CIRA Cash Flow Management & Liquidity Analysis 2 — Questions and Answers
Question 1: Which metric best measures a company's ability to meet short-term obligations without selling inventory?
- Current ratio
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Operating cash flow ratio
Correct answer: Quick ratio
The quick ratio (cash + receivables divided by current liabilities) excludes inventory, providing a more conservative measure of immediate liquidity.
Question 2: A company's days sales outstanding (DSO) increased from 30 to 60 days during a distress period. What is the most likely cash flow implication?
- Improved cash conversion efficiency
- Delayed cash collections reducing available liquidity (Correct answer)
- Increased revenue recognition accelerating cash inflows
- Reduced accounts payable obligations
Correct answer: Delayed cash collections reducing available liquidity
A doubling of DSO means customers are taking twice as long to pay, which delays cash collections and reduces the company's available liquidity.
Question 3: What is 'adequate protection' in the context of a secured creditor's cash collateral rights in Chapter 11?
- A guaranty provided by the debtor's parent company
- Compensation or security provided to prevent diminution of a secured creditor's interest (Correct answer)
- A court order prohibiting the sale of collateral
- Additional equity contributed by existing shareholders
Correct answer: Compensation or security provided to prevent diminution of a secured creditor's interest
Adequate protection is the relief provided to a secured creditor to compensate for any decrease in the value of its collateral interest while the debtor uses the property in Chapter 11.
Question 4: In a restructuring context, 'operational cash burn' is best defined as:
- Net income minus depreciation and amortization
- Cash consumed by day-to-day operations excluding restructuring costs (Correct answer)
- Total debt service payments in a given period
- Capital expenditures required to maintain operations
Correct answer: Cash consumed by day-to-day operations excluding restructuring costs
Operational cash burn represents the cash used by core business operations, excluding one-time restructuring costs, and indicates the baseline liquidity need of the business.
Question 5: Which of the following actions would MOST directly improve a distressed company's short-term liquidity?
- Accelerating depreciation on fixed assets
- Negotiating extended payment terms with key suppliers (Correct answer)
- Increasing goodwill on the balance sheet
- Issuing additional common stock
Correct answer: Negotiating extended payment terms with key suppliers
Extending supplier payment terms defers cash outflows, directly improving the company's near-term cash position and working capital.
Question 6: When evaluating a distressed company's liquidity, a restructuring advisor would be most concerned about which combination of conditions?
- High DSO and high days payable outstanding (DPO)
- Low DSO and high inventory turnover
- High DSO and low days payable outstanding (DPO) (Correct answer)
- Low inventory and high current ratio
Correct answer: High DSO and low days payable outstanding (DPO)
High DSO means slow cash collection from customers, while low DPO means rapid payments to suppliers — together they create a severe cash flow squeeze.
Question 7: What is a 'carve-out' in the context of DIP financing?
- An exemption from the automatic stay for secured creditors
- A specified amount of DIP collateral reserved for professional fees and unsecured creditor committee expenses (Correct answer)
- The portion of assets excluded from the DIP lender's lien
- A mechanism to split the estate into separate operating units
Correct answer: A specified amount of DIP collateral reserved for professional fees and unsecured creditor committee expenses
A carve-out is a negotiated cap in the DIP order that sets aside a portion of DIP collateral to pay professional fees and certain estate expenses, ensuring access to counsel.
CIRA Cash Flow Management & Liquidity Analysis 2
Which metric best measures a company's ability to meet short-term obligations without selling inventory?