A distressed company can look profitable while running out of cash, and a plan can promise strong recoveries while lacking the financing to deliver them. CIRA study therefore calls for more than learning bankruptcy terms. You need to trace how operating problems become liquidity pressures, identify who controls assets and decisions in a chapter 11 case, and test whether a proposed recovery survives valuation, priority, cash flow, accounting, and tax analysis. This guide follows AIRA’s three independently assessed parts: managing turnaround and bankruptcy cases, developing plans, and addressing financial reporting, taxes, and ethics. The examples use stated assumptions so you can practice making defensible decisions from incomplete business facts without treating a forecast or proposed claim as certain.
Managing Turnaround and Bankruptcy Cases
1. Read the liquidity runway
In Part 1, a liquidity forecast starts with cash that can actually be spent, then places expected receipts and required payments on their due dates. For each day or week, closing cash equals opening cash plus receipts minus payments; that closing figure becomes the next period’s opening cash. The lowest balance matters more than the final balance because a later collection cannot fund an earlier payroll. Separate committed receipts from hoped-for sales, and separate essential operating payments from amounts whose timing might be negotiated. Also identify cash subject to a lender’s interest or another restriction before counting it as available. A forecast should show the first negative balance, any minimum operating cushion, and the action needed by that date. This cash discipline is part of the Part 1 course scope.
Worked example: A debtor starts with $400,000 of available cash. Over three weeks it collects $900,000 and pays $1.1 million, so closing cash is $400,000 + $900,000 − $1.1 million = $200,000. Payroll of $350,000 falls due the next day, before further receipts. The first funding gap is $150,000. If management also needs a $100,000 cash cushion, it must arrange $250,000 before payroll.
Watch the distinction: A positive balance at the end of a month does not prove every intervening payment can be made. Date the receipts and disbursements, then find the lowest cash point.
2. Normalize distressed earnings
In Part 1, normalized EBITDA estimates earnings from operations likely to continue under a stated plan. Start with reported EBITDA, remove gains that will not recur, and add back unusual expenses only when evidence shows they will stop. A property sale gain may increase reported profit without indicating stronger customer demand. A relocation charge may be nonrecurring, but related rent, staffing, or duplicate facility costs could persist. Check transaction records, contracts, and the forecast before accepting an adjustment. Keep the direction of each adjustment clear: subtract unusual income and add back genuinely nonrecurring expense. Normalization is an analytical estimate, not a claim that the adjusted figure was earned in cash. It should be reconciled to both historical statements and the operational changes needed to achieve it.
Worked example: Reported EBITDA is $1.2 million. It includes a $500,000 property sale gain that will not recur and a $200,000 relocation expense that management documents as complete. Normalized EBITDA is $1.2 million − $500,000 + $200,000 = $900,000. That is $300,000 below the reported figure. If any relocation costs continue, the $200,000 add-back must be reduced accordingly.
Watch the distinction: Calling an expense unusual does not make it avoidable. An add-back overstates sustainable earnings if similar costs recur or the proposed operating plan still requires them.
Reference: [2]
3. Find cash trapped in working capital
In Part 1, the cash conversion cycle measures how long operating cash is tied up between paying for inputs and collecting from customers. Add days sales outstanding to inventory days, then subtract payable days. A longer cycle usually increases funding needs when sales grow. To estimate cash released by faster collections, multiply the reduction in collection days by average daily credit sales, provided the sales base and payment pattern are stable. That estimate is a one-time working capital release, not a permanent increase in annual profit. Test whether invoices are disputed, customers are financially stressed, or discounts are needed to accelerate payment. A shorter payable period can offset collection gains, while inventory reductions may threaten service if they remove necessary stock. Measure each proposed change against operational consequences.
Worked example: Days sales outstanding are 60, inventory days are 75, and payable days are 45. The cash conversion cycle is 60 + 75 − 45 = 90 days. If better billing and collection cut days sales outstanding to 50, the cycle becomes 80 days. At $120,000 of daily credit sales, ten fewer collection days release about $1.2 million, assuming sales and customer payment behavior otherwise hold.
Watch the distinction: A ten-day collection improvement is not ten days of added revenue. It accelerates cash from existing sales; its value depends on whether those receivables would otherwise be collected.
Reference: [2]
4. Distinguish cash pressure from asset deficiency
In Part 1, distinguish the ability to pay obligations when due from the value remaining after claims are compared with realizable assets. A company may have cash for this week yet face a substantial asset deficiency. Conversely, assets may exceed claims while cash is unavailable before payroll or a debt maturity. Use explicit values and dates: unrestricted cash and scheduled payments for the liquidity question; estimated realizable asset value and the relevant claims for the value comparison. Realizable value depends on sale conditions, liens, and transaction costs, so book assets are an unreliable substitute. The two analyses guide different immediate decisions. A near-term payment gap calls for cash action. An asset deficiency also affects creditor bargaining positions and the credibility of a proposed recovery plan. Neither simple comparison alone settles every legal insolvency question.
Worked example: Assume the company has enough unrestricted cash for $300,000 of payments due this week. Separately, its assets are estimated to realize $15 million against $19 million of claims on the same valuation basis. The apparent deficiency is $19 million − $15 million = $4 million. Current payments can be met, but the value comparison points to a deeper shortfall that cash timing alone cannot cure.
Watch the distinction: Cash in the bank is a poor proxy for overall solvency. It can cover immediate bills while realizable asset value remains below claims, or be scarce despite substantial assets.
Reference: [2]
5. Trace the cause of the earnings decline
In Part 1, a contribution bridge tests whether lower sales volume explains a decline in EBITDA. Contribution equals revenue minus costs that vary with sales; EBITDA then subtracts fixed operating costs. Hold price, variable cost rate, and fixed costs constant first to isolate the volume effect. Multiply the revenue change by the contribution margin to estimate the change in EBITDA. Then reconcile any remaining difference to price changes, product mix, variable cost inflation, or changes in fixed costs. This sequence prevents a team from blaming an unexplained loss on volume alone. In a distressed company, the distinction affects the remedy: restoring volume may help when margins are sound, while high variable costs or excess fixed capacity require different action. Check whether the assumed margin remains valid at the lower output level.
Worked example: At $20 million revenue and a 40% contribution margin, contribution is $8 million. Subtract $7 million of fixed costs to get $1 million EBITDA. A 15% volume decline at unchanged prices reduces revenue to $17 million. Contribution becomes $6.8 million, and EBITDA becomes negative $200,000. The $3 million revenue loss times 40% explains the full $1.2 million EBITDA decline.
Watch the distinction: Do not subtract the full lost revenue from EBITDA. Variable costs usually fall with volume, so the earnings effect is lost contribution unless prices, costs, or capacity also change.
Reference: [2]
6. Use avoidable costs in product decisions
In Part 1, a product exit should be judged by incremental cash earnings, not by a reported product profit after arbitrary overhead allocations. Identify revenue and variable costs that disappear if the product stops. Their difference is the contribution lost. Then identify support costs that can actually be removed, such as dedicated labor or a cancellable service contract. Costs that remain, including allocated headquarters expenses, do not improve the exit economics. Include shutdown costs, contract penalties, customer spillovers, and any higher-value use of released capacity. Compare the outcome over the time horizon in which costs can be removed; a lease may be unavoidable this quarter but avoidable after renewal. A product with a negative allocated profit may still help cover common fixed costs and preserve cash.
Worked example: A product generates $35,000 of monthly contribution after its variable costs. Stopping it would eliminate $20,000 of dedicated support costs. The monthly earnings change is $20,000 saved − $35,000 lost = negative $15,000. Unless its capacity can earn more than $15,000 monthly elsewhere, discontinuing it worsens earnings. Headquarters overhead allocated to the product is irrelevant if that spending continues.
Watch the distinction: A product shown as unprofitable after allocated overhead is not automatically a good exit. Count only cash flows that change because of the decision.
Reference: [2]
7. Test an outsourcing proposal
In Part 1, outsourcing replaces an internal process with a vendor obligation, so compare like periods and like service levels. Start with internal costs that genuinely disappear, not the department’s entire allocated budget. Subtract the vendor fee, then account for transition spending, retained oversight staff, contract minimums, and costs if service fails. The first year can differ sharply from later years because migration is paid once. A small projected saving deserves a sensitivity test: delays, quality defects, or higher order volumes may erase it. Also check whether the vendor can meet essential service during the turnaround and whether the debtor can exit the contract if demand changes. For a cash-constrained company, the timing of transition payments matters as much as the annual earnings estimate.
Worked example: Internal costs that would disappear total $600,000 per year. A vendor charges $480,000 annually, and migration costs $90,000 once. First-year savings are $600,000 − $480,000 − $90,000 = $30,000. Later annual savings are $120,000 if prices and service levels hold. A first-year service failure costing more than $30,000 would erase that year’s projected benefit.
Watch the distinction: Comparing the vendor quote with total departmental expense exaggerates savings if managers, facilities, or systems remain. Retained costs and transition payments belong in the decision.
