pathfinder - The Institute of Chartered Accountants of Nigeria

PATHFINDERQUESTION 3a. Financial symptoms of going concern problems includei. Adverse or negative current ratio or trend;ii. Dependence on short finance for long term needs;iii. High gearing ratio;iv. Dividends, tax and other statutory deductions in arrears;v. Excess of stocks and debtors;vi. Exceeding overdraft limitsvii. Recurring operating losses;viii. Default on loan interest or principal repayment;ix. Potential loss on long term contract;x. Under capitalization particularly where there is deficiency of sharecapital and reserves.xi. Major rescheduling of debtsxii. Substantial sales of fixed assets not expected to be replacedxiii. Denial of normal terms of trade credit by suppliersb. The above symptoms can be mitigated by addressing alternative means ofgenerating adequate cashflow.i. Disposal of assets without adversely affecting operationsii. Postponing the replacement of assets without adversely affectingoperations;iii. Lease assets rather than outright purchaseiv. Rolling over existing loan facilitiesv. Rescheduling debtsvi. Additional capital by way of rights issuec. Other symptoms that raise problems about going concern of an enterpriseinclude:i. Loss of key management staff;ii. Prolonged industrial action;iii. Loss of key franchise or patent;iv. Loss of principal supplier or customer;v. Substantial dependence on one or certain project or product;vi. Continuous use of obsolete machines;INTERMEDIATE EXAMINATION - NOVEMBER 201046