CIA Financial Analysis & Reporting 3 — Questions and Answers
Question 1: An appraiser is determining the replacement cost of a building destroyed by fire. The original cost was $800,000, accumulated depreciation is $200,000, and the current replacement cost new is $1,100,000. What is the Actual Cash Value (ACV)?
- $800,000
- $600,000
- $825,000 (Correct answer)
- $1,100,000
Correct answer: $825,000
ACV = Replacement Cost New × (1 − Depreciation %) = $1,100,000 × (1 − 200/800) = $1,100,000 × 0.75 = $825,000.
Question 2: A retailer's gross profit margin dropped from 42% to 35% after a flood damaged inventory. Which financial analysis technique best isolates the impact of the flood on profitability?
- Ratio analysis comparing pre- and post-loss periods
- Trend analysis using prior three years' data (Correct answer)
- Vertical common-size income statement analysis
- DuPont decomposition of return on equity
Correct answer: Trend analysis using prior three years' data
Trend analysis using multiple prior years normalizes seasonal variation and establishes a baseline, best isolating the flood's discrete impact on profitability.
Question 3: For a business interruption claim, the 'period of restoration' is most accurately defined as:
- The policy period during which premiums are paid
- The time required to repair or replace damaged property with reasonable speed (Correct answer)
- The duration of the lawsuit to settle the claim
- The fiscal year in which the loss occurred
Correct answer: The time required to repair or replace damaged property with reasonable speed
The period of restoration covers the time needed to repair or replace property with due diligence and dispatch, limiting the insurer's exposure to a reasonable recovery timeline.
Question 4: An appraiser calculating extra expense coverage should include which of the following costs incurred after a covered loss?
- Permanent capital improvements made opportunistically during repairs
- Temporary relocation costs necessary to continue business operations (Correct answer)
- Pre-loss deferred maintenance finally addressed during restoration
- Long-term lease buy-outs negotiated during the loss period
Correct answer: Temporary relocation costs necessary to continue business operations
Extra expense coverage reimburses necessary temporary costs, such as relocation, that allow the business to continue operations during the restoration period.
Question 5: Which depreciation method results in the highest book value of assets in the early years of an asset's life?
- Double declining balance
- Sum-of-the-years digits
- Straight-line (Correct answer)
- Units of production
Correct answer: Straight-line
Straight-line depreciation spreads cost evenly, resulting in the highest book value in early years compared to accelerated methods that front-load depreciation.
Question 6: When an appraiser reviews a hotel's revenue report to quantify a business interruption loss, which metric is the most comprehensive indicator of overall performance?
- Average Daily Rate (ADR)
- Occupancy percentage
- Revenue Per Available Room (RevPAR) (Correct answer)
- Food & beverage revenue per occupied room
Correct answer: Revenue Per Available Room (RevPAR)
RevPAR combines both occupancy rate and ADR into a single metric, making it the most comprehensive measure of a hotel's revenue-generating performance.
Question 7: A co-insurance clause requiring 80% coverage penalizes an insured who carries only 60% of the required insurance. If the property value is $1,000,000 and the loss is $200,000, how much will the insurer pay?
- $120,000
- $150,000 (Correct answer)
- $160,000
- $200,000
Correct answer: $150,000
Payment = (Insurance Carried ÷ Insurance Required) × Loss = ($600,000 ÷ $800,000) × $200,000 = 0.75 × $200,000 = $150,000.
CIA Financial Analysis & Reporting 3
An appraiser is determining the replacement cost of a building destroyed by fire.
The original cost was $800,000, accumulated depreciation is $200,000, and the current replacement cost new is $1,100,000.
What is the Actual Cash Value (ACV)?