CTA Due Diligence & Forensic Analysis in Turnaround 2

Question 1

What is 'normalized EBITDA' and why is it important in turnaround due diligence?

Accepted Answer

EBITDA adjusted for non-recurring and one-time items to reflect underlying business performance

Answer

Normalized EBITDA adjusts for non-recurring items to reveal underlying business performance, which is essential in distressed situations where financial statements often contain unusual charges that obscure true operating economics.

Question 2

In forensic analysis, what is 'kiting' in the context of a distressed company's cash management?

Accepted Answer

A fraudulent scheme using float between bank accounts to artificially inflate cash balances

Answer

Kiting is a fraudulent scheme where funds are moved between accounts to exploit check clearing time, artificially inflating cash balances and deceiving lenders and auditors about actual liquidity.

Question 3

Which analytical technique is most useful for detecting fictitious or manipulated revenues in a distressed company?

Accepted Answer

Benford's Law analysis of the distribution of leading digits in financial data

Answer

Benford's Law analysis examines the statistical distribution of leading digits in financial data; deviations from the expected natural pattern can indicate fabricated or manipulated numbers in large financial datasets.

Question 4

What is a 'preference payment' in the context of bankruptcy forensic analysis?

Accepted Answer

A payment made to a creditor within 90 days before bankruptcy that may be clawed back

Answer

A preference payment is made to a creditor within 90 days before bankruptcy filing (one year for insiders) and may be recoverable by the bankruptcy estate as it gives preferential treatment over other similarly situated creditors.

Question 5

When reviewing a distressed company's inventory during forensic analysis, what should the analyst be most alert to?

Accepted Answer

Overstated inventory values, obsolete items, and discrepancies with physical counts

Answer

Forensic analysts must be alert to overstated inventory values, obsolete items, and physical inventory shortfalls as these materially overstate assets and can mask the true severity of a company's financial distress.

CTA - Certified Turnaround Analyst Practice Test

CTA - Certified Turnaround Analyst Practice Test

CTA Due Diligence & Forensic Analysis in Turnaround 2