.
9. Which of the following is a disadvantage for a business broker that performs business valuations?
   1. They sell businesses.
   2. They are not accountants.
   3. They sometimes use rules of thumb to price businesses.
   4. They sometimes specialize in certain industries.
10. Which professional organization offers the ABV designation?
    1. The AICPA.
    2. The American Society of Appraisers.
    3. The Appraisal Foundation.
    4. The National Association of Certified Valuation Analysts.
11. Which of the following is the least likely reason for a business to be valued?
    1. Marital dissolution.
    2. Financing.
    3. Insurance claim.
    4. Marriage of the owner.
12. Which of the following assignments may require more than one valuation?
    1. Spin-off.
    2. Acquisition.
    3. Merger.
    4. Bankruptcy.

This chapter was dedicated solely to business valuation standards. Therefore, it was designed to familiarize you with the business valuation and some standards of the AICPA as well as those of other valuation organizations.

1. Which business organization has not officially adopted the definitions in the International Glossary of Business Valuation Terms?
   1. American Institute of Certified Public Accountants (AICPA).
   2. National Association of Certified Valuation Analysts (NACVA).
   3. The Appraisal Standards Board of the Appraisal Foundation (ASB).
   4. The Canadian Institute of Chartered Business Valuators (CICBV).
2. All of the following are exceptions from the Statement on Standards for Valuation Services (SSVS) No. 1 except:
   1. Valuing publicly traded stock, including consideration of a blockage discount.
   2. Internal use assignments from employers to employee members not in public practice.
   3. Engagements that are exclusively for the purpose of determining economic damages.
   4. Mechanical computations when the member does not apply valuation approaches and methods.
3. In determining whether one can reasonably expect to complete the valuation engagement with professional competence, the valuation analyst should consider all of the following except:
   1. Subject interest.
   2. Valuation date.
   3. Capital structure.
   4. Scope of the engagement.
4. Nonfinancial information should be obtained to understand the nonfinancial components of the company, including all of the following except:
   1. Products or services.
   2. Financial structure.
   3. Industry markets.
   4. Management team.
5. For an intangible asset, the valuation analyst should consider which of the following?
   1. Terminal value.
   2. Capitalization rate.
   3. Capital structure.
   4. Remaining useful life.
6. The three common valuation approaches include all of the following except:
   1. Rule of thumb.
   2. Income approach.
   3. Market approach.
   4. Asset approach.
7. In performing a calculation engagement, the valuation analyst should consider all of the following except:
   1. Identity of the client.
   2. All applicable valuation methods.
   3. Valuation date.
   4. Purpose and intended use.
8. Which of the following is an example of a service that does not rise to the level of an engagement to estimate value?
   1. Determining the value of relatively small blocks of publicly traded stock with a per share price that is readily ascertainable.
   2. Valuing a block of publicly traded stock if the analysis includes consideration of a discount for blockage.
   3. Valuing stock that is not publicly traded.
   4. Computing the fair market value of assets in a charitable remainder trust if the engagement requires the application of valuation methods and professional judgment.
9. Which of the following is not one of the four general standards under the AICPA Code of Professional Conduct?
   1. Professional competence.
   2. Due professional care.
   3. Independence.
   4. Planning and supervision.
10. Which of the following is not one of the three frequently used market approach valuation methods for intangible assets?
    1. Guideline public company method.
    2. Comparable uncontrolled transactions method.
    3. Comparable profit margin method.
    4. Relief from royalty method.
11. The detailed report should include all of the following sections except:
    1. Financial statement analysis.
    2. Reconciliation of calculations of value.
    3. Valuation adjustments.
    4. Sources of information.
12. Which type of report provides an abridged content for a valuation engagement?
    1. Detailed report.
    2. Summary report.
    3. Calculation report.
    4. Oral report.
13. Which organization is the author of the SSVS No. 1?
    1. Institute of Business Appraisers.
    2. American Society of Appraisers.
    3. AICPA.
    4. National Association of Certified Valuation Analysts.
14. If valuation services are performed for a client for whom the valuation analyst’s firm also performs attest services, the valuation analyst should consult with which AICPA Professional Standard to ensure compliance?
