Corporate Finance: Liquidation and Cash Flow

This assignment delves into the intricacies of corporate finance, covering two key aspects: liquidation procedures in the USA and capital budgeting with a focus on cash flow analysis. It examines the legal framework surrounding liquidation, outlining the roles of debtors, creditors, and liquidators in winding up a company. Furthermore, it explores different methods of preparing cash flow statements (direct and indirect), highlighting their significance in assessing a firm's liquidity. The assignment utilizes relevant case studies and examples to illustrate these concepts.

Running Head: Corporate Finance
Corporate Finance

Corporate Finance 1
Contents
Article 1-Liquidation procedures in the USA..................................................................................1
Article 2-Capital Budgeting and Cash Flow in Finance Management............................................2
References........................................................................................................................................3

Corporate Finance 2
Article 1-Liquidation procedures in the USA
The article above gives detailed overview of the liquidation proceedings held in USA.
Liquidation refers to procedure in which a company being insolvent sells of their assets and set-
off their liabilities to end the business activities. The chapter 7 of the law states that an individual
or partnership or any other organization can initiate the liquidation procedure within their
organization. Organizations like railways, insurance etc. are not eligible in this criterion
(Shearman & Sterling LLP, 2017).
Further the article states that as per chapter 11 the debtors of the company can apply for
liquidation. In liquidation by debtor, the power to bidding the assets and setting off liabilities is
held under their control. But the debtors shall make sure that the assets are realized at an
optimum value. Whereas bankruptcy code refers to the liquidation proceedings applied on firms
by the order of court. In case of liquidation by debtors, the debtor shall seek approval from the
court for proceedings. Further the court shall appoint a liquidator in case the debtors fail to do so.
Liquidator is an official appointed by the court or company to initiate the winding up procedure
(Fabbri, & Menichini, 2010).
 The trustee is obliged to centralize the property of debtors and liquidate them to pay to
parties.
 Also the trustee shall create a liquidator’s financial statement of affairs which shall
include the amount realized by selling assets and amount paid to set-off the preferential,
unsecured creditors etc.
 They shall provide statement to the related parties.

Corporate Finance 3
 After setting off all the liabilities from assets, the trustee shall pay the surplus to the
preferences and equity shareholder of the company (Bayraktar, & Ludkovski, 2014).
 Whereas in case of deficit, the liquidator call from contributories the amount in ratio of
their holdings.
 After completion of the winding up procedure the liquidator shall provide the reports in
the court to wind up the company.
The involvement of court in this process is to adjudicate and conduct the auction fairly to meet
the expenses of the company. In case of liquidation by creditors (chapter 11), the creditors
appoint an executive to look after the effect of realization of assets to make sure that the action is
done fairly (Shearman & Sterling LLP, 2017). The official also holds the rights of intervening in
the action and informing the court if necessary.
Article 2-Capital Budgeting and Cash Flow in Finance Management
Cash Flow statement refers to statements showing the effective change in cash and cash
equivalents of a company. The IAS7 governs the rules of the statements. The article provides the
list of people interested in the cash flow statements of accounts which are:
 Potential lender
 Potential investors
 Potential employees or contractors of the company
 Shareholders
 Accounting personnel of the company who maintain the liquidity balance of the
company.
Further article discusses about the types of cash flow statements which are followed below:

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 Cash flow from operating activities: this division includes the setting of the operating
revenue of the company with the fictitious and intangible expenses of the company.
Change in working capital also becomes a part of this segment (Eshna,2016).
 Cash flow from investing activities: it includes the expense incurred by the company in
purchasing any asset for the company. Sale of fixed assets results in surplus of the
company.
 Cash flow from financing activities: the activities related to the activities done by the
company with a view to generate capital/funds for the firm or to repay dividend etc. to
investors. Activities like payment of dividend, issuance of share, repayment of debenture
are accountable under this head.
 Total Cash Flow: it refers to the cash flow made by the organization including above
three mentioned activities (Hodge, Hopkins, & Wood, 2010).
 Net cash flow: this statement only includes the change in cash account of the firm
through investing and financing activities.
 Free and net free cash flow: free cash flow refers to the change cash account through
operating activities.
The article states that the CFS is prepared with a view to analyze the liquidity of a firm. The
balance sheet and income statement only reflects the accrual activities of the company whereas
CFS includes inflow and out flow cash, and non-cash transactions like depreciation, bad debts
etc. as well (Eshna, 2016). There are two methods of preparing the CFS which are direct and
indirect method. Under direct method taxes are included in operating activities and dividends are
a part of investing or operating activities whereas under indirect method non cash transactions
are adjusted from cash and surplus is subtracted and liabilities are added in the net income

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(Davies, & Crawford, 2011). Cash flow forecasting refers to the modeling of liquidity statement
of the company for a specified time period.

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References
Bayraktar, E., & Ludkovski, M. (2014). Liquidation in limit order books with controlled
intensity. Mathematical Finance, 24(4), 627-650.
Davies, T., & Crawford, I. (2011). Business accounting and finance. Pearson.
Eshna., (2016). Capital Budgeting and Cash Flow in Finance Management. Viewed on August
29, 2017 from https://www.simplilearn.com/capital-budgeting-and-cash-flow-in-finance-
management-rar247-article
Fabbri, D., & Menichini, A. M. C. (2010). Trade credit, collateral liquidation, and borrowing
constraints. Journal of Financial Economics, 96(3), 413-432.
Hodge, F. D., Hopkins, P. E., & Wood, D. A. (2010). The effects of financial statement
information proximity and feedback on cash flow forecasts. Contemporary Accounting
Research, 27(1), 101-133
Shearman & Sterling LLP., (2017). Liquidation procedures in the USA. Viewed on August 29,
2017 from https://www.lexology.com/library/detail.aspx?g=23ac797b-088f-4041-9fc4-
a58d5ab69746