Question

Short answer question

When a major industry retailer declares bankruptcy and starts to close down its stores, what kind of topics are very important and relatable to the field of accounting? Preferably try to tie in knowledge from intermediate accounting that relates to this topic of discussion.

Answer 1

Economic downturn, lower demand and changes in retail market conditions are making the retail industry face financial challenges. Nowadays many retailers are going bankrupt. Whenever they file for bankruptcy, they first have to pay the obligations to creditors. A trustee is appointed by the court who takes care of all asset liquidation and paying back to creditors. Trustee sells company's assets and payback the amount to creditors first.

Important topics of accounting to be taken into consideration:

1. Retails must change and update their capital structure, they should have less percentage of debt and more equity, heavy debt increases the interest burden and liability too. Heavy debt increases the leverage and decreases the solvency and liquidity position of the company in the market.
2. Retailer should seek bankruptcy protection.
3. Retailers must make the budget so that cost and revenue can be estimated and if cost is increasing, it can be controlled.
4. Retailers can cut the cost by shutting down some outlets and making the goods available online. Online business incurs low cost.
5. Sometimes bankruptcy filing can be avoided by negotiating with the creditors to entend the time limit or by restructuring the debt.