    1. ET section 1.200.001—Independence Rule.
    2. ET section 1.310.001—Standards Rule.
    3. ET section 0.400.09—Confidential Client Information.
    4. ET section 0.300.060—Due Care.
15. The understanding established between the valuation analyst and the client, whether in writing or oral, should include all of the following except:
    1. Client responsibilities.
    2. Applicable assumptions and limiting conditions.
    3. Type of report to be issued.
    4. Types of discounts to be applied.
16. Which of the following is not considered financial information that should be obtained?
    1. Income tax returns.
    2. Organizational structure.
    3. Owner’s compensation and perquisites.
    4. Prospective financial statements.
17. When applying the capitalization of benefits, the valuation analyst should consider which of the following?
    1. Discount rate.
    2. Terminal value.
    3. Nonrecurring revenue.
    4. Relief from royalties.
18. Which of the following is true regarding subsequent events?
    1. The valuation should be updated to reflect subsequent events.
    2. Subsequent events should be disclosed in a report if they affect the value determined.
    3. Subsequent events are generally known or knowable at the date of valuation.
    4. Certain subsequent events may warrant disclosure as long as they are informational only.
19. Which type of report should be issued for a calculation engagement?
    1. Calculation report.
    2. Detailed report.
    3. Summary report.
    4. Any of the above.
20. The exemption for certain controversy proceedings applies to which provision of the SSVS?
    1. Developmental provisions.
    2. Reporting provisions.
    3. Overall engagement provisions.
    4. Documentation provisions.
21. Which of the following statements is true?
    1. Both the attorney and the valuation analyst act as advocates for the client.
    2. Neither the attorney nor the valuation analyst acts as an advocate for the client.
    3. The valuation analyst acts as an advocate for the client, and the attorney acts as an advocate for his or her opinion.
    4. The attorney acts as an advocate for the client and the valuation analyst acts as an advocate for his or her opinion.
22. A detailed report is appropriate for:
    1. Valuation engagements.
    2. Calculation engagements.
    3. Both valuation and calculation engagements.
    4. Neither valuation nor calculation engagements.
23. Which of the following statements relating to oral reports is true?
    1. Oral reports are prohibited by the SSVS.
    2. Oral reports are allowed only for valuation engagements.
    3. Oral reports are allowed only for calculation engagements.
    4. Oral reports are allowed for both valuation and calculation engagements.
24. A member’s independence may be impaired in a valuation engagement for which of the following clients?
    1. Tax client.
    2. Attest client.
    3. Personal financial planning client.
    4. Litigation client

In this chapter, I explained what the valuation analyst needs to know to learn about the engagement, factors to consider in deciding whether to accept the engagement, how to define the engagement, writing engagement letters, and creating the initial document request.

1. Before accepting an assignment, considerations should include all of the following except:
   1. The standard of value.
   2. The purpose and function of the engagement.
   3. The amount of time required to do the job.
   4. The type of report to be issued.
2. In performing a business valuation for a marital dissolution, which of the following is correct?
   1. The valuation analyst can represent only the plaintiff or the defendant, never both.
   2. The valuation analyst can be mutually retained by both parties as long as both parties agree.
   3. The valuation analyst can represent the plaintiff, and the valuation analyst’s partner in another office can represent the defendant.
   4. The valuation analyst can represent both the plaintiff and the defendant but can act as an advocate for only one.
3. Which of the following is not a reason why the intended use of a valuation is important?
   1. The intended use can affect the determination of appropriate methods.
   2. The intended use can determine the type of report to be issued.
   3. The intended use can help determine conflicts of interest.
   4. The intended use can affect the manner in which the job is performed.
4. Which of the following statements is correct about a valuation engagement?
   1. It is allowable for a valuation analyst to streamline the process to save the client money.
   2. If expert testimony is anticipated, the judge or jury will remember that the valuation analyst qualified his or her opinion and that is the reason for an incomplete report.
