[Anonymous]

Becker #CPA-02366

The question asks: After considering an entitys negative trends & financial difficulties, an auditor has substantial doubt about the entitys ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include managements plans to:

a) increase current dividend distributions

b) reduce existing lines of credit

c) increase ownership equity

d) purchase assets formerly leased

i know the answer is c) but why wouldn’t it be b). can someone explain this me?

[rknight21]

i think you are confusing b… u r thinking about reducing the customers line of credit but in fact they are talking abt the actually clients credit being reduced by the bank… in that case it would not be good to have your line of credit reduced by your bank…. correct me if i am wrong someone

also this is one of those best case answers… if you had to choose between reducing existing line of credit (assuming we talking abt customers line of credit) and selling equity…selling equity would have a greater effect for the company. raise more capital quicker

[Anonymous]

C.

Answer is not B because reducing credit line means you can borrow less money. Think like you are going break one day, you need to borrow money, which a creditor lend you money if you have bad credit or good credit?

[Anonymous]

now makes sense! thanks chitown & rknight

[Study Chair]

I think of this from an earnings perpective. If a going concern is experiencing negative trends and financial difficulty, the auditor would look to the entity's ability to increase owner's equity. That can a couple of different ways. Increasing net income would increase retained earnings and therefore increase equity. Selling stock can also increase cash flow and increase equity. That's why I think it's most important to look at management's plan to increase owner's equity.

BEC 86
FAR 87
REG 86
AUD 93 DONE!!

[Anonymous]

i think when it comes to mitigation, increase ownership means issuing more stock (CS mostly). issuing stock = cash inflow.

[Anonymous]

And also, please note that the question says “most likely.” This has been emphasized a great deal in my Yaeger DVDs. You may have more than one correct answer, but you need to choose the BEST answer. You rank them. In this question, one may be stuck between choosing B or C. Answer B could work, but C is much better for reasons mentioned by the other posters above.

[Author]

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