Question 1

What is financial due diligence?

Accepted Answer

Financial due diligence is also known as "accounting" due diligence. It focuses on providing buyers and investors an idea of the company’s long-term economic earnings and is a critical evaluation of the company&#x27;s financial stability. It examines the company&#x27;s past and current financial results to create future projections and evaluate possible risks. Some financial information that would be reviewed with financial due diligence includes things such as cash flow, assets, liabilities, audited finance statements, balance sheets and projections. The aim of the financial due diligence process is to decide if the information is correct and to provide buyers with useful information about the company&#x27;s results.

Question 2

What is forensic accounting?

Accepted Answer

Forensic accounting is a branch of accounting that examines a person&#x27;s or a company&#x27;s accounts using auditing, accounting, and forensic skills. When using forensic accounting, an analysis is provided that is usable in legal proceedings. Forensic accountants investigate whether a company has engaged in financial reporting misconduct. In short, financial accounting uses both investigation and accounting to find financial crimes.

Question 3

How Is forensic accounting and financial due diligence related?

Accepted Answer

Before a deal is closed, forensic accountants will perform due diligence and find information on certain issues. A forensic accountant may examine accounts receivable in order to vet accounts and see how well the business is run, among other things. A forensic accountant works on due diligence issues and provides any evidence to aid the buyer or seller to make informed choices before closing a deal.

Question 4

What is a proforma operating budget?

Accepted Answer

Businesses often divide their budgets into several categories- an operating budget and a capital budget. A pro forma operating budget is a budget that is created in advance of possible changes to your company that may affect your business’s finances or operating structure. New debt obligations, loans, bankruptcy, and mergers are factors to weigh in a pro forma operating budget. A pro forma operating budget shows the expected outcomes, including cash flows, net sales, and taxation.

Question 5

What is a pro forma balance sheet?

Accepted Answer

A pro forma balance sheet is a calculation of projected estimates that helps to properly manage a company&#x27;s finances in the future in regard to providing returns to investors, keeping track of inventory and paying bills.

Balance sheets may also be used to demonstrate a company&#x27;s financial adequacy, such as identifying a high debt-to-equity ratio, which a bank could assess to determine credibility.

Question 6

What is pre-money valuation?

Accepted Answer

Pre-money valuation is the worth of a business before it receives any outside investment. That&#x27;s essentially the estimated value of a startup before it gets any funding. This valuation provides investors with an estimate of the company&#x27;s market worth as well as the value of each share.
The most important factor affecting the scale of an investor&#x27;s equity interest in a firm is pre-money valuation. This is because the formula determines the price per share (PPS) that an investor will pay for its stock.

Question 7

What is post-money valuation?

Accepted Answer

The worth of a business after it has received investments and assets is referred to as a post-money valuation. Outside funding and capital are included in this value. External investors, such as venture capitalists and angel investors, can use these post-value valuations to find out how much equity they get when they invest in the business.

Question 8

How do you calculate valuations?

Accepted Answer

When it comes to the valuation process, it has a major impact on ownership ratios. This is due to the fact that the amount of value levied on a business before investing varies greatly. For example, sometimes the pre-money valuation will be worth more than the post-money valuation since the pre-money valuation excludes the money spent.

When calculating the post-money evaluation, the investment amount plus the percent the investor receives equals the post money valuation. For example, if an investment is worth $4 million and the investor receives 10 percent, the post money evaluation would equal $40 million.

In order to calculate pre-money evaluation, it is important to remember that this valuation is before it receives any funding from investors. However, this type of valuation provides investors information on how the company would be valued currently.You must first calculate the post-money evaluation to get the pre-money evaluation. The formula is the post-money valuation minus the investment amount.

Question 9

What is sensitivity analysis?

Accepted Answer

Financial modeling often employs sensitivity analysis as a technique. It allows you to see how different values of a series of independent variables influence a single dependent variable under different circumstances. As a result, sensitivity analysis can be applied to a wide range of areas other than finance and economics, such as biology.

A what-if analysis is another name for a financial sensitivity analysis. Financial analysts also use this method of analysis to forecast the results of decisions taken under specific conditions. A sensitivity analysis allows for forecasts based on historical evidence, and it can be used to assist in making decisions about stock markets or how interest rates impact bond prices.

Sensitivity analysis examines all the factors in great precision and provides more reliable estimates. It also enables decision makers to see where potential changes can be needed, as well as the opportunity to make strategic choices about their finances and businesses.

However, sensitivity analysis has certain drawbacks, such as the fact that it is never completely accurate because it is dependent on assumptions and historical evidence, so it is essentially a credible approximation with space for error.

Question 10

How do you calculate your cash conversion cycle?

Accepted Answer

There are some factors to remember when calculating the Cash Conversion Cycle. Days Inventory Outstanding (DIO) is the first part of the formula, which refers to the total time it takes to turn inventory into finished products and sell them. The second element is your DSO, or Days Sales Outstanding, which is the average number of days your accounts receivables have been waiting for payment. Days Payable Outstanding (DPO) is the total time it takes a company to buy from its suppliers on accounts payable. Once you have calculated each part of the formula you can calculate your CCC which is the DIO + DSO-DPO.

Question 11

Why is your cash conversion cycle important?

Accepted Answer

The CCC is a useful measurement when it comes to comparing your past performance as a business. You also may be able to utilize your CCC to compare to competitors’ financial information. 
Overall, the CCC is a valuable statistic because it is used to assess a company&#x27;s performance. The CCC can be used in any sector, but it is especially relevant for retailers because their activities include purchasing inventory and marketing it to consumers, resulting in a significant portion of their resources being locked up as products.

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