   3. If a client informs the valuation analyst that there will be severe scope limitations, the best solution may be to decline the assignment.
   4. The valuation analyst should accept all assignments, regardless of potential scope limitations.
5. A good engagement letter will include all of the following except:
   1. A detailed background of the company to be valued.
   2. The standard of value that will be used.
   3. The effective date of the valuation.
   4. The responsibilities of the client.
6. Which of the following statements is true?
   1. A valuation engagement should always be completed.
   2. The valuation analyst should never do less than a valuation engagement if the end result will be misleading or prone to error.
   3. Accountant valuation analysts do not need to include language in their engagement letter relating to financial statement opinions.
   4. Nonaccountants are subject to the American Institute of Certified Public Accountants (AICPA) standards and perform either valuation or calculation engagements.
7. An appraisal as defined by the Business Valuation Committee of the American Society of Appraisers has all of the following qualities except:
   1. It is expressed as a single dollar amount or as a range.
   2. It considers all relevant information as of the appraisal date.
   3. The appraiser conducts appropriate procedures to collect and analyze all information expected to be relevant.
   4. The valuation is based only upon the approach(es) selected by the appraiser.
8. A limited appraisal as defined by the Business Valuation Committee of the American Society of Appraisers has all of the following qualities except:
   1. It is expressed as a single dollar amount or as a range.
   2. It considers all relevant information as of the appraisal date.
   3. The appraiser conducts limited procedures to collect and analyze all information expected to be relevant.
   4. The valuation is based upon the approach(es) deemed by the appraiser to be appropriate.
9. If a client is unwilling to pay for a valuation engagement for litigation purposes, a good compromise may be to:
   1. Perform a valuation engagement and charge the fees for a calculation engagement.
   2. Refer the client to another appraiser who charges lower fees.
   3. Perform a valuation engagement with a summary report, and, in the event that the client is unable to settle, upgrade to a detailed report for trial.
   4. Perform a valuation engagement without compromising.
10. Which of the following is not a type of service as defined by the Business Valuation Committee of the American Society of Appraisers?
    1. Summary appraisal.
    2. Appraisal.
    3. Limited appraisal.
    4. Calculation.
11. Which of the following is a step necessary to ensure there is no conflict of interest?
    1. Check with all staff to make sure no conflict exists.
    2. Check with other partners and office locations to make sure no conflict exists.
    3. Complete a conflict of interest verification form.
    4. All of the above are necessary.
12. How often should valuation analysts prepare engagement letters?
    1. Never.
    2. For litigated assignments.
    3. For full valuation assignments.
    4. For every assignment.
13. Which of the following statements regarding effective date(s) is correct?
    1. Valuations are similar to balance sheets in that they are of a specific point in time.
    2. Valuations are similar to income statements in that they are of a specific period of time.
    3. The valuation date is of little importance to the valuation process.
    4. The most common valuation date is the current date.
14. Which of the following statements is incorrect regarding what may be valued?
    1. The entire company may be valued. This is referred to as the equity of the company.
    2. The entire capital structure may be valued. This is referred to as the invested capital of the company.
    3. A portion of the equity may be valued. This is a simple calculation taking the percentage of the total equity.
    4. The value of the company excluding certain assets may be valued.
15. Which of the following is not an acceptance consideration?
    1. Will an asset appraiser be needed?
    2. Are we aware of any potential fee collection problems?
    3. Is the staffing commitment required by the engagement beyond our capabilities?
    4. Is the professional competence necessary to perform the engagement beyond our capabilities?
16. Which of the following does not need to be included in the engagement letter?
    1. Detailed description of the documents requested.
    2. The standard of value that will be used.
    3. The responsibilities of the client.
    4. Payment terms.
17. In the first paragraph of the engagement letter, which name should appear as being engaged to determine the company value?
