Question

In: Accounting

Classify the following as either Financial, Operating or Other indicators of going concern problems. (1) During...

Classify the following as either Financial, Operating or Other indicators of going concern problems.

(1) During the year the Marketing Manager retired, but she was not replaced

(2) The current ratio deteriorated 2.2 to 1.9

(3) Your client is in the tourist industry. Due to COVID-19, the government introduced legislation that restricted travel.

(4) Due to COVID-19, the border with the country from which your client imports raw materials was closed and your client was unable to obtain critical raw materials

(5) Your client decided to defer the final dividend for the year because of poor economic conditions

Solutions

Expert Solution

Based on the information available in the question, we can classify as follows:-

Scenario 1:-

During the year the Marketing Manager retired, but she was not replaced - This is classified under Operating problem as there has been a loss of key management personnel, however, there is no replacement that has been made with respect to the position.

Scenario 2:-

The decline in Current Ratio is considered to be a Financial problem as a decline in the current ratio would have most probably arised from the decrease in the current assets or increase in current liabilities. Either ways, the business is affected financially.

Scenario 3:-

This is classified under the Other problems leading to a Going concern problem. The government introduced legislation to control the tourism industry during the Covid 19 pandemic is neither operational nor financial and would hence be classified as Other problems.

Scenario 4:-

This is classifed as an Operating roadblock leading to a Going concern problem. The inability to source raw materials due to Government's restriction would be classified as an Operating issue.

Scenario 5:-

Arrears or discontinuance of dividends are classified as Financial indicators leading to Going concern problems.

Please let me know if you have any questions via comments and all the best :) !


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