Reference: [2]
8. Set the turnaround sequence
In Part 1, turnaround work follows the cash runway. Stabilize first by identifying the next unavoidable payment, protecting critical operations, and engaging parties whose cooperation is needed before cash runs out. Diagnose the causes of losses in parallel, using customer, margin, working capital, and capacity evidence. Then implement changes with named owners and dated milestones, and monitor cash and operating measures against the forecast. The sequence is practical rather than rigid: diagnosis cannot wait indefinitely, but a long strategic review will not fund tomorrow’s payroll. A short-term lender accommodation should be tied to a credible operating plan, reporting cadence, and revised forecast. The Part 1 study guide can be used to connect immediate case decisions with the underlying business analysis.
Worked example: Next week’s receipts are $500,000. Essential payroll and suppliers require $430,000, leaving $70,000 for a $300,000 debt maturity. The immediate gap is $230,000. Management should verify receipt dates, protect essential payments, and approach the lender before maturity with a short forecast and proposed relief. It can then test whether margin losses or working capital caused the recurring pressure.
Watch the distinction: A plausible long-term strategy cannot substitute for an immediate cash action. If the next maturity exceeds available cash, secure a workable bridge while diagnosing the business.
9. Control cash against a weekly forecast
In Part 1, a weekly cash variance tells management whether the forecast failed because money arrived late, spending exceeded plan, or the opening balance was wrong. Reconcile forecast closing cash to actual closing cash by separate receipt and payment variances. A collection shortfall can be timing, lost sales, invoice disputes, or customer distress; those causes need different remedies. A payment overrun can reflect an unplanned essential purchase, a duplicate payment, or costs excluded from the forecast. Assign each variance to an owner, update its expected reversal date, and carry the corrected assumptions into the next rolling forecast. Avoid treating a delayed receipt as permanently lost without evidence. Equally, do not assume it will arrive next week merely to make the projection balance.
Worked example: Forecast cash closes at $600,000 + $400,000 receipts − $700,000 payments = $300,000. Actual cash closes at $600,000 + $300,000 − $760,000 = $140,000. The $160,000 adverse variance consists of $100,000 fewer receipts and $60,000 more payments. The team should identify the specific customers and disbursements before revising the next week’s cash forecast.
Watch the distinction: A single unfavorable closing balance does not identify the cause. Separate collection and spending differences, then determine whether each is a timing shift or a lasting change.
Reference: [2]
10. Locate the operating bottleneck
In Part 1, output from a process is limited by its narrowest effective step. Map units through each stage and compare capacity with actual good output, not just scheduled machine hours. Increasing capacity before the constraint may raise work in process without increasing shipments or cash. Improve the constrained stage through scheduling, reduced rework, added shifts, maintenance, or selective investment, then check whether the constraint moves elsewhere. The relevant economic measure is extra contribution from saleable units less the incremental cost of relieving the bottleneck. Demand, material supply, quality, and shipping capacity may impose lower limits than the stated machine capacity. A distressed business should favor changes that create near-term cash with manageable execution risk, rather than broad spending across every department.
Worked example: Assembly can make 120 units daily, but testing can release only 80, so shipments are capped at 80 if other steps and demand permit. Raising assembly capacity to 140 adds zero shipments. Adding 20 effective testing slots raises the limit to 100 daily, an increase of 20. At $50 contribution per sold unit, the maximum added contribution is $1,000 per day before the testing cost.
Watch the distinction: The busiest department is not necessarily the constraint. Find the step that limits saleable output; improving a faster upstream stage can merely build inventory.
Reference: [2]
11. Choose a viable business focus
In Part 1, choosing a business focus means comparing the cash consequences of mutually exclusive uses of scarce assets. Establish the legacy activity’s avoidable loss, the proposed activity’s contribution after its direct support costs, the one-time conversion spending, and the time until cash arrives. Then test demand evidence, staffing needs, equipment suitability, and the risk that the projected contribution is delayed. Include any shutdown obligations or lost customers that the switch creates. An attractive annual improvement may still be impossible if conversion cash is needed before financing is available. Compare both first-year and steady-state results so the one-time investment is visible. Keep financing charges separate unless the alternatives require different borrowing. A plan should state which assumptions can be measured early and what action follows if they fail.
Worked example: A legacy line loses $400,000 annually. The same equipment could support a service line expected to generate $650,000 of annual contribution before $150,000 of dedicated support costs, or $500,000 net. Relative to the legacy loss, steady-state improvement is $900,000. After a one-time $300,000 conversion cost, first-year improvement is $600,000 before financing effects, assuming the service forecast starts on schedule.
Watch the distinction: Comparing the new line’s sales with the old line’s loss misses direct support costs and conversion cash. Evaluate incremental contribution and when the investment must be paid.
Reference: [2]
12. Build a standstill case
In Part 1, a standstill request asks a creditor to defer enforcement or payment while the debtor protects operating value. The case for relief should show a dated cash forecast, the effect of making versus deferring the payment, and why essential spending supports collateral or future repayment. Explain the causes of distress, proposed corrective actions, reporting frequency, milestones, and how deferred debt will ultimately be addressed. The creditor will examine collateral, existing covenants, other creditors’ actions, and whether the forecast assumptions are credible. A standstill changes the payment timetable only to the extent agreed; it does not erase the claim. The debtor should track interest, fees, and any new conditions so temporary relief does not create an unmanageable later obligation. Worked scenarios in CIRA practice questions can reinforce this cash comparison.
Worked example: An eight-week forecast has $2 million of operating receipts and $1.7 million of essential payments, producing $300,000 before debt service. A $600,000 loan payment would leave a $300,000 deficit. If the lender defers it, the period instead closes with $300,000 from these flows. The difference between the two cases is $600,000; the debtor must explain how and when that deferred amount can be paid.
Watch the distinction: A standstill is not a $600,000 earnings improvement. It postpones cash outflow and may add later obligations, so the lender needs a credible repayment path.
Reference: [2]
13. Identify workout consent barriers
In Part 1, an out-of-court workout depends on contractual authority as well as economics. Read the governing agreement to determine which changes require ordinary majority approval, a higher threshold, or each affected creditor’s consent. Then calculate support using the denominator the agreement specifies, such as outstanding principal rather than the number of lenders. Identify whether a proposed extension changes only consenting creditors’ rights or attempts to bind holdouts. A commercially sensible proposal can fail because the required vote is absent; negotiating pressure cannot replace a missing contractual power. Options include obtaining more support, changing the requested amendment, or negotiating separately with holdouts. Assess collateral sharing and payment priorities before assuming participants can offer one another value without affecting nonparticipants’ rights.
Worked example: Assume a facility has $20 million outstanding and its agreement requires 90% principal support to extend all maturities. Lenders holding $16 million support the proposal: $16 million ÷ $20 million = 80%. The vote is ten percentage points short, equal to $2 million of additional supporting principal. On these facts the amendment cannot bind the remaining lenders. Negotiators need more consent or a structure within the agreement.
Watch the distinction: Do not infer approval from a large majority alone. The controlling denominator and amendment threshold determine whether a workout can bind lenders who decline to participate.
Reference: [2]
14. Map creditor recoveries
In Part 1, a secured creditor’s recovery depends first on its enforceable interest in collateral and the value available from that collateral. Compare the debt with a supported collateral estimate to identify covered value and any unsecured deficiency. Then examine prior liens, sale costs, collateral deterioration, and whether the valuation assumes continued use or sale. A deficiency can give the lender a separate stake in negotiations with general unsecured creditors, while a well-covered lender may focus more heavily on preserving collateral. The simple debt-minus-value calculation is a starting point, not a final distribution: legal rights, claim allowance, other interests, and the applicable process can change recoveries. Use sensitivity ranges when collateral value is uncertain, because a modest appraisal change may shift bargaining power between creditor groups.
Worked example: A lender is owed $9 million and has a valid first interest in collateral estimated at $7 million, with no prior lien assumed. The debt is supported by $7 million of collateral value; $9 million − $7 million = $2 million is the estimated deficiency. If a supported appraisal instead values the collateral at $8 million, the deficiency falls to $1 million, changing the lender’s expected unsecured participation.
Watch the distinction: A $9 million secured loan is not necessarily a $9 million secured recovery. Collateral value and competing interests determine coverage; the uncovered balance may share with unsecured claims.
15. Work with a creditors’ committee
In Part 1, an unsecured creditors’ committee represents a collective creditor interest in a chapter 11 case. It can consult with the debtor in possession, investigate business conduct and transactions, review information, and participate in plan negotiations. With court approval, it may retain professionals to assist its work. These powers help address information imbalances when individual suppliers cannot investigate effectively on their own. The committee does not take over routine management, spend the debtor’s cash at will, or approve a major transaction by itself. It can request information, negotiate changes, and present an objection for the court to consider. An advisor should distinguish evidence from suspicion, examine whether a transaction benefits the estate, and understand how the proposal affects the unsecured creditor body rather than one vocal member.
