CBS Financial Statement Analysis 2 — Questions and Answers
Question 1: Under ASC 852, how should a debtor-in-possession reclassify liabilities that are subject to compromise?
- They remain in their original balance sheet classifications
- They are moved to a separate 'Liabilities Subject to Compromise' line item (Correct answer)
- They are written off entirely until the plan is confirmed
- They are reclassified as contingent liabilities in the footnotes only
Correct answer: They are moved to a separate 'Liabilities Subject to Compromise' line item
ASC 852 requires that liabilities subject to compromise be segregated and presented as a separate line item on the balance sheet.
Question 2: When analyzing a distressed company's cash flow statement, which section is most critical for assessing short-term liquidity during bankruptcy proceedings?
- Cash flows from investing activities
- Cash flows from financing activities
- Cash flows from operating activities (Correct answer)
- Non-cash supplemental disclosures
Correct answer: Cash flows from operating activities
Operating cash flows reveal whether the debtor can fund day-to-day operations independently of asset sales or new financing.
Question 3: A company's quick ratio is 0.4 during Chapter 11. What does this indicate?
- The company has strong short-term liquidity
- Current liabilities exceed liquid assets by more than double (Correct answer)
- The company is generating positive free cash flow
- The company's inventory is its primary asset
Correct answer: Current liabilities exceed liquid assets by more than double
A quick ratio of 0.4 means liquid assets (cash + receivables) cover only 40% of current liabilities, indicating severe liquidity stress.
Question 4: In a bankruptcy reorganization, how is fresh-start accounting applied to intangible assets?
- Intangibles are carried at pre-petition book value
- Intangibles are eliminated and no new intangibles are recorded
- Intangibles are recorded at reorganization value allocated based on fair value (Correct answer)
- Intangibles are written down by the percentage of debt discharged
Correct answer: Intangibles are recorded at reorganization value allocated based on fair value
Under fresh-start accounting, all assets including intangibles are restated to their fair values as of the emergence date.
Question 5: Which financial metric best captures a distressed firm's ability to service secured debt from operations?
- Gross margin percentage
- Debt service coverage ratio (DSCR) (Correct answer)
- Current ratio
- Price-to-earnings ratio
Correct answer: Debt service coverage ratio (DSCR)
DSCR measures operating income relative to principal and interest obligations, directly reflecting debt service capacity.
Question 6: A bankruptcy trustee notes that a company's accounts receivable days outstanding increased from 45 to 120 days. What is the most likely concern?
- The company is collecting receivables too aggressively
- Revenue is declining and customers are not paying timely (Correct answer)
- The company has eliminated all bad debt reserves
- Inventory turnover has improved significantly
Correct answer: Revenue is declining and customers are not paying timely
A dramatic increase in DSO signals collection problems, potential revenue recognition issues, or deteriorating customer creditworthiness.
Question 7: Under fresh-start reporting, the reorganization value is first allocated to which assets?
- Long-term liabilities
- Identifiable tangible and intangible assets at fair value (Correct answer)
- Retained earnings
- Goodwill is recorded first as a plug figure
Correct answer: Identifiable tangible and intangible assets at fair value
Reorganization value is allocated to identifiable assets at fair value first; any excess becomes goodwill under fresh-start accounting.
CBS Financial Statement Analysis 2
Under ASC 852, how should a debtor-in-possession reclassify liabilities that are subject to compromise?