Accounting – 7.1 Accounting principles | e-Consult
7.1 Accounting principles (1 questions)
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The events described – declining sales, losses, restricted credit, and supplier demands – raise serious concerns about Alpha Ltd's ability to continue as a going concern. These are indicators of financial distress and suggest the company may be facing insolvency.
Implications:
- Asset Valuation: Assets may need to be valued at their net realizable value (the amount they could be sold for), rather than their historical cost.
- Liability Recognition: Liabilities may need to be assessed for potential non-payment.
- Going Concern Disclosure: The company must disclose substantial doubt about its ability to continue as a going concern in the notes to the financial statements.
- Audit Implications: The auditor will likely issue a qualified or adverse audit opinion if the going concern doubt is significant.
Management Actions: Management could take the following steps:
- Develop a turnaround plan: This should include strategies to increase sales, reduce costs, and improve cash flow.
- Negotiate with creditors: Seek extended payment terms or restructuring of debts.
- Seek additional financing: Explore options such as loans, equity investment, or asset sales.
- Implement cost-cutting measures: Identify areas where expenses can be reduced.
- Improve operational efficiency: Streamline processes to increase productivity and reduce waste.