Certified Valuation Analyst (CVA) Practice Exam

Which source is a good benchmark for determining excess cash on a company's balance sheet?

1. EPA Guidelines

2. RMA or BizMiner

3. GAAP Standards

4. IRS Publication

The correct answer is: RMA or BizMiner

A good benchmark for determining excess cash on a company's balance sheet is the use of RMA (Risk Management Association) or BizMiner data sources. These sources provide industry-specific financial benchmarking information that includes typical cash holdings relative to a company's size and revenue. By analyzing average cash levels within a particular industry, analysts can assess whether a company's cash holdings are excessive compared to its peers. Using RMA or BizMiner allows for comparisons against similar businesses, which helps in identifying what constitutes normal versus excess cash. This is important because excess cash might indicate that the company is not efficiently utilizing its resources, whereas lower cash levels could suggest potential liquidity issues. In contrast, other sources like EPA guidelines, GAAP standards, or IRS publications do not specifically focus on financial benchmarking or industry norms related to cash position. They have different purposes: EPA guidelines relate to environmental regulations, GAAP standards govern general accounting practices without specific industry context, and IRS publications focus on tax-related information and compliance. Therefore, when looking for a relevant benchmark specifically to assess excess cash, RMA or BizMiner stands out as the most suitable option.