ACCA Dec 2019 Past Paper – Question Going Concern

Hi,
I’m currently working on past paper questions – ACCA AA Dec 2019 Sample Questions that I have found online.
I don’t understand, the question asked, ‘ indicators that Marlin Co is NOT a going concern’, but the answer given sounds like the company IS going concern such as low cash flow, etc.

Please, can you explain to me how is the answers given shows that the company is NOT going concern but it sounds like the company is??

Please see the question c) and the answer below.

It is 1 July 20X5 and you are an audit manager of Spadefish & Co and you are currently responsible for the audits of two existing clients:

Triggerfish Co manufactures hair products and its year ended on 31 May 20X5. You are finalising the audit programmes for the forthcoming year-end audit.

Marlin Co is a distributor of electronic goods and its year ended on 30 April 20X5. The audit is almost complete and the auditor’s report is due to be signed shortly.

The following matters have been brought to your attention for each company.

Triggerfish Co – Receivables
Triggerfish Co’s draft year-end trade receivables are $3.85m (20X4: $2.45m) and revenue for the year is slightly increased on 20X4. Triggerfish Co has a large number of customers with balances ranging from $5,000 to $45,000. A positive receivables circularisation has been undertaken based on the year-end balances. The majority of responses from customers agreed to the balances as per Triggerfish Co’s receivables ledger, however, the following exceptions were noted:

Balance per Triggerfish Response from customer
Albacore Co $36,558 Nil response
Flounder Co $24,115 $18,265
Menhaden Co -$5,360 (Credit) $3,450
Due to the increase in receivables, Triggerfish Co has recently recruited an additional credit controller to chase outstanding receivables. As a result of the additional focus on chasing outstanding receivables the finance director thinks it is not necessary to continue to maintain a significant allowance for receivables and has reduced the closing allowance from $125,000 to $5,000.

Marlin Co – Going concern
During the year under audit Marlin Co has consistently paid a number of its suppliers significantly later than usual and only after several reminders. As a result some of its suppliers have withdrawn credit terms meaning the company must pay cash on delivery. The company has also just received notification that its main supplier who provides the company with over 60% of its specialist electrical equipment has ceased to trade.

The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed. The directors have decided that in order to conserve cash, no final dividend will be paid in 20X5.

(c) Identify and explain THREE potential indicators that Marlin Co is NOT a going concern. (3 marks)

– The answer is: (c) Going concern indicators
Marlin Co has paid some of its suppliers considerably later than usual and only after many reminders; hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. This suggests that the company was struggling to meet their liability as they fell due and will also put significant additional pressure on the company’s cash flow, because the company will have to pay for goods on delivery but is likely to have to wait for cash from its receivables due to credit terms.

Marlin Co’s main supplier who provides over 60% of the company’s specialist equipment has just stopped trading. If the equipment is highly specialised, there is a risk that Marlin Co may not be able to obtain these products from other suppliers which would impact on the company’s ability to trade. More likely, there are other suppliers available but they may be more expensive or may not offer favourable credit terms which will increase the outflows of Marlin Co and worsen the cash flow position.

Marlin Co’s overdraft has grown significantly during the year and is due for renewal within the next month. If the bank does not renew the overdraft and the company is unable to obtain alternative finance, then it may not be able to continue to meet its liabilities as they fall due, especially if suppliers continue to demand cash on delivery, and the company may not be able to continue to trade.

In order to conserve cash, Marlin Co has decided not to pay a final dividend for the year ended 30 April 20X5. This may result in shareholders losing faith in the company and they may attempt to sell their shares; in addition, they are highly unlikely to invest further equity, and Marlin Co may need to raise finance to repay their overdraft.