Chapter 9 - Basic Business Appraisal

Question 0

What is the difference between accrual and cash accounting?

Answer 0

Cash: used by closely held firms; recognizes income when actually received and expenses when actually paid.

Accrual: used by publicly traded companies; recognizes income when the sale is made (not closed and money collected) and recognizes expenses when expenses are incurred (not later when they’re paid).

Question 1

What is the difference between an income statement and a balance sheet in a business sale?

Answer 1

Income statement reflects company’s profitability over an accounting period

Balance sheet shows the company’s financial position at an exact moment in time

Question 2

How do you calculate inventory turnover ratio in a business sale?

Answer 2

Cost of goods sold / ending inventory = Inventory Turnover Ratio

Question 3

In a business sale, what is “book value”?

Answer 3

The asset’s original cost less depreciation

Question 4

In a business sale, when is the Liquidation Value Approach use appropriate?

Answer 4

When a business is unlikely to keep operating, or is otherwise looking for a quick sale of the firm’s assets.

Most conservative way to determine value.

Question 5

In a business sale, what is the difference between Current Ratio and Quick Ratio?

Answer 5

Current Ratio= current assets/current liabilities

Quick Ratio=(current assets-inventory)/
. current liabilities

Question 6

In a business sale, how do you convert cash to accrual basis?

Answer 6

1. Subtract current accounts payable from accounts receivable to get a net projected income or loss
2. Add that result to current NOI to determine accrual NOI
3. Add accounts receivable to current sales to determine accrual sales

Question 7

What is an appraisal called when it is for a value as of a date in the past?

Answer 7

A retrospective appraisal.