Chapter 03 Homework

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A new client, an oil and gas explorer in Western Canada, is currently negotiating a loan worth $3 million to avoid defaulting on its long-term debt that is due in three months. Its latest quarterly earnings report indicate that the entity has a working capital deficiency of $500,000, while its cash balance fell to $250,000, down from $500,000 a year earlier. There is a 0.5:1 current ratio. With little expectation of improved sales, the entity plans to cut back on production to preserve cash. It has also been paying suppliers late consistently, and some suppliers have begun demanding cash on delivery from the client. As a result, the share price has plunged and the entity has lost more than half of its market value in the last week.

Which of the following conditions in this case may cast doubt on the client's ability to continue as a going concern?

A. Declining ratios

B. Long-term loans reaching maturity without alternative financing in place

C. Prolonged losses

D. An inability to pay debts when they fall due

E. Supplier reluctance to provide goods on credit

F. The loss of a major market, key customer, franchise, or licence

G. Overreliance on a few customers or suppliers

H. Shortage of a key input or raw material

I. Rapid growth with insufficient planning

J. Falling behind competitors

(Note: I just know one tip is that this question has 4 correct responses - only 4 conditions are correct)