    1. The valuation analyst expected to sign the report.
    2. All valuation analysts expected to participate in preparation of the report.
    3. The firm name.
    4. The individual supervising the project.
18. In the detailed description of the valuation subject in the engagement letter, all of the following should be included except:
    1. The type of equity to be valued.
    2. The size of the interest to be valued.
    3. A brief history of the company to be valued.
    4. Which assets and liabilities are to be included in the value.
19. Which of the following statements regarding standardized checklists is true?
    1. The valuation analyst frequently knows a lot about the subject company, making modifying the standardized checklist easy.
    2. Sending out a standardized checklist may demonstrate a lack of interest by the valuation analyst if irrelevant items are included.
    3. This type of document should be used for every valuation, regardless of size.
    4. Setting up multiple checklists proves to be a time waster.
20. Which of the following items is typically included in a document checklist for a medical practice but is excluded from a general checklist?
    1. Accounts receivable aging as of the date of valuation.
    2. Copies of stockholder agreements.
    3. Reports of other professionals, including appraisals on specific assets.
    4. List of all specialties or subspecialties.
21. Which of the following criteria does not have to be addressed in a highest and best use analysis?
    1. Physically possible.
    2. Legally permissible.
    3. Financially feasible.
    4. Economically possible.

In this chapter, I explained the principles of valuation, various standards of value, how the purpose of the valuation influences the standard of value, the concept of subsequent events (items that are known or knowable), and the influence of the Internal Revenue Service (IRS) on business valuations. The chapter also exposed you to many of the key revenue rulings.

1. In determining the investment value of a closely held company that your publicly traded client is considering acquiring, which of the following issues would generally be considered least important?
   1. Restating the target enterprise’s cash-basis historical and projected financial statements to the accrual basis.
   2. Adjusting owner’s compensation.
   3. Recognizing expected cost savings from combined operations.
   4. Understanding the target organization’s cost of capital.
2. In a possible merger of two similar companies, the board of directors of one of the companies has asked the analyst to determine the likely combined profitability and value of the new company, including synergies. Which of the following standards of value is appropriate for this case?
   1. Intrinsic value.
   2. Investment value.
   3. Fair value.
   4. Economic value.
3. Which of the following is not one of the three main valuation principles that constitute the foundation of valuation theory?
   1. The principle of supply and demand.
   2. The principle of alternatives.
   3. The principle of substitution.
   4. The principle of future benefits.
4. Which valuation principle states, in essence, that nobody will pay more for something than he or she would pay for an equally desirable substitute?
   1. The principle of supply and demand.
   2. The principle of alternatives.
   3. The principle of substitution.
   4. The principle of future benefits.
5. Which of the following is not an application of the principle of substitution?
   1. The market approach estimates the value of the business being appraised from information derived from the market.
   2. The asset-based approach simulates the starting of an equivalent business from scratch.
   3. The income approach considers normalization adjustments to eliminate control adjustments.
   4. The income approach looks to financial equivalents to estimate value.
6. Which of the following is not a frequently used standard of value for business valuations?
   1. Fair market value.
   2. Book value.
   3. Fair value.
   4. Investment value.
7. “The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts” is a common definition of:
