[Maxlee]

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

a.

Usual trade credit from suppliers is denied.

b.

Significant related party transactions are pervasive.

c.

Arrearages in preferred stock dividends are paid.

d.

Restrictions on the disposal of principal assets are present.

The correct answer is A. But I don’t understand why C is incorrect?

Thanks!

[paulerodriguez]

Trade credit from a vendor is typically denied due to past due amounts on prior invoices. This is an indication of an entity's weak cash flows, thus possibility of an on-going concern.

REG - 80 (10/20/2014)
FAR - 76 (05/29/2015)
AUD - 68,71,87 (05/09/2016)
BEC - 72,77 (02/01/2016)

Done!!!

[paulerodriguez]

Of course dividends are paid out of retained earnings (which derive from net profits), and stock dividends are approved by the board of directors. However, just because dividends decrease doesn't mean retained earnings are down. The board could have restricted the payout of dividends to reserve cash flows for other investments or asset purchases.

REG - 80 (10/20/2014)
FAR - 76 (05/29/2015)
AUD - 68,71,87 (05/09/2016)
BEC - 72,77 (02/01/2016)

Done!!!

[Author]

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