Chap 17

Question 1

All the resources of a business, including tangibles and intangibles, are called the

A)
assets.
 B)
capital.
 C)
gross income.
 D)
cash flow.

Answer 1

Explanation
The answer is assets. Assets are the entire resources of a business, including tangibles and intangibles such as accounts and notes receivable, cash, inventory, equipment, real estate, and goodwill.

Question 2

Which accounting term refers to the total amount of money generated from an investment after the expenses are paid?

A)
Assets
 B)
Equity
 C)
Capital
 D)
Cash flow

Answer 2

Explanation
The answer is cash flow. Cash flow is the total amount of money generated from an investment after expenses have been paid.

Question 3

Which type of risk is also called inflation risk?

A)
Liquidity risk
 B)
Interest-rate risk
 C)
Business risk
 D)
Purchasing-power risk

Answer 3

Explanation
The answer is purchasing-power risk. Purchasing power risk reflects the fact that inflation may cause the investor to be paid back with less valuable dollars.

Question 4

The market value of an apartment building is $475,900. The investor has leveraged $380,720. What is the investor’s equity in the property?

A)
$95,180
 B)
$380,720
 C)
$475,900
 D)
$50,000

Answer 4

Explanation

The answer is $95,180. The solution is $475,900 market value – $380,720 leverage amount = $95,180 equity.

Question 5

An advantage of real estate investment trusts is

A)
stock brokerage fees.
 B)
that more recordkeeping is required.
 C)
that it offers diversification.
 D)
special tax incentives to purchasers not available in other types of investments.

Answer 5

Explanation
The answer is that it offers diversification. REITs offer investors the opportunity to invest in income-producing real estate properties. REITs are attractive because they offer diversification and liquidity.

Question 6

The value of an established business property, compared with the value of just the physical assets of a business that is NOT yet established, is called

A)
tangible assets.
 B)
going-concern value.
 C)
goodwill.
 D)
business enterprise.

Answer 6

Explanation
The answer is going-concern value. Going-concern value is the value of an established business property compared with the value of just the physical assets of a business that is not yet established.

Question 7

Intangible assets of a business does NOT include

A)
customer loyalty.
 B)
goodwill.
 C)
inventory.
 D)
trademarks.
Explanation

Answer 7

iExplanation
The answer is inventory. An intangible asset is something of value lacking physical substance, existing only in connection with something else such as the goodwill of a business.

Question 8

The buyer should sign which type of agreement before releasing financial information concerning a business?

A)
Latent defect disclosure
 B)
Confidentiality (nondisclosure) agreement
 C)
Listing agreement
 D)
Financial statement

Answer 8

Explanation
The answer is confidentiality (nondisclosure) agreement. The buyer should sign a confidentiality (nondisclosure) agreement before releasing the name of the business or its financials to the buyer.

Question 9

Which financial report indicates the results of business operations over a specific period of time?

A)
Balance sheet
 B)
Income statement
 C)
Working capital statement
 D)
Depreciable asset statement

Answer 9

Explanation
The answer is income statement. The income statement is a concise summary of all income and expenses of a business for a stated period of time.

Question 10

The cost to duplicate the business structure being appraised having the same use but differing physically somewhat is called

A)
reproduction cost.
 B)
benchmarking.
 C)
cost analysis.
 D)
replacement cost.

Answer 10

Explanation
The answer is replacement cost. When replacement cost is used, the appraiser calculates the cost that would result in a building having the same use and capabilities as the one being appraised, even though the new building might differ physically.

Question 11

A case in which the interest paid for borrowed funds is more than the overall rate of return to an investor is an example of

A)
liquidity.
 B)
positive leverage.
 C)
negative leverage.
 D)
yield.

Answer 11

Explanation
The answer is negative leverage. If the interest paid for borrowed funds is more than the overall rate of return from an investment, the investor’s real yield is decreased, resulting in negative leverage.

Question 12

An advantage of real estate as an investment is

A)
risk.
 B)
a localized market.
 C)
active management.
 D)
the leverage of borrowed money.
Explanation
The answer is the leverage of borrowed money. The goal of leveraging is to increase one's yield on equity by using borrowed funds.

Answer 12

Explanation
The answer is the leverage of borrowed money. The goal of leveraging is to increase one’s yield on equity by using borrowed funds.