Worked example: Several unsecured suppliers question a proposed sale to an insider. The committee asks for the sale process, valuation support, and competing-offer evidence. It may investigate and, with court approval, obtain professional help. If the price appears low, it can negotiate or object in court. Management remains responsible for operating the debtor, while the court decides whether the sale may proceed under the applicable process.
Watch the distinction: A committee objection does not automatically veto a transaction. It supplies evidence and argument within the case process; the committee is an oversight and negotiating body.
16. Prepare before a chapter 11 filing
In Part 1, preparation for a possible chapter 11 filing should put immediate decisions on a reliable factual base. Build a dated cash forecast and identify which balances are unrestricted, which may be cash collateral, and which payments are essential. Map collateral, lenders, major contracts, leases, suppliers, customer dependencies, and disputed claims. Reconcile these records to accounting data so early case reports and requests do not conflict. Identify transactions that may require court action, such as using cash collateral, obtaining financing, or selling a major asset outside ordinary operations. Also determine which operations can continue with existing resources and what would fail without timely relief. Filing itself does not create working capital. The first-stage plan should connect each cash need to an available source and the authority needed to use it.
Worked example: A debtor forecasts $1 million of near-term payroll and supplier payments. It has $700,000 of unrestricted cash and $500,000 of receivable proceeds subject to a lender’s interest. Unrestricted cash leaves a $300,000 gap. The $500,000 cannot simply be added to available funds. Before filing, the team should document the lien, propose a spending budget, and address consent or court authorization for using those proceeds.
Watch the distinction: Treating every bank balance as spendable can make filing liquidity look stronger than it is. Trace each cash source to its restrictions and required authority.
17. Separate case roles and authority
In Part 1, a U.S. chapter 11 debtor generally remains in possession and continues ordinary business operations while carrying fiduciary duties and reporting obligations. That operating role does not give management unrestricted power over every asset or transaction. A major sale outside ordinary business, certain financing, and use of cash collateral require the applicable consent or court process. Creditors and a committee may investigate, negotiate, and object, but an objection is participation in the decision process rather than a transfer of management authority. The court resolves matters presented for approval under the governing legal standards. When analyzing an action, ask who proposes it, whose rights it affects, whether it is ordinary course, what authorization is needed, and what evidence should support the request. The U.S. Courts chapter 11 overview describes these basic roles.
Worked example: Management continues buying routine inventory as debtor in possession. It then proposes selling the company’s principal factory, a major asset outside ordinary operations. The proposed sale needs the applicable court process and supporting evidence about price and alternatives. A secured lender or committee may object and present contrary evidence. Neither creditor’s objection alone decides the result; the court determines whether the transaction may proceed.
Watch the distinction: Debtor in possession does not mean free of oversight. Ordinary operations can continue, but material actions affecting estate value or creditor rights may require authorization.
18. Budget the use of cash collateral
In Part 1, cash collateral can include collections from receivables in which a lender has a security interest. The debtor may physically hold that cash, yet its use is constrained by the lender’s interest. A useful budget identifies opening cash collateral, expected collections, essential payments by date, ending balance, and how the spending preserves or changes collateral value. The debtor needs the secured party’s consent or court authorization to use cash collateral, and the lender’s interest must receive appropriate protection under the applicable process. Protection may involve replacement interests, periodic payments, or other measures supported by the facts; do not assume a forecast alone is enough. Test whether projected collections are collectible and whether budgeted spending creates value before cash is exhausted.
Worked example: A debtor has $800,000 of receivable proceeds subject to a lender’s lien and proposes $600,000 of essential operating payments. The budget would leave $200,000 of that cash before new collections. The arithmetic shows the requested use, but it does not establish permission. The debtor should seek lender consent or court authorization and show how the proposal protects the lender’s interest as the cash is spent.
Watch the distinction: A bank balance is not automatically unrestricted cash. When proceeds are cash collateral, a budget supports the request but cannot replace consent or court authorization.
19. Screen a possible preference
In Part 1, screening a possible preference begins with a payment or transfer made before filing for the benefit of a creditor. Examine whether it was on account of an earlier debt, made while the debtor was insolvent, within the applicable lookback period, and allowed the creditor to receive more than it would under the relevant liquidation comparison. These elements need evidence; a recent payment alone is insufficient. Then analyze defenses, including ordinary course, contemporaneous exchange, and subsequent new value where the facts support them. Transaction dates, invoice history, payment practices, and later deliveries matter. State a preliminary exposure as the qualifying transfer less supported defenses, without treating that arithmetic as a judgment. Avoid inserting an unverified lookback period or assuming every late payment falls outside ordinary course.
Worked example: Assume a $200,000 prefiling payment falls within the applicable lookback period and otherwise meets the preference elements. Invoices and payment history support an ordinary-course defense for $120,000. Preliminary exposure is $200,000 − $120,000 = $80,000. That figure remains conditional: later qualifying new value, a stronger ordinary-course record, or a disputed element could reduce or eliminate recovery.
Watch the distinction: A payment shortly before filing is not automatically recoverable. Prove the required elements and test defenses before using the payment amount as expected estate proceeds.
Reference: [2]
20. Assess a suspect asset transfer
In Part 1, a suspect asset transfer calls for more than comparing sale price with one appraisal. Determine what interest the debtor transferred, what value it received, when the exchange occurred, and its financial condition then. For a constructive fraudulent transfer theory, inadequate value must be assessed alongside the other required financial-condition elements. Evidence of actual intent presents a separate inquiry. Investigate exposure to the market, equipment condition, liens, removal costs, and whether a fast sale reduced the achievable price. An appraisal range can alter the apparent gap substantially. The decision sequence is to verify the transaction and valuation date, estimate reasonably equivalent value in context, examine financial condition or intent, and identify defenses and recovery limits. A discount is a signal for investigation, not a conclusion of avoidability.
Worked example: Assume an insolvent company sells unencumbered equipment estimated at $900,000 for $300,000. The apparent value gap is $600,000. That supports investigation of reasonably equivalent value and the other required elements. If an appraisal shows the equipment would realize only $350,000 after removal and sale costs, the apparent gap falls to $50,000; the original $900,000 estimate cannot simply be treated as recoverable value.
Watch the distinction: A low price alone does not prove a fraudulent transfer. Value depends on condition and sale circumstances, and the legal analysis also requires the relevant financial-condition or intent elements.
Reference: [2]
Plan Development
21. Value the operating business
In Part 2, an earnings multiple values the operating business before allocating that value among lenders and owners. Start with maintainable EBITDA: remove unusual gains, add back costs only when they will genuinely disappear, and account for the spending needed to sustain operations. Select a multiple using comparable businesses or transactions, then adjust your judgment for size, customer concentration, growth, and distress. Multiplying EBITDA by the selected multiple gives enterprise value. To estimate equity value, subtract debt and debt-like obligations and add cash that is genuinely excess to operating needs. Check that the multiple and EBITDA use comparable definitions; a multiple based on debt-free transactions should not be applied to earnings burdened by interest. Part 2 study guide develops this valuation work within plan analysis.
Worked example: Assume normalized annual EBITDA is $4 million and a supported comparable multiple is 5 times. Enterprise value is $4 million × 5 = $20 million. Subtract $15 million of debt and add $2 million of cash that operations do not require: illustrative equity value is $7 million. Verify that debt excludes no material debt-like obligation. Transaction costs, pension claims, and valuation uncertainty could reduce the amount available to owners.
Watch the distinction: A $20 million enterprise value is not a $20 million shareholder recovery. Debt claims and other adjustments stand between operating value and the residual equity interest.
Reference: [2]
22. Build a discounted cash flow value
A discounted cash flow analysis values the cash an operating business can generate for its capital providers. Forecast unlevered free cash flow after operating taxes, capital spending, and changes in working capital, but before interest and debt principal. Discount those flows at a rate consistent with their risk and currency. A terminal value represents cash flows beyond the explicit forecast; with constant perpetual growth, divide next year's cash flow by the discount rate minus growth. Growth must be lower than the discount rate, and the terminal assumption deserves scrutiny because it can dominate the result. Discount each forecast flow at its payment date, discount terminal value from the forecast endpoint, then bridge enterprise value to equity separately. Compare implied margins and reinvestment with credible operating capacity.
Worked example: Assume year-end free cash flows of $2 million and $2.4 million, a 12% discount rate, and 2% perpetual growth after year 2. Year-2 terminal value is $2.4 million × 1.02 ÷ (0.12 − 0.02) = $24.48 million. Present value is $2 million ÷ 1.12 + ($2.4 million + $24.48 million) ÷ 1.12², or about $23.21 million. This is enterprise value before debt and cash adjustments.
Watch the distinction: Do not add an undiscounted terminal value to discounted forecast cash flows. Terminal value is measured at the forecast endpoint and must be discounted back too.
