CIRA Financial Analysis & Reporting 2 — Questions and Answers
Question 1: Under ASC 852, which of the following must be segregated on the balance sheet of a debtor-in-possession?
- Pre-petition liabilities subject to compromise (Correct answer)
- All unsecured liabilities
- Post-petition trade payables
- Deferred tax liabilities
Correct answer: Pre-petition liabilities subject to compromise
ASC 852 requires pre-petition liabilities subject to compromise to be segregated from ordinary liabilities on the DIP balance sheet.
Question 2: Which financial metric best measures a distressed company's ability to service its debt from operations?
- Current ratio
- Debt-to-equity ratio
- EBITDA-to-interest coverage ratio (Correct answer)
- Quick ratio
Correct answer: EBITDA-to-interest coverage ratio
The EBITDA-to-interest coverage ratio directly compares operating cash generation to interest obligations, making it the most relevant debt service metric.
Question 3: When preparing a Statement of Affairs, assets are valued at:
- Historical cost less accumulated depreciation
- Fair value or estimated net realizable value (Correct answer)
- Replacement cost
- Tax basis
Correct answer: Fair value or estimated net realizable value
A Statement of Affairs presents assets at their estimated net realizable or liquidation value rather than historical cost.
Question 4: A company's trailing twelve-month (TTM) EBITDA is best calculated using which approach?
- Most recent fiscal year only
- Most recent quarter annualized by multiplying by 4
- Last fiscal year plus YTD current period minus YTD prior period (Correct answer)
- Simple average of the last four quarters
Correct answer: Last fiscal year plus YTD current period minus YTD prior period
TTM EBITDA is computed as prior full-year EBITDA plus current YTD minus the comparable prior-year YTD period to capture the most recent 12 months.
Question 5: Which ratio is most commonly used to assess working capital adequacy in a distressed company?
- Debt-to-EBITDA
- Current ratio (Correct answer)
- Interest coverage ratio
- Fixed charge coverage ratio
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) directly measures short-term liquidity and working capital adequacy.
Question 6: Fresh-start reporting requires that a reorganized company's assets be recorded at:
- Historical cost carried forward from the predecessor entity
- Fair value as of the fresh-start date (Correct answer)
- Book value adjusted for inflation
- Tax basis as approved by the IRS
Correct answer: Fair value as of the fresh-start date
Under ASC 852, fresh-start reporting mandates that all assets and liabilities be recorded at fair value on the reorganization effective date.
Question 7: In a distressed financial analysis, 'normalized EBITDA' typically excludes which of the following?
- Recurring cost of goods sold
- One-time restructuring charges and non-recurring professional fees (Correct answer)
- Ongoing rent expense
- Regular employee compensation
Correct answer: One-time restructuring charges and non-recurring professional fees
Normalized EBITDA removes non-recurring items like restructuring charges and bankruptcy-related professional fees to reflect sustainable operating performance.
CIRA Financial Analysis & Reporting 2
Under ASC 852, which of the following must be segregated on the balance sheet of a debtor-in-possession?