Originally posted by robbie carrobie
cash is an asset in accounting terms, what i think you mean is that they start to sell off the assets (which take many forms) and hope to realise the value of those assets (it must be understood that assets like plant and machinery depreciate in value over time). Balance sheets are not accounts, they are simply a statement of what is owed to the bus ...[text shortened]... accounts like provisions. All of this makes it difficult to ascertain what is really going on.
All true, and those are the reasons I quit studying accounting as a very promising student. The goalposts are moved all the time in very capricious ways.
Thing is that especially during the Greenspan era at the Fed, interest rates became the tool du jour of assuring Wall Street prosperity, and the existence of virtually free borrowing led to massive malinvestment, which never would have happened in a market with interest rates set by supply and demand.
About 90% of first year accounting students wash out in the very first quarter, way before the muddy part is even begun.
The tricks of the LBO guys as outlined by David Stockman who was in the business, was to sell assets like buildings, machines, etc. and then lease them from the new owners, creating the impression on the balance sheet of greater cash flow than was actual.
The tremendous leverage or premium paid, also gave the false picture of prosperity, while the dept to income ration told an entirely different story. Then as the short term debt came due, it was recycled in much the same manner as homeowners taking equity out of the residence with 2nd and 3rd mortgages. The same collateral was used for multiple layers of loans, with the only ones partly protected being the brokers of the deal, who all the time until the eventual collapse or resale were squeezing out cash, while the debt was not being retired, because it never could have been anyway.