TMA Introduction to Business 2 — Questions and Answers
Question 1: In a turnaround context, what does 'runway' refer to?
- The physical layout of a manufacturing plant
- The number of months a company can operate before running out of cash (Correct answer)
- The time required to train new management
- The period needed to negotiate with creditors
Correct answer: The number of months a company can operate before running out of cash
Runway is the number of months of cash remaining at the current burn rate, a critical metric in any turnaround.
Question 2: Which financial statement best reveals a company's short-term liquidity crisis?
- Income statement
- Balance sheet
- Cash flow statement (Correct answer)
- Statement of retained earnings
Correct answer: Cash flow statement
The cash flow statement shows actual cash inflows and outflows, directly revealing short-term liquidity problems.
Question 3: A company's quick ratio is 0.6. What does this indicate?
- The company is highly liquid
- The company may struggle to meet short-term obligations without selling inventory (Correct answer)
- The company has excessive cash reserves
- The company is performing above industry average
Correct answer: The company may struggle to meet short-term obligations without selling inventory
A quick ratio below 1.0 suggests the company cannot cover current liabilities with its most liquid assets.
Question 4: Which of the following is a PRIMARY driver of business distress according to turnaround professionals?
- Excessive marketing spend
- Management dysfunction or poor strategic decisions (Correct answer)
- Overly aggressive hiring
- High employee morale
Correct answer: Management dysfunction or poor strategic decisions
TMA research consistently identifies management dysfunction and poor strategic decisions as the leading cause of business distress.
Question 5: What is 'EBITDA' most commonly used for in turnaround analysis?
- Calculating tax liability
- Measuring cash-generating ability before financing and non-cash charges (Correct answer)
- Determining inventory value
- Assessing employee productivity
Correct answer: Measuring cash-generating ability before financing and non-cash charges
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) approximates operating cash flow and is widely used in distressed company valuation.
Question 6: In business turnarounds, 'stakeholder management' primarily involves:
- Managing stock market investor expectations exclusively
- Communicating with and balancing the interests of all parties affected by the restructuring (Correct answer)
- Reducing the number of shareholders
- Eliminating non-essential vendor contracts
Correct answer: Communicating with and balancing the interests of all parties affected by the restructuring
Effective stakeholder management requires transparent communication with creditors, employees, customers, and suppliers throughout the turnaround process.
Question 7: What is a 'going concern' opinion from an auditor?
- A positive assessment of company growth prospects
- A warning that the company may not survive the next 12 months (Correct answer)
- An endorsement of management's strategy
- A certification that financials are free of material misstatement
Correct answer: A warning that the company may not survive the next 12 months
A going concern opinion signals the auditor's substantial doubt about the company's ability to continue operations for the next year.
TMA Introduction to Business 2
In a turnaround context, what does 'runway' refer to?