Reference: [2]
23. Estimate liquidation proceeds
Liquidation analysis starts with what assets are likely to realize under the assumed sale process, rather than their book values or replacement costs. Group assets by sale method and timing: receivables may require collection discounts, inventory may need markdowns, and specialized equipment may draw few bidders. Subtract sale expenses, employee and facility wind-down costs, and the cost of preserving assets until disposal. The resulting net proceeds are a pool, not an automatic payment to unsecured creditors. Trace liens to their collateral and account for applicable administrative and priority claims before estimating each constituency's recovery. State whether the scenario assumes an orderly marketing period or a rapid sale. A longer process can improve prices while consuming cash and adding execution risk; compare both effects.
Worked example: Assume an orderly sale produces $12 million: $5 million from receivables, $4 million from inventory, and $3 million from equipment. Sale fees cost $1 million and payroll, lease, and storage wind-down costs total $2 million. Net liquidation proceeds are $12 million − $1 million − $2 million = $9 million. That $9 million must still be allocated under liens and applicable priorities; it is not the general unsecured recovery.
Watch the distinction: A balance sheet showing $12 million of assets does not establish $12 million for distribution. Sale discounts and shutdown costs can materially shrink realizable value.
Reference: [2]
24. Compare value paths on a common basis
A plan decision requires alternatives measured at the same date and on the same claim basis. For each path, identify gross business value, new capital required, transaction costs, the time until proceeds arrive, and which party bears downside risk. Do not subtract new financing mechanically if the quoted going-concern value already reflects its investment; that would count the cost twice. Convert delayed cash to present value using a rate matched to the risk, then compare recoveries by creditor class rather than only total enterprise value. Also test whether a plan can obtain financing and execute the operational change it assumes. A quick liquidation may offer lower headline value yet greater certainty, while continued operation can preserve upside and consume cash before creditors receive anything.
Worked example: Assume a going-concern offer would produce $19 million of distributable value before a separate $5 million rescue investment, which must be repaid from proceeds. The remainder is $14 million before execution risk. An immediate sale also yields $14 million net. If the operating route takes a year and has material failure risk, its equal nominal remainder is less attractive without additional upside. Confirm that the $5 million is not already reflected in the quoted $19 million.
Watch the distinction: The larger headline valuation need not be the better creditor outcome. Required funding, timing, sale costs, and failure risk can reverse the apparent ranking.
25. Split an undersecured claim
For plan analysis, separate a secured creditor's total allowed claim from the value supported by its collateral. An undersecured claim has a secured component up to the relevant collateral value and an unsecured deficiency for the balance, subject to applicable legal treatment and any relevant election. Establish what property the lien covers, whether another lien has senior rights, and the valuation purpose and date. A collateral appraisal can differ from a forced-sale price or a going-concern contribution because those assumptions answer different questions. The deficiency may share in an unsecured class, while the secured component receives treatment tied to its collateral rights. Changes in collateral value therefore affect both bargaining leverage and projected distributions. Avoid presenting an appraisal point estimate as an undisputed court determination.
Worked example: A lender has an allowed $10 million claim secured by equipment valued at $7 million for the stated plan purpose, with no senior lien in this example. The preliminary split is $7 million secured and $10 million − $7 million = $3 million unsecured deficiency. If a supported valuation rises to $8 million, the deficiency falls to $2 million. The plan must use the applicable claim treatment and resolve valuation disputes.
Watch the distinction: Calling the entire $10 million debt secured because a lien exists over equipment ignores the collateral's value and overstates the creditor's secured recovery.
26. Size turnaround financing
Size financing from a dated cash forecast, not from the total projected loss. Begin with opening unrestricted cash and roll forward receipts and disbursements each week. Find the lowest cumulative cash balance before new borrowing, then add the minimum cushion needed to absorb forecast error and keep essential payments current. Include financing fees, interest, delayed collections, and uses restricted by lending terms when they are not already in the forecast. Check when the facility must be drawn and when cash generation can repay it; peak borrowing can exceed the ending balance. A debtor in chapter 11 must also account for court authority and the effect of proposed liens or priority on existing creditors. Financing that fills the cash trough but cannot be serviced later may postpone, rather than solve, the shortfall.
Worked example: Suppose a 13-week forecast reaches negative $2 million in week 8 before financing, then improves. Management requires $500,000 of available cash at all times. Minimum peak funding is $2 million + $500,000 = $2.5 million. If a $100,000 upfront fee is paid from the facility and was omitted from the forecast, required gross availability becomes $2.6 million. Verify that cash collateral restrictions do not make projected cash unusable.
Watch the distinction: Using only the week-13 ending cash balance can miss an earlier payroll crisis. Size the facility against the lowest dated balance plus a stated cushion.
27. Assess new-money security
New money is judged by more than its stated principal and interest rate. Identify the proposed collateral, existing liens, likely realizable value, maturity, fees, covenants, and cash-control terms. Financing secured by unencumbered assets may preserve existing lenders' lien positions, although those assets may be needed for another plan use. A proposal that would prime an existing lien raises a different dispute about adequate protection and court authorization. Compare offers on expected total cost and on their effect on plan feasibility: a cheaper loan with a tight borrowing base can fail when inventory falls, while a larger commitment may carry restrictive milestones. In a chapter 11 case, distinguish lender consent from the court approval needed for the debtor's borrowing arrangement. Model what happens if collateral value or forecast sales decline.
Worked example: Assume assets worth an estimated $4 million have no existing lien. A lender proposes $2 million of new money against them, giving 2 times estimated asset coverage before costs. A 25% valuation decline reduces collateral to $3 million and coverage to 1.5 times. That supports further review, not automatic approval: borrowing authority, fees, covenant headroom, and competing uses of the assets still affect the choice.
Watch the distinction: An unencumbered asset does not make new financing free of risk. Its value may fall, and pledging it can remove flexibility from the eventual plan.
28. Test exit debt service
An exit financing proposal needs cash for both operations and scheduled debt service. Start with a supported EBITDA forecast, then deduct cash taxes, maintenance capital spending, and the working-capital investment needed to achieve projected sales. The remainder is cash available for interest and principal before any other stated uses. Compare that amount with each payment date, not only annual totals; a seasonal trough can cause default despite a full-year surplus. Test the downside case and refinancing at maturity. If principal payments exceed available cash, a plan needs a smaller amortization schedule, a longer term, additional equity, or a credible source of proceeds. Noncash depreciation affects earnings and taxes, but it is not itself a current cash payment. Check whether projected capital spending is sufficient to sustain EBITDA.
Worked example: Assume annual EBITDA is $3 million and cash taxes, capital spending, and additional working capital total $1.5 million. Cash available for debt service is $1.5 million. After $600,000 interest, only $900,000 remains for principal. A proposed $1.2 million principal installment therefore exceeds capacity by $300,000. Even a revised $900,000 installment would leave no cushion for forecast misses or other cash obligations.
Watch the distinction: Comparing EBITDA directly with principal and interest overstates capacity. Taxes, reinvestment, and working capital consume cash before lenders can be paid.
Reference: [2]
29. Design claim classes
Plan classification begins with each claim's legal rights, collateral, priority, and proposed treatment. Claims with substantially similar rights may generally be grouped, while secured claims tied to different collateral and claims entitled to priority require separate analysis. Classification shapes voting and recovery, so an economically convenient grouping cannot simply erase meaningful legal distinctions. Make a claim register showing allowed amount, security, lien position, disputed status, and proposed distribution; reconcile it to the plan's classes. Then ask which classes are impaired and entitled to vote under the applicable chapter 11 rules. A class label does not itself change a creditor's underlying rights. AIRA's Part 2 course outline identifies classes and interests as a plan-development topic; the actual classification analysis depends on the claims and governing law.
Worked example: Assume a machinery lender is owed $6 million against its collateral, a tax authority holds a $1 million priority claim, and suppliers hold $4 million of ordinary unsecured claims. The lender's lien rights, the tax claim's priority, and the suppliers' general claims call for distinct treatment analyses. Placing all $11 million in one voting class would conceal those differences. Record each group's proposed payment and impairment before assessing votes.
Watch the distinction: A class is not merely a negotiating team. Combining creditors for convenience can distort voting and obscure rights that the plan must respect.
30. Apply the recovery waterfall
A recovery waterfall allocates an assumed pool in the order required by the assets' liens and applicable claim priorities. First identify gross proceeds and costs necessary to produce them. Trace secured claims to their collateral rather than treating every dollar of cash as free for general creditors. Then account for claims that must be paid ahead of general unsecured claims under the stated assumptions. Divide the remaining pool by allowed general unsecured claims to calculate their recovery percentage, and cap distributions at the amount owed. In a real case, collateral costs, lien disputes, carve-outs, and administrative obligations can change the sequence. A clean practice calculation should state those assumptions explicitly. The waterfall is also a check on plan promises: the same dollars cannot pay a secured lender and an unsecured class.
Worked example: Assume $10 million in proceeds, all treated as one distributable pool after respecting the stated lien allocation. Sale costs are $1 million, a secured creditor receives $6 million from its collateral, and higher-priority claims receive $1 million. General unsecured creditors receive $10 million − $1 million − $6 million − $1 million = $2 million. Against $4 million of allowed general unsecured claims, recovery is $2 million ÷ $4 million = 50%.
