CBS Financial Statement Analysis 3

Question 1

Which ratio measures how efficiently a bankrupt company converts inventory to sales and is critical for liquidation valuation?

Accepted Answer

Inventory turnover ratio

Answer

Inventory turnover reveals how quickly inventory sells, which is essential when estimating liquidation proceeds from stock-in-trade.

Question 2

A Chapter 11 debtor's balance sheet shows goodwill of $50M. Under fresh-start accounting at emergence, what happens to pre-petition goodwill?

Accepted Answer

It is eliminated and new goodwill may be recorded based on reorganization value

Answer

Pre-petition goodwill is eliminated entirely under fresh-start accounting; new goodwill is only recognized if reorganization value exceeds fair value of net assets.

Question 3

In solvency analysis, which test compares the fair value of assets to the fair value of liabilities to determine insolvency?

Accepted Answer

The balance sheet test

Answer

The balance sheet test defines insolvency as the condition where fair value of total liabilities exceeds fair value of total assets.

Question 4

When evaluating a reorganization plan, a creditor examines EBITDA projections. Why is EBITDA particularly useful in this context?

Accepted Answer

It approximates cash generation before capital structure effects, useful for valuation

Answer

EBITDA strips out financing costs and non-cash charges, making it a useful proxy for operating cash flow in enterprise valuations.

Question 5

A preference analysis requires determining whether a payment made 90 days before bankruptcy was made while the debtor was insolvent. Which financial documents are most relevant?

Accepted Answer

Pre-petition balance sheets and solvency analyses

Answer

Pre-petition balance sheets help establish whether assets exceeded liabilities at the time of the alleged preferential transfer.

(CBS) Certified Bankruptcy Specialist Practice Test

(CBS) Certified Bankruptcy Specialist Practice Test

CBS Financial Statement Analysis 3