Part 1. Going Concern Facts: A Chicago area company ("XYZ") manufactures traditional wood cabinets for home use. It has been in business since 1965 -- & has a December 31" year- end. In 2017 the Company had a slight loss. In 2018 and 2019, the Company had much larger losses, significant declines in sales (approximately 15%) & terminated about 15% of its workers. The sales decline was directly caused by competition in a highly competitive market. In 2020, preliminary numbers reviewed by your audit firm during September, 2020 (as part of the planning phase of the 12/31/2020 year end audit), reflected a very large loss, a continued decline in sales & additional staff reductions. In 2017, 2018, 2019, & 2020 XYZ has suffered recurring losses from operations, and has had a net capital deficiency. XYZ expects continued weak demand for its cabinets in 2021 & beyond. . . XYZ hopes to use its expertise to manufacture other types of wood furniture starting in 2021. XYZ has large bank loans pursuant to an asset based lending arrangement with a large reputable bank. There is little additional borrowing capacity on this bank line. The audited financial statements are due 120 days after the 12/31/2020 year end - i.e. 4/30/2021. Your audit firm intends to release the audited financial statements on or prior to this due date. The XYZ bank debt is due on demand, is secured by its accounts receivable and inventory and is guaranteed by the Owner of XYZ. . Substantially all of the work for the 2020 audit is completed by February 28, 2021. . The Owner and the Auditors agree Capital Contributions of $10,000,000 are needed to ensure the Company will survive at least 1 more year from the date the financial statements are issued or available to be issued, as applicable. . The Owner pledges $10,000,000 in Capital Contributions payable as follows: $3,300,000 on March 31, 2021 $6,700,000 on June 30, 2021 . In early April, 2021, the Auditors examined documentation of the receipt