Watch the distinction: Dividing gross sale proceeds by unsecured claims ignores costs and senior rights. Calculate the residual pool first, then the unsecured recovery rate.
31. Count class acceptance
Chapter 11 claim-class acceptance has two separate tests based on allowed claims that actually vote: more than half in number and at least two-thirds in amount. Tally accepting and rejecting ballots for each impaired voting class, excluding creditors who do not cast a ballot from these denominators. Count creditors for the number test and dollar value for the amount test; a large lender cannot substitute dollars for missing accepting votes. Resolve ballot validity and claim amount disputes before relying on the count. Acceptance by one class does not mean the whole plan is confirmed, because other voting and confirmation requirements still apply. The U.S. Courts chapter 11 overview describes creditor voting and court confirmation; the candidate must perform the class arithmetic on the actual ballots.
Worked example: Five creditors in one impaired class cast valid ballots. Three accepting creditors hold $7 million of allowed claims; two rejecting creditors hold $2 million. The number test is 3 ÷ 5 = 60%, more than half. The amount test is $7 million ÷ $9 million = 77.78%, above two-thirds. This class accepts on the stated facts. A sixth creditor who did not vote is outside both ballot denominators.
Watch the distinction: Do not calculate acceptance from all claims scheduled in the class. The voting tests use allowed claims represented by ballots actually cast.
32. Test a dissenting class
When an impaired class rejects a chapter 11 plan, confirmation may still be sought under the applicable cramdown requirements. For a dissenting unsecured class, examine whether a junior interest receives or retains value under the plan while that class is not paid in full. That pattern raises the absolute-priority issue: existing owners ordinarily cannot keep valuable interests over a dissenting senior class without satisfying the governing requirements. Also assess whether treatment discriminates unfairly and whether value estimates are credible. An equity stake labeled as compensation or a new investment requires analysis of its actual economic substance and legal basis. Do not infer that a 60% unsecured recovery alone prevents confirmation; the problem is the combination of dissent, incomplete payment, and proposed junior retention in the assumed ordinary chapter 11 setting.
Worked example: Assume an impaired unsecured class with $10 million allowed claims rejects a plan paying $6 million, a 60% recovery. Existing equity would keep ownership worth $1 million without any separately established legal basis for doing so. Because the senior class is not paid in full, the proposed retention presents an absolute-priority obstacle. The debtor must change treatment or establish a legally valid route through the applicable confirmation requirements.
Watch the distinction: A majority vote from other classes does not erase a dissenting class's cramdown protections. Test the distribution to junior interests against that class's unpaid amount.
33. Stress-test plan feasibility
Feasibility analysis asks whether the reorganized business can make promised payments under assumptions that are supportable, not merely mathematically possible. Build a dated cash model from operating drivers: volume, price, margin, payroll, capital spending, and working capital. Reconcile the base case to recent results and identified changes. Then vary the drivers that matter most, including a plausible delay in collections or slower margin improvement. Find the first payment period that falls below the minimum cash balance or debt-service requirement; an annual average can hide a quarterly failure. Separate a modest cushion from a true contingency source such as committed financing. Where a plan relies on refinancing or asset sales, test the timing and evidence for those events. A narrow positive margin warrants attention even if the forecast never becomes negative.
Worked example: Assume annual cash available for debt service is $1.4 million and required payments are $1.1 million, giving $300,000 headroom. A 20% reduction in available cash gives $1.4 million × 0.80 = $1.12 million, only $20,000 above payments. If an unbudgeted $50,000 repair occurs, available cash falls to $1.07 million and the shortfall is $30,000. The plan needs more resilience than its base case suggests.
Watch the distinction: A positive base-case surplus does not establish feasibility. A small downside change can consume that surplus before the first required payment date.
34. Apply the liquidation floor
The chapter 7 liquidation comparison protects an impaired creditor that does not accept a chapter 11 plan. Estimate what that creditor would receive in a hypothetical chapter 7 case, after sale costs, liens, administrative expenses, and applicable priorities. Then compare it with the present value of the property distributed under the plan to that creditor. Payment dates matter: a deferred promise of $2 million can be worth less than $2 million today. Use a discount rate appropriate to the risk of receiving the plan payments and state the assumptions that drive the chapter 7 estimate. The comparison operates creditor by creditor for the relevant nonaccepting impaired holders, not simply by comparing total plan value with total liquidation proceeds. A plan can create more aggregate value yet still fail an individual creditor's floor.
Worked example: Assume a creditor's estimated chapter 7 distribution is $2 million at the comparison date. Its plan treatment consists of deferred payments with a supported present value of $1.8 million. The plan falls short by $2 million − $1.8 million = $200,000 for that creditor. Increasing the plan distribution's present value by at least $200,000 would close this stated gap, subject to the other confirmation requirements.
Watch the distinction: Comparing face amounts misses timing and risk. A deferred plan note with $2 million printed on it may have less value than $2 million received in liquidation.
35. Negotiate value and control together
Plan terms allocate both value and control. Cash has immediate value; deferred notes depend on payment dates, security, and default risk. Covenants can protect creditors through reporting, limits on borrowing, or remedies, but may constrain the debtor's ability to run the business. Governance rights, board seats, and consent rights can change who decides future sales or refinancing. Put each package on a common present-value basis, then ask whether the assumed risk already reflects its protections. Avoid counting a covenant as a separate dollar benefit if it is already incorporated into the note's risk-adjusted value. Negotiation also depends on what each party gives up, such as litigation rights or upside participation. A nominally larger payment package may be less useful if its conditions make performance unlikely.
Worked example: Creditors compare $5 million cash at the effective date with $3 million cash plus a note valued at $2.4 million on a risk-adjusted present-value basis. The second package totals $5.4 million, $400,000 more under those assumptions. Its covenant and governance terms still need review because they may alter default probability or control. If that review changes the note value to $1.8 million, the package falls to $4.8 million.
Watch the distinction: Adding a note's face value to immediate cash can exaggerate recovery. Discount future payments for timing and credit risk before comparing negotiated packages.
Reference: [2]
36. Model plan tax effects
Tax consequences can shift value between plan alternatives even when their pretax recoveries match. Debt cancellation may produce cancellation-of-debt income, but a bankruptcy-related exclusion may change current taxable income while reducing tax attributes such as loss carryforwards. Asset transfers can create gains measured against tax basis, and the party bearing the tax may differ by transaction structure. Build a sources-and-uses model that identifies the taxpayer, the tax event, available attributes, and when cash taxes could arise. Keep accounting gain, taxable income, and creditor distribution separate; they need not be equal. If the applicable exclusion or attribute ordering is uncertain, show alternatives rather than treating the canceled face amount as free cash. The plan's after-tax value should also reflect any future tax benefit lost when attributes are reduced.
Worked example: Assume a plan cancels $4 million of debt and that all $4 million would otherwise be cancellation-of-debt income. If a bankruptcy exclusion applies, current taxable income from that cancellation may be zero, but tax attributes may be reduced. Suppose an illustrative $3 million loss carryforward is reduced by $3 million under the applicable ordering. The plan avoids current income from cancellation while losing a future loss benefit; the remaining tax effects require separate analysis.
Watch the distinction: Excluded debt-discharge income is not necessarily a permanent tax windfall. Reducing tax attributes can increase future taxable income after the business recovers.
Reference: [2]
37. Make disclosure decision-useful
A disclosure statement should let creditors judge the plan's proposed treatment and its main uncertainties. Connect projected revenue, margins, capital spending, and cash needs to observable operating changes rather than presenting only a finished valuation. Explain material assumptions behind going-concern and liquidation estimates, the proposed claim classes, distribution timing, financing terms, and risks that could change recovery. Reconcile forecasts with recent actual results so readers can see the work required to reach the plan case. A sensitivity table is useful when one assumption, such as customer retention, strongly affects payments. Separate known contracts from management targets and identify who supplies new capital. In a standard chapter 11 case, disclosure is part of informed voting; the analysis should be clear enough for a creditor to compare the plan with realistic alternatives.
Worked example: A debtor recently earned $2 million EBITDA but projects $4 million next year. Its bridge attributes $1.2 million to signed price increases and $800,000 to a planned plant consolidation. Disclosure should show when prices take effect, expected customer losses, $300,000 of consolidation spending, and a downside if savings arrive late. The gross $2 million improvement does not automatically become cash for creditors because implementation costs and working capital also matter.
Watch the distinction: A projected EBITDA number without its drivers cannot support an informed recovery decision. Creditors need the actions, costs, timing, and downside behind it.
38. Balance plan sources and uses
An effective-date sources-and-uses schedule checks whether the plan can perform its immediate promises. List each reliable cash source separately: existing unrestricted cash, committed financing, sale proceeds expected by the effective date, and new equity. List professional fees, required claim payments, financing fees, operating cash needs, and distributions as uses. Confirm dates and restrictions; a source arriving next quarter cannot pay a claim due at emergence, and cash collateral may not be freely spendable. Total sources must cover total uses plus an operating cushion or a separately funded contingency. Reconcile the schedule with the cash forecast to prevent counting the same opening cash twice. Also distinguish a committed facility's maximum size from the amount actually drawable under its borrowing conditions. A balanced table with zero spare cash is arithmetically complete but operationally fragile.
Worked example: Assume effective-date sources are $12 million of unrestricted cash and committed draws. Uses are $1 million fees, $6 million secured payment, $2 million priority payment, and $3 million unsecured distribution. Total uses are $1 million + $6 million + $2 million + $3 million = $12 million, leaving zero. If operations require a $500,000 opening cushion, the plan has a $500,000 funding gap unless a separate source covers it.
Watch the distinction: Equal headline sources and promised payments do not prove the plan is funded. Check payment dates, draw restrictions, fees, and opening operating cash.
39. Structure an out-of-court exchange
An out-of-court exchange trades existing claims for new instruments or cash without using a confirmed chapter 11 plan to bind dissenters. Compare what participating holders surrender with the new notes' present value, collateral, maturity, and covenants. Then read the governing contract's amendment and consent rules separately from participation levels. A holder may voluntarily exchange its own debt while nonparticipants retain their old contractual rights. If a proposed amendment needs a stated percentage, falling short can leave holdouts able to enforce terms the exchange was meant to change. Map other creditor agreements, guarantees, and lien releases that might require consent. A successful participation campaign therefore needs both acceptable economics and a workable legal structure. Model the post-exchange debt stack, including obligations left with holdouts.
Worked example: Assume $20 million of notes are outstanding. Holders of $18 million accept an exchange into new notes, so participation is $18 million ÷ $20 million = 90%. The indenture requires 95% consent for the targeted amendment, equal to $19 million. The exchange can bind the $18 million of participating claims under its terms, but participation is $1 million short of the amendment threshold. The proposal cannot impose that amendment on holdouts.
Watch the distinction: High exchange participation does not automatically amend everyone's debt. The voluntary exchange and any amendment have separate consent requirements and different effects on holdouts.
Reference: [2]
40. Choose an orderly liquidation route
A chapter 11 liquidation plan and conversion to chapter 7 can both lead to asset sales, but their expected recoveries and administration may differ. Estimate gross proceeds under each route, then subtract marketing, professional, preservation, and wind-down costs. Compare when cash reaches creditors and who will conduct the sale. Continued chapter 11 operations may preserve customer relationships and permit an orderly process, yet burn cash or expose the estate to missed milestones. Chapter 7 administration may be simpler for some assets while producing a lower price for a business that depends on active management. Apply liens and priorities consistently after calculating net proceeds; total net value alone does not tell each creditor's recovery. Test whether an apparent premium remains after delay, execution risk, and additional administrative costs.
Worked example: Assume an orderly chapter 11 plan sale could yield $11 million gross with $2 million in sale and administration costs, or $9 million net. A chapter 7 estimate is $10 million gross less $2 million costs, or $8 million net. The plan route shows a $1 million nominal advantage. If an extra six-month delay would consume $600,000 of unmodeled cash, its advantage narrows to $400,000 before other risks.
Watch the distinction: The route with higher gross sale proceeds need not pay creditors more. Include administration, delay, and the risk that a projected sale price is missed.
Financial Reporting, Taxes, and Ethics
41. Assess advisor retention
In Part 3, define whom the financial advisor will serve, the work to be performed, and how compensation will be sought before substantive estate or committee work begins. A debtor in possession and a creditors’ committee have different interests, so an engagement letter should identify the client, reporting lines, deliverables, access to information, and potential limits on sharing work. Investigate prior engagements, unpaid fees, investments, and relationships with major parties. A connection is a disclosure and analysis issue; its significance depends on whether it creates an adverse interest or prevents the advisor from meeting the applicable retention standard. In chapter 11, employment of estate and committee professionals generally involves court approval. The AIRA course outline places retention and fees in Part 3, while the engagement facts determine the actual analysis.
Worked example: A debtor proposes hiring an advisor who valued it last year for its largest lender. The advisor should disclose the prior client, fee arrangements, continuing obligations, and any position taken on collateral value. Counsel and the court can then assess adverse interests and the proposed scope. Prior familiarity may speed the work, but it does not establish eligibility for retention.
Watch the distinction: Assuming valuable experience cures a conflict skips the key question: whether the earlier relationship affects the advisor’s loyalty or judgment in this specific engagement.
42. Review professional fees
In Part 3, examine a professional fee request by connecting each charge to authorized, necessary work that reasonably benefited the case when performed. Start with the approved engagement and billing terms. Then test dates, personnel, tasks, hours, rates, expenses, and whether another professional performed the same work. A poor eventual outcome does not automatically make earlier reasonable work unnecessary; hindsight should not replace the information available when the work was done. Conversely, detailed time entries do not justify avoidable duplication. Separate unsupported entries from the rest of the request, calculate the adjustment, and explain any remaining factual question. Compensation in a chapter 11 case is subject to court review, so your analysis supports a decision rather than awarding fees. A useful review preserves the trail from each challenged entry to the proposed reduction.
Worked example: An advisor requests 100 hours at $400 per hour, totaling $40,000. The reviewer finds 10 hours spent repeating another retained professional’s documented analysis, with no distinct purpose. Removing 10 × $400, or $4,000, leaves $36,000 of supported time charges. Expenses, other questioned entries, and the court’s final determination remain separate issues.
Watch the distinction: Cutting every bill by a flat percentage is tempting but hides whether the challenged work was actually unnecessary, duplicated, inadequately documented, or outside the engagement.
43. Reconcile operating reports
In Part 3, treat a monthly operating report as a claim about activity that must tie to records, particularly when cash drives case decisions. Begin with the bank statement balance and adjust for deposits recorded but not yet credited and checks recorded but not yet cleared. The result should equal the general ledger cash balance. Then compare the reconciled ledger with the report, checking its date, bank accounts, restricted cash presentation, and any post-closing entries. Differences caused by timing need support; an unexplained plug is not a reconciliation. Repeat the logic for receipts and disbursements, because a correct ending balance can conceal offsetting errors. The U.S. Courts chapter 11 overview describes the debtor in possession’s reporting duties; a reviewer still needs transaction evidence before relying on a particular report.
Worked example: The bank statement shows $1.2 million. Outstanding checks of $200,000 reduce it to $1.0 million, and a $100,000 deposit in transit raises reconciled cash to $1.1 million. If the ledger agrees but the operating report says $1.4 million, the $300,000 reporting difference needs investigation. It cannot be explained by the already reconciled timing items.
Watch the distinction: Adding outstanding checks to the bank balance reverses their effect. The bank has not paid them yet, but the books have already reduced cash.
44. Bridge earnings to cash
In Part 3, bridge an operating result to cash by identifying which earnings items have not yet become receipts or payments. EBITDA excludes interest, taxes, depreciation, and amortization, but it also says little about when customers pay or suppliers must be paid. A rise in receivables or inventory consumes cash; a rise in payables can temporarily provide it. Subtract capital spending because replacing equipment requires money even though the expense enters earnings over time. Then account separately for interest, taxes, restructuring payments, debt service, and asset-sale receipts as relevant. Distinguish a sustainable working-capital release from delayed payments that will soon reverse. The resulting forecast should reconcile opening cash, operating flows, investing flows, and financing flows to closing cash. This bridge reveals why a profitable debtor may still need immediate liquidity.
Worked example: Assume monthly EBITDA of $500,000. Receivables and inventory, net of payable changes, absorb $800,000, while capital spending uses $200,000. Before interest, taxes, and financing, the cash change is $500,000 − $800,000 − $200,000 = negative $500,000. With $900,000 opening cash, closing cash would be $400,000 on those limited assumptions, despite positive EBITDA.
Watch the distinction: Treating EBITDA as cash available for payments ignores collections, inventory, and equipment needs. A positive margin can coexist with a shrinking bank balance.
Reference: [2]
45. Separate prefiling and later obligations
In Part 3, classify an obligation by the transaction that created it, not merely the invoice date or the date someone asks for payment. A prepetition delivery generally produces a prepetition claim even if the bill arrives later. Goods or services supplied after filing for authorized case operations create a later obligation whose priority and payment treatment require analysis of the facts. Keep the two periods separate in claims records, trade ledgers, cash forecasts, and reporting. Do not pay an older balance simply because the supplier also provides essential current goods; prepetition payment generally needs a valid legal basis and, where applicable, court authorization. Conversely, failing to budget current authorized purchases risks new unpaid obligations and operational disruption. For a contract spanning the filing date, trace delivery or performance and any governing order rather than allocating by invoice label alone.
Worked example: A supplier delivered $300,000 of components before filing and another $100,000 afterward under authorized purchase orders. Record and analyze the $300,000 as a prepetition claim. Budget the $100,000 later delivery as a current case obligation under its terms. The supplier’s combined $400,000 statement does not turn the older amount into a current operating expense.
