CIRA Financial Analysis & Reporting 3 — Questions and Answers
Question 1: A 13-week cash flow forecast is primarily used in insolvency proceedings to:
- Determine enterprise value for plan confirmation
- Monitor short-term liquidity and covenant compliance under DIP financing (Correct answer)
- Calculate the reorganization value for fresh-start reporting
- Assess long-term going-concern viability
Correct answer: Monitor short-term liquidity and covenant compliance under DIP financing
The 13-week cash flow forecast tracks near-term cash receipts and disbursements to ensure the DIP borrower maintains adequate liquidity and meets lender covenants.
Question 2: Which of the following is NOT typically included as a reorganization item under ASC 852?
- Professional fees directly related to the bankruptcy case
- Gain on debt discharge
- Depreciation on property, plant & equipment (Correct answer)
- Interest earned on accumulated cash during bankruptcy
Correct answer: Depreciation on property, plant & equipment
Depreciation on PP&E is an ordinary operating expense, not a reorganization item; ASC 852 reorganization items include professional fees, debt discharge gains, and interest on cash accumulations.
Question 3: When a creditor holds both secured and unsecured claims against a debtor, the unsecured deficiency claim arises when:
- The collateral value exceeds the claim balance
- The claim balance exceeds the collateral's fair value (Correct answer)
- The creditor fails to file a proof of claim
- The court disallows the secured claim entirely
Correct answer: The claim balance exceeds the collateral's fair value
An unsecured deficiency claim equals the amount by which a creditor's total claim exceeds the fair value of its collateral.
Question 4: Which approach to valuing a distressed business is most appropriate when the company will be sold as a going concern?
- Orderly liquidation value
- Forced liquidation value
- Enterprise value based on discounted cash flows or comparable transactions (Correct answer)
- Book value of net assets
Correct answer: Enterprise value based on discounted cash flows or comparable transactions
A going-concern sale assumes the business continues to operate, making DCF or comparable transaction multiples the most appropriate valuation approaches.
Question 5: In a waterfall analysis, which class of claims is typically paid first?
- General unsecured creditors
- Equity holders
- Administrative expense claims (Correct answer)
- Junior subordinated debt
Correct answer: Administrative expense claims
Administrative expense claims, including post-petition obligations and DIP financing, have priority over all pre-petition claims and are paid first in the waterfall.
Question 6: A company has $5M in EBITDA and $30M in total debt. What is its leverage ratio?
- 0.17x
- 6.0x (Correct answer)
- 25.0x
- 150%
Correct answer: 6.0x
The leverage ratio (Debt/EBITDA) equals $30M ÷ $5M = 6.0x, indicating the company carries 6 times its annual EBITDA in debt.
Question 7: Which financial statement is most useful for identifying the sources and uses of cash during a restructuring period?
- Balance sheet
- Income statement
- Statement of cash flows (Correct answer)
- Statement of stockholders' equity
Correct answer: Statement of cash flows
The statement of cash flows classifies operating, investing, and financing activities, making it the most direct tool for tracking cash movement during restructuring.
CIRA Financial Analysis & Reporting 3
A 13-week cash flow forecast is primarily used in insolvency proceedings to: