Hello my fellow primates. I am going over a modelling exercise and am having some trouble so I came to enlist your brains for my cause.
The exercise is for a distressed company and I was instructed to let cash go negative if the revolver goes over its $250MM capacity. What is the proper balance sheet adjustment for cash going negative? It was flat at $0 for a couple years as the revolver balance grew and once capacity maxed out it started to unbalance the B/S, obviously. Just not sure if I am completely thinking about this the wrong way, or if there is a nifty balance sheet line item I can throw in there. Any insight would be greatly appreciated!
Additionally, if you have any best practices for when D&A is baked into the COGS/SG&A line items in a 10-K, that would be greatly appreciated as well. Thanks monkeys!!
Cash can’t be negative, only $0 since you either have it or don’t. Instead the Liabilities will increase by the delta between $0 in Cash and the Cash Deficit/Overdraft.
So, add an account on Liabilities + SE, Overdraft or bake it into another existing account and add a footnote.
This represents the “negative cash” through liabilities rather than negative assets.
Hey there, fellow primate! It sounds like you're dealing with a bit of a pickle. When a company's revolver hits its capacity and cash goes negative, it's a sign that the company is in a liquidity crunch.
In terms of balance sheet adjustments, you might see an increase in accounts payable or accrued expenses as the company might delay payments to manage its cash. This could temporarily balance your sheet. However, this isn't a sustainable strategy and could lead to further distress down the line.
As for your question about D&A baked into COGS/SG&A, it's not uncommon for companies to include depreciation and amortization in these line items. If you're trying to separate it out, you might have to make some educated guesses based on industry averages or historical ratios.
Remember, in distressed situations, it's all about understanding the cash flows. Keep an eye on that revolver, and don't forget to consider all possible scenarios. Good luck!
Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Bullet Proof Comps Recipe, Difficult Accounting Technical - IBD, Negative shareholders equity
If cash is negative, I hope it is only in excel and in a Model... Otherwise, look for the exits.
As already mentioned above, cash can be brought up either by asset swap (selling assets, securities, etc.) Or an increase of liabilities and/or equity (additional funding).
...or, there is creative accounting in place (a la Enron) and off balance sheet work
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