Watch the distinction: Using the latest invoice date to classify the whole balance can misstate both claims and operating cash needs when deliveries straddle the filing.
46. Identify reorganization items
In Part 3, separate costs arising directly from the reorganization from costs of running the business during the case. Under U.S. reorganization accounting, directly related items can be presented as reorganization items so readers can distinguish case effects from continuing operations. Typical candidates include court-case professional fees and qualifying gains or losses on disposing of assets under the plan. Ordinary payroll, rent, materials, and customer service remain operating costs even though the company is in chapter 11. The cause of the charge matters more than whether it occurred after filing or was approved by the court. Check whether a cost is direct, whether it belongs in the reporting period, and whether another accounting rule governs its recognition. Clear classification helps users compare operating performance and estimate the cash needed to complete the case.
Worked example: Assume $200,000 of approved advisor fees directly relates to negotiating a reorganization and $50,000 pays monthly store rent. The case fees are analyzed for presentation as reorganization items; rent remains an operating expense. The $250,000 total cash need still matters, but presenting both charges as restructuring expense would hide $50,000 of continuing occupancy cost.
Watch the distinction: Labeling every postfiling expense a reorganization item makes ongoing operations look artificially profitable and weakens forecasts of costs that will continue after emergence.
Reference: [2]
47. Report disputed compromise liabilities
In Part 3, distinguish a proposal to compromise debt from a completed change in the recognized obligation. A lender’s offer, unsigned term sheet, or contested plan can inform disclosure and forecasting without extinguishing a liability. First identify the existing recorded amount and its support. Then determine whether a binding agreement or confirmed plan has changed the debtor’s obligations and when the relevant accounting conditions are satisfied. Also ask whether the final transaction is an extinguishment, a modification, or an exchange of instruments, because those paths can have different measurements. Record a gain only after measuring the consideration and remaining obligations under the applicable guidance. Explain uncertainties in notes or projections as appropriate. A plan forecast may show a prospective lower debt balance, but that forecast should not be confused with the current balance sheet.
Worked example: The ledger carries $10 million of debt. Negotiators circulate a term sheet proposing $6 million in full settlement, but signatures and required approvals are outstanding. The implied $4 million reduction is a scenario, not a recognized gain on these facts. Continue evaluating the $10 million recorded obligation and disclose the material negotiation as appropriate until the accounting event occurs.
Watch the distinction: Booking the difference as soon as settlement seems likely confuses a possible future outcome with an accomplished change in the debtor’s legal obligation.
Reference: [2]
48. Measure extinguishment effects
In Part 3, measure an assumed extinguishment by comparing the carrying amount of the old liability with the fair value of consideration transferred, including any new obligation issued. Check accrued interest, unamortized discounts, fees, and whether the transaction truly qualifies as extinguishment; these can alter a real calculation. Keep professional costs separately identified so readers can see the gain from resolving the debt and the expense of accomplishing the restructuring. A gain improves reported income but does not itself supply cash. For planning, show the cash payment, the new note’s future service, and professional payments in the cash forecast. If the transaction instead modifies existing debt, apply the relevant modification guidance rather than forcing an extinguishment result. State the measurement assumptions whenever a practice problem simplifies these questions.
Worked example: Assume an $8 million liability is fully extinguished for $3 million cash and a new note measured at $2 million, with no other debt adjustments. The gain is $8 million − $3 million − $2 million = $3 million. Separately expensing $400,000 of related professional work gives a $2.6 million combined income effect. Immediate cash paid is $3.4 million.
Watch the distinction: Calling the $3 million accounting gain a cash inflow overlooks the $3 million settlement payment and the new $2 million obligation.
Reference: [2]
49. Test fresh-start eligibility
In Part 3, fresh-start reporting depends on more than emergence from chapter 11. U.S. reorganization accounting tests whether reorganization value immediately before confirmation is less than the total of postpetition liabilities and allowed claims, and whether holders of existing voting shares receive less than half of the emerging entity’s voting shares. Both conditions must be assessed. Reorganization value and claim totals require consistent measurement and a clear date; voting control requires looking at what old holders receive under the plan, not their former ownership. If fresh-start reporting applies, the emerging company uses a new basis of accounting, so later financial statements belong to a successor reporting entity. The Part 3 study guide can be used to connect this eligibility test with emergence reporting.
Worked example: Assume reorganization value immediately before confirmation is $40 million and postpetition liabilities plus allowed claims total $60 million. The first condition holds because $40 million is below $60 million. Existing shareholders receive 20% of new voting shares, below half, so the second holds too. On these stipulated facts, fresh-start reporting is indicated, subject to verifying the measurements and plan terms.
Watch the distinction: Assuming every confirmed plan creates a new accounting entity skips the two criteria. A debtor may reorganize legally without qualifying for fresh-start reporting.
Reference: [2]
50. Allocate emergence value
In Part 3, connect the value assigned to an emerging business with the assets and liabilities recognized on its new balance sheet. Under a fresh-start model, determine the reorganization value, measure identifiable assets and relevant liabilities under the applicable allocation guidance, and reconcile the resulting net amount. Some value may attach to inventory, property, customer relationships, or other identifiable intangibles rather than goodwill. Only a supported residual after the required allocation can be considered goodwill. Check that enterprise value and equity value have not been mixed: debt and other claims affect the bridge between them. Also distinguish a valuation assumption from an accounting measurement, particularly where appraisals, contingent liabilities, or tax effects remain unresolved. A reconciliation schedule should show each adjustment and leave no unexplained plug in the successor balance sheet.
Worked example: Assume a simplified fresh-start allocation with $50 million reorganization value, no unmeasured operating liabilities, and $44 million assigned to all identifiable net operating assets at required measurements. The residual is $50 million − $44 million = $6 million for goodwill evaluation. If another identifiable intangible worth $2 million is found, the residual falls to $4 million.
Watch the distinction: Putting every difference between reorganization value and old book value into goodwill skips required measurement of identifiable assets, liabilities, and possible value adjustments.
Reference: [2]
51. Read predecessor and successor results
In Part 3, compare predecessor and successor results only after identifying changes in accounting basis, period length, and business activity. Fresh-start reporting can remeasure inventory, property, and intangible assets. Those measurements can affect later cost of goods sold, depreciation, and amortization even if selling prices and physical volume do not change. Reconcile reported gross profit to an illustrative operating measure by isolating a known step-up effect, then examine whether volume, mix, or input costs also changed. Do not present the adjusted number as a replacement for reported results; it is an analytical bridge. Watch for a short predecessor stub period and a longer successor period, since raw dollar comparisons can mislead. Explain both the accounting change and any genuine operating improvement before attributing a margin movement to the turnaround.
Worked example: Successor sales are $5 million at a reported 25% gross margin, so gross profit is $1.25 million and cost of sales is $3.75 million. That cost includes a $500,000 inventory step-up charge. Excluding that stated effect yields $1.75 million gross profit, or 35% of sales. Against a predecessor 30% margin, the operating comparison warrants further mix and cost analysis.
Watch the distinction: Reading a lower successor margin as proof of worse operations ignores charges created by the new measurement basis, especially when revalued inventory is sold.
Reference: [2]
52. Distinguish assurance report issues
In Part 3, separate uncertainty about continued operation from an error in the financial statements. An auditor evaluates whether substantial doubt about going concern exists, whether management’s plans alleviate it, and whether required disclosures are adequate. Proper disclosure can still accompany an unmodified opinion with the applicable going-concern section. A material omitted claim is different: the statements may be misstated, and an uncorrected misstatement can require a qualified or adverse opinion depending on pervasiveness. If evidence is unavailable, a scope limitation raises another reporting path. Start by identifying the issue, its amount or likely effect, the evidence available, and whether management has corrected or disclosed it. The advisor should not infer the audit opinion from distress alone; the accountant’s report follows the applicable assurance standards and the resolved facts.
Worked example: Management omits a supported $2 million claim that is material and refuses correction. The auditor assesses how pervasive the omission is before choosing a modified opinion. Separately, assume substantial doubt about continued operation remains but is adequately disclosed. That uncertainty calls for the applicable going-concern reporting treatment; it does not cure the $2 million misstatement.
Watch the distinction: Treating a going-concern paragraph as a substitute for correcting a missing liability confuses disclosure of uncertainty with accurate measurement of known obligations.
Reference: [2]
53. Calculate litigation damages carefully
In Part 3, lost-profit damages require a supported comparison between what probably would have happened without the alleged wrong and what actually happened. Establish causation and a credible volume estimate, then calculate incremental revenue less variable costs that those sales would have required. Subtract any additional costs avoided because the business did not perform, taking care not to subtract a cost already included in the unit contribution margin. Consider capacity constraints, customer demand, substitute sales, mitigation, and the duration of the loss. If the damage period extends over time, timing and discounting may matter. Lost revenue alone exaggerates harm because making sales usually costs money. A sound model exposes each assumption so a fact finder can see which part of the result depends on sales evidence, cost behavior, or legal findings about causation.
