- 6 Marks
Question
An entity is normally viewed as a going concern. It is assumed that the entity has neither the intention nor the desire of liquidation or of curtailing materially the scale of its operations.
However, if the going concern is threatened, the financial statements would be prepared on a different basis.
Required:
State the factors that indicate an organisation may no longer be a going concern under the following categories:
(i) Financial (ii) Operational (iii) Legal or regulatory (6 Marks)
Answer
Factors Indicating an Organisation May No Longer Be a Going Concern:
(i) Financial Factors:
- Default on loan agreements.
- Arrears in dividend payments.
- Denial of trade credit from suppliers.
- Recurring operating losses.
- Negative working capital.
- Adverse key financial ratios.
- Inability to meet statutory capital requirements.
(ii) Operational Factors:
- Labour disputes or high turnover.
- Emergence of successful competitors.
- Loss of key customers.
- Declining market share.
- Loss of significant suppliers.
(iii) Legal or Regulatory Factors:
- Changes in laws or regulations adversely affecting the entity.
- Pending legal proceedings against the entity.
- Withdrawal of operating licenses.
- Uninsured risks or regulatory non-compliance.
- Topic: Introduction to Corporate Reporting
- Series: NOV 2014
- Uploader: Dotse