Due Diligence & Forensic Analysis in Turnaround Flashcards
7 cards from real CTA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Due Diligence & Forensic Analysis in Turnaround flashcards as text
What is 'normalized EBITDA' and why is it important in turnaround due diligence?
Answer: EBITDA adjusted for non-recurring and one-time items to reflect underlying business performance
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.
In forensic analysis, what is 'kiting' in the context of a distressed company's cash management?
Answer: A fraudulent scheme using float between bank accounts to artificially inflate cash balances
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.
Which analytical technique is most useful for detecting fictitious or manipulated revenues in a distressed company?
Answer: Benford's Law analysis of the distribution of leading digits in financial data
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.
What is a 'preference payment' in the context of bankruptcy forensic analysis?
Answer: A payment made to a creditor within 90 days before bankruptcy that may be clawed back
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.
When reviewing a distressed company's inventory during forensic analysis, what should the analyst be most alert to?
Answer: Overstated inventory values, obsolete items, and discrepancies with physical counts
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.
What does 'substantive consolidation' mean in the context of complex bankruptcy proceedings?
Answer: Merging the assets and liabilities of related entities and treating them as a single debtor
Substantive consolidation merges the assets and liabilities of related entities as if they were a single debtor, often pursued when assets have been commingled and separate corporate identities have been routinely disregarded.
In due diligence for a leveraged buyout gone wrong, what is most important to analyze regarding the debt structure?
Answer: The terms, covenants, maturity schedule, and cross-default provisions of all debt instruments
Understanding the complete debt structure including covenants, maturity schedule, and cross-default provisions is critical to identifying constraints, triggers, and options that will shape the available turnaround strategies.