Assignment 2 Essay

Submitted By sara4545
Words: 986
Pages: 4

Case 2-4
To: Partner
From: CA
Subject: Going Concern Issues for Canadian Computer Systems Inc.
As the Conceptual Framework notes, financial statements are prepared assuming the entity is a going concern and will continue in operation into the foreseeable future. While reviewing audit working papers several issues have arose about CCS’s ability to realize its assets and discharge its liabilities, and the going concern assumption has come into question. After discussing these problems the following factors need to be assessed according to IAS1, in order to assess CCS’s ability to continue operations.
Cash Flows
CCS’s bank is currently have control over cash receipts. The bank releases funds based on operating budgets prepared by management. This indicates that CCS has been having issues with their cash flows, although it also ensures that CCS will have cash flows available. Demand loans are also used to finance ongoing operations, at a rate of 1% over the banks’ prime rate. Securing this type of financing is a good indicator that CCS is able to pay back its debts.
CCS has faced significant losses through years 10 and 11. In year 11, there as a net loss $6.41 million, 2.83 million of this was related to CCS, the remaining $2.83 million was related to SIL. After gains from discontinued operations the net income for the year was $1.94 million, which is enough to cover the 1.8 million in interest payments on behalf of SIL. Thus making the cash flows from operations less than the operating losses, which is another key factor in deciding whether CCS is a going concern.
SIL issued preferred shares in the amount of $40 million and use the proceeds to pay down the bank loan. As a result, SIL was listed on the stock exchange. The interest expense debt obligation SIL totaled 2.83 million and has been included on the income statement under “Loss from Sandra Investments Limited.” CCS is no longer obligated to pay back this loan, which will help improve cash flows. As, SIL was on the stock exchange is another good indicator that CCS is a going concern.
Working Capital
Currently liabilities include mortgages payable of $21.6 million due currently. They have been reclassified from long-term debt as a result of CCS’s failure to comply with operating covenants and restrictions. This creates a large deficit of $83.71 million ($87.05million - $3.34million) in CCL’s working capital. If the lender does not reconsider the payment of the mortgage due, this could pose problems to CCL’s going concern. If the mortgage can be reclassified as long-term, than the working capital deficit would be reduced significantly.
Another long term debt of $15 million was be classified as occur and liability due to the default and September 30, Year 11. This will also affect the working capital it negotiations cannot be made with the lender. This will largely affect CCS’s going concern.
Common Shares Issued
CCS issued $160,000 in common share to satisfy the amounts owing to them. This will help decrease accounts payable and make it more probable that CCS will play its creditors one-time. New equity issues are also being considered for Year 12, which will help fulfill liabilities owing. But to improve CCS is going concern.

Breach of contract
A claim related to a breach of contract has filed against one of the company subsidiaries in the amount of $3.7 million, plus interest. Management believes that the claim is illegitimate, however, if payments need to be made as a result of this, it will be covered under liability insurance. Since that breach of contract will have no impact may CCS’s financial statements, it should not affect CCS is going concern.

Software Expenses
Operating expenses included $1 million in development costs relating to a computer software program in Year. Sales are expected to embark in your 12, which will generate revenues, to improve the financial wellbeing of CCS and its going concern.

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