Worked example: Assume evidence supports 200,000 lost unit sales and a $5 unit contribution after variable production and selling costs. Gross lost contribution is 200,000 × $5 = $1 million. A separate $100,000 campaign cost would have been necessary for those sales and was avoided; it is not included in the $5 figure. Estimated lost profit is $900,000.
Watch the distinction: Multiplying missing units by their selling price claims revenue as profit. Subtract variable and other avoided costs once, while checking for substitute sales.
Reference: [2]
54. Check professional independence
In Part 3, assess professional independence through the actual financial and personal relationships that could affect the proposed role. For an accountant seeking estate employment, identify investments, claims, prior engagements, family or business ties, and relationships with major creditors or insiders. Disclose relevant connections, then evaluate adverse interests and the applicable disinterestedness requirements. The percentage of an investment is evidence, not a universal safe harbor or automatic prohibition. A small ownership interest could matter if the lender’s recovery turns on the accountant’s valuation; a larger interest held through an unrelated, diversified vehicle may present a different fact pattern. Also distinguish court retention standards from any additional independence rules governing an audit or attestation engagement. Document the assessment before work begins, and revisit it when financing, ownership, or the engagement scope changes.
Worked example: An accountant proposed for estate work owns 2% of a secured lender whose collateral value is disputed. Disclose the holding, its value, the lender’s stake, and the accountant’s proposed tasks. If the accountant would opine on that collateral, the financial interest is especially relevant. The 2% figure alone neither resolves eligibility nor replaces the required court process.
Watch the distinction: Assuming an investment is harmless because it is small ignores how the disputed task could affect its value and the professional’s judgment.
55. Protect client information
In Part 3, control information sharing by identifying the client, the purpose for which material was supplied, and who has authority to release it. A creditors’ committee has important oversight rights, but that role does not give an individual advisor permission to distribute every debtor document. Legal advice and materials prepared for counsel may raise privilege or work-product issues in addition to contractual confidentiality. Identify what the requester actually needs, check engagement terms and any court order, and route legal-material decisions through authorized counsel. Often the relevant financial assumption can be supported with transaction records or a shareable summary without forwarding a legal memorandum. Keep a record of requests and responses. The aim is to give case participants reliable facts while preserving legitimate protections and avoiding selective disclosure that could mislead them.
Worked example: A committee asks the debtor’s forecasting advisor for a confidential legal memo discussing litigation risk. The advisor received it solely to model scenarios. The advisor should seek authorized direction before sharing the memo, including review of privilege concerns. Meanwhile, a separate schedule could show the forecast’s assumed litigation cash outcomes, ranges, and timing if approved for disclosure.
Watch the distinction: The committee’s oversight role does not make every document in an advisor’s possession freely shareable. Authority and privilege must be checked for the requested material.
56. Show expert sensitivity
In Part 3, expert valuation evidence is stronger when it shows how material assumptions move the result. Identify the earnings measure, whether it is normalized, the selected multiple or discount rate, and the evidence supporting the chosen range. Then vary assumptions that reasonable participants might dispute. A sensitivity table is not a probability distribution: its endpoints show conditional outcomes, not guaranteed limits. Reconcile differences between enterprise and equity value, and state any debt, cash, or transaction-cost adjustments. An expert should explain why one point within the range is more persuasive rather than hiding the range behind a single precise figure. Check whether the alternative assumptions remain internally consistent; for example, higher growth might require more working capital or investment. Clear sensitivities help the court understand which disagreement actually drives creditor recoveries.
Worked example: At normalized EBITDA of $4 million, a 4-times multiple gives $16 million enterprise value and a 6-times multiple gives $24 million. The spread is $8 million. If supported comparable evidence favors 5 times, the midpoint estimate is $20 million. The expert should still explain why the selected companies, risk, and growth prospects justify that choice.
Watch the distinction: A point estimate without assumptions looks more certain than the evidence allows. It also prevents readers from seeing which disputed input changes recoveries most.
Reference: [2]
57. Identify debt-discharge tax consequences
In Part 3, calculate potential cancellation-of-debt income by comparing the debt discharged with the amount treated as paid or otherwise retained under the transaction, after checking items such as accrued interest and the form of consideration. For a U.S. debtor in a qualifying bankruptcy case, a bankruptcy exclusion may keep eligible discharge income out of current taxable income. Exclusion does not make the transaction tax-neutral forever: tax attributes, including loss carryforwards or asset basis, may be reduced under applicable ordering rules. Distinguish tax treatment from financial-reporting gain, which follows separate accounting guidance. Also identify whose debt was discharged and whether the taxpayer meets the bankruptcy exclusion conditions. For further calculation practice, CIRA practice questions can be worked with explicit assumptions about consideration and available attributes.
Worked example: Assume a debtor’s $10 million principal obligation is fully settled for $6 million cash, with no accrued-interest issue or other adjustment. Potential cancellation-of-debt income is $10 million − $6 million = $4 million. If the qualifying bankruptcy exclusion applies, the $4 million may be excluded from current taxable income, but attribute reduction must then be evaluated.
Watch the distinction: Calling excluded discharge income permanently tax-free overlooks attribute reduction, which can raise tax in later profitable years by reducing deductions or basis.
Reference: [2]
58. Track reduced tax attributes
In Part 3, follow excluded cancellation-of-debt income into the taxpayer’s remaining tax attributes. The exclusion may preserve current cash by avoiding immediate taxable income, but it can reduce future deductions, credits, or asset basis. Work from the applicable ordering rules and the taxpayer’s actual attribute balances rather than assuming every dollar reduces net operating losses first. For a simplified problem, the ordering can be stipulated so the arithmetic is clear. Show the opening attribute, the amount absorbed, and the closing balance. Then explain the economic effect: fewer losses available against later taxable income may increase future tax payments. Be careful about timing and elections, because a real case can involve basis reduction and other attributes. A disclosure or plan model should describe material uncertainty rather than presenting the reduced carryforward as an automatic cash cost today.
Worked example: Assume $3 million of discharge income is excluded, and the stipulated applicable ordering applies all $3 million against an existing $5 million net operating loss, with no other adjustments. Remaining loss is $5 million − $3 million = $2 million. No current tax is calculated from the excluded amount, but the debtor has $3 million less loss available for future use.
Watch the distinction: Leaving the original $5 million loss carryforward intact after excluding $3 million of discharge income overstates the future tax shield under the stated ordering.
Reference: [2]
59. Model an ownership-change limit
In Part 3, an ownership change can restrict how quickly a reorganized U.S. company uses losses generated before the change. Determine the prechange loss balance, establish whether the relevant ownership-change rule applies, and calculate the applicable annual limitation under the stated facts. Each year’s usable loss is constrained by that limit, available taxable income, and remaining carryforward, subject to any governing adjustments. A large loss balance therefore does not necessarily shelter all near-term profits. In a plan model, compare taxes and cash under the limit with a case in which losses could be used faster. Timing matters because a deduction deferred for several years has less present value than one usable immediately. Real cases can involve special bankruptcy rules, built-in gains or losses, and attribute reduction, so state which factors the exercise includes.
Worked example: Assume an ownership change creates a $1 million annual limit on a $10 million prechange loss carryforward, with no adjustments. Taxable income before the loss is $2 million in each of three years. Use $1 million each year, or $3 million total. Taxable income remains $1 million each year, and $7 million of loss remains after year three.
Watch the distinction: Using $2 million of losses each year because taxable income permits it ignores the stipulated $1 million annual ownership-change limit.
Reference: [2]
60. Compare after-tax sale structures
In Part 3, compare sale structures on the same economic basis: who receives the price, which liabilities transfer, which taxes arise, and when cash arrives. An asset sale can trigger entity-level gain measured against tax basis, while a stock sale may shift asset-level tax exposure and other risks to the buyer, affecting price. Do not compare gross asset proceeds with a net stock price or ignore debt, transaction costs, and shareholder-level taxes. State those items as assumptions when they are outside a simplified exercise. Calculate each structure’s net proceeds, then test whether valuation or tax uncertainty could reverse the ranking. In an actual plan, tax attributes, allocation of purchase price, and the buyer’s desired protections can matter. Show separate lines for price, tax, costs, and risk adjustments so decision makers can challenge each input.
Worked example: Assume no debt, transaction costs, or shareholder-level tax in this comparison. A $10 million asset sale with $7 million tax basis creates $3 million gain; at a hypothetical 25% entity-level tax rate, tax is $750,000 and net is $9.25 million. A $10 million stock offer less a $1 million buyer-risk price discount yields $9 million. The asset route is $250,000 higher under these assumptions.
Watch the distinction: Comparing the $10 million headline prices alone misses the asset-sale tax and stock-sale price adjustment. Changing either assumption could change the preferred structure.
Reference: [2]
Official references and further reading
- AIRA - Certified Insolvency & Restructuring Advisor - CIRA
- AIRA - CIRA Courses & Examinations
- Chapter 11 - Bankruptcy Basics