CBB CBB Business Operations & Profitability Assessment 2 — Questions and Answers
Question 1: What does 'working capital' measure in business operations?
- The total value of all fixed assets owned by the business
- Current assets minus current liabilities, reflecting short-term operational liquidity (Correct answer)
- The business's annual payroll expense
- The owner's equity stake in the company
Correct answer: Current assets minus current liabilities, reflecting short-term operational liquidity
Working capital shows whether a business has sufficient liquid assets to cover its short-term obligations and sustain daily operations.
Question 2: What is the significance of reviewing a business's accounts receivable aging report during a sale?
- It shows the number of employees on the payroll
- It reveals the quality and collectability of outstanding customer invoices (Correct answer)
- It tracks the depreciation schedule of fixed assets
- It outlines the business's marketing budget allocation
Correct answer: It reveals the quality and collectability of outstanding customer invoices
An aging report shows how long invoices have been outstanding, identifying collection problems that could reduce actual cash flow.
Question 3: When assessing a business for sale, what does 'inventory turnover' indicate?
- How frequently the business changes its product line
- How many times inventory is sold and replaced in a given period, reflecting operational efficiency (Correct answer)
- The rate at which employees leave and are replaced
- The number of times the business has changed ownership
Correct answer: How many times inventory is sold and replaced in a given period, reflecting operational efficiency
Inventory turnover measures how efficiently a business converts inventory into sales, with low turnover indicating potential obsolescence risk.
Question 4: What does 'key man risk' mean in the context of a business being sold?
- The risk of a key employee filing a lawsuit
- The business's vulnerability to loss if a critical person—often the owner—leaves (Correct answer)
- The risk of the buyer replacing all management
- A risk associated with the business's key product being discontinued
Correct answer: The business's vulnerability to loss if a critical person—often the owner—leaves
Key man risk refers to the danger that a business's success depends too heavily on one individual whose departure would harm operations.
Question 5: Which ratio best assesses a business's ability to meet short-term obligations?
- Debt-to-equity ratio
- Current ratio (current assets Ă· current liabilities) (Correct answer)
- Return on equity (ROE)
- Price-to-earnings (P/E) ratio
Correct answer: Current ratio (current assets Ă· current liabilities)
The current ratio measures short-term liquidity by comparing liquid assets to near-term liabilities, with a ratio above 1 generally considered healthy.
Question 6: What does normalizing a business's financials help a broker accomplish?
- Reduce the broker's commission
- Present the business's true earning power by removing non-recurring or owner-specific expenses (Correct answer)
- Increase the seller's reported tax liability
- Prepare the business for an IPO
Correct answer: Present the business's true earning power by removing non-recurring or owner-specific expenses
Normalization adjusts the financials to reflect what a new owner would realistically earn, making the business more accurately comparable to others.
CBB CBB Business Operations & Profitability Assessment 2
What does 'working capital' measure in business operations?