   1. Fair market value.
   2. Fair value.
   3. Investment value.
   4. Intrinsic value.
8. Which of the following is not one of the components included in the definition of fair market value?
   1. Cash or cash equivalent value.
   2. Value to a particular buyer.
   3. Exposure for sale on the open market
   4. Neither party under compulsion to act.
9. Which of the following statements regarding price and value is correct?
   1. Price and value are interchangeable and mean the same thing.
   2. Conditions in the real world often influence value without affecting price.
   3. Price and value are always equal in the valuation.
   4. Price is what you pay, and value is what you get.
10. Which of the following statements is correct?
    1. Fair value considers a willing buyer and a willing seller.
    2. Fair market value considers that the buyer is not always compelled but the seller is always under compulsion.
    3. Fair value assumes the buyer and seller have equal knowledge.
    4. Fair value considers the concept of fairness to the seller.
11. Which standard of value considers value to a particular buyer?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
12. All of the following valuation purposes are prepared using fair market value except:
    1. Estate and gift taxes.
    2. Employee stock ownership plans.
    3. Financial reporting.
    4. Ad valorem taxes.
13. In most states, which standard of value is used to value stockholder disputes?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
14. Which of the following valuation purposes uses investment value as the applicable standard of value?
    1. Financial acquisitions.
    2. Strategic acquisitions.
    3. Financial reporting.
    4. Estate and gift taxes.
15. Which of the following comments concerning Revenue Ruling 59-60 is incorrect?
    1. According to the author, it is probably the greatest treatise ever issued on valuation.
    2. The ruling covers what is known as the formula approach or excess earnings method.
    3. The ruling discusses the eight factors to consider, at a minimum, in valuing closely held businesses.
    4. The ruling outlines that valuation is a prophecy about the future.
16. Which Revenue Ruling discusses what is known as the formula approach or excess earnings method of valuation?
    1. Revenue Ruling 59-60.
    2. Revenue Ruling 68-609.
    3. Revenue Ruling 77-287.
    4. Revenue Ruling 93-12.
17. Which standard of value applies to all federal tax valuations?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
18. Which standard of value is frequently used by financial analysts based on all of the facts and circumstances of the business or the investment, often ignoring the fluctuations of the stock market?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
19. The concept that there are three economic reasons that investors will invest in certain stock—dividends, capital appreciation, or a combination of the two—is based on which principle?
    1. The principle of supply and demand.
    2. The principle of alternatives.
    3. The principle of substitution.
    4. The principle of future benefits.
20. Which of the following relates to the concept of highest and best use?
    1. Definitions of value.
    2. Premise of value.
    3. Standards of value.
    4. Principle of substitution.
21. Which of the following is an example of a premise of value?
    1. Intrinsic value.
    2. Fair market value.
    3. Going concern value.
    4. Minority interest value.
22. Assuming a discount rate of 10%, which of the following has the highest cash value?
    1. $85,000 cash purchase.
    2. $125,000 purchase financed over 5 years.
    3. $150,000 purchase financed over 7 years.
    4. $200,000 purchase financed over 10 years.
23. “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” is the definition of which of the following?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
24. Which of the following statements is true in regard to fair value?
    1. Willing buyer and willing seller.
    2. Hypothetical buyer and seller.
    3. Applicable to minority blocks.
    4. Assumes reasonable knowledge by both parties.
25. In most states, stockholder disputes have the same standard of value as which of the following?
    1. Financial reporting.
    2. Estate and gift tax.
    3. Strategic acquisitions.
    4. Employee stock ownership plans.
26. Which standard of value is applicable to strategic acquisitions?
    1. Fair market value.
    2. Fair value.
    3. Investment value.
    4. Intrinsic value.
27. Which Revenue Ruling modified 59-60 by making it applicable to income and other taxes, as well as to estate and gift taxes?
    1. Revenue Ruling 65-192.
    2. Revenue Ruling 68-609.
    3. Revenue Ruling 77-287.
    4. Revenue Ruling 93-12.
28. Which Revenue Ruling was intended “to provide information and guidance to taxpayers, IRS personnel, and others concerned with the valuation, for Federal tax purposes, of securities that cannot be immediately resold because they are restricted from resale pursuant to Federal security laws”?
    1. Revenue Ruling 59-60.
    2. Revenue Ruling 68-609.
    3. Revenue Ruling 77-287.
    4. Revenue Ruling 93-12.
29. Which Revenue Ruling allows appropriate minority discounts to be applied when minority interests of family members in a closely held corporation are valued?
    1. Revenue Ruling 59-60.
    2. Revenue Ruling 68-609.
    3. Revenue Ruling 77-287.
    4. Revenue Ruling 93-12.
30. Which of the following is not one of the eight factors outlined in Revenue Ruling 59-60 for determining fair market value?
    1. The book value of the stock and the financial condition of the business.
    2. Sales of the stock and the size of the block of stock to be valued.
    3. The earnings capacity of the company.
    4. The dividends paid by the company.