ACCT3002 Chap.2 Going Concern Assessment

No. An entity can report profit while lacking cash to meet obligations, especially when receivables are slow, debt matures soon or operating cash is negative. Analyse cash sources, timing, financing terms and the feasibility of management's plans.

State the direction, compare it with prior periods or a relevant benchmark, and explain the cause and cash consequence. A ratio is a signal, not a conclusion. Connect it to maturities, covenants, operating conditions and corroborating evidence.

It may arise because the entity sold long-term assets to fund current obligations. That can support liquidity once but may reduce productive capacity. Determine what was sold, whether the sale can recur, and whether operations still generate cash.

Select the movements that change the entity's ability to meet obligations rather than narrating every number. Put liquidity, leverage, interest coverage and operating cash into a timeline. For each movement, explain a plausible cause and decide whether it is recurring, temporary or dependent on financing.

Reconcile apparently favourable cash with its source: asset sales and new borrowing may raise the closing balance while ordinary activity deteriorates. Map debt maturities, covenant tests and supplier or payroll commitments against forecast receipts and available facilities.

Challenge the most sensitive forecast assumptions with post-year-end trading, historical forecasting accuracy, signed agreements and external market information. The result should be a supported assessment of uncertainty, not a mechanical verdict from one ratio.

Match the evidence to the action management says will close the funding gap. A proposed refinancing needs lender correspondence, term sheets, conditions, approval status and a realistic completion date. Asset disposal needs ownership records, valuation support, marketability and evidence that proceeds are available before obligations fall due.

Cost reductions need board approval, implementation detail and cash-flow timing, not just a target percentage. Sales recovery needs post-year-end orders, margins, collections and capacity evidence, compared with earlier forecasts. Reperform the cash model under adverse but plausible assumptions and inspect covenant calculations.

Finally, consider whether the plan itself creates new risks, such as selling productive assets or relying on restricted cash. Corroboration must establish feasibility, timing and magnitude together.

Use indicator, explanation and corroboration. Put each adverse or favourable trend in the first column, the business and cash mechanism in the second, and evidence that could confirm timing and feasibility in the third. Add a final horizon row for obligations, facilities and covenants.

The grid prevents a ratio list from masquerading as analysis and makes the eventual disclosure or reporting conclusion depend on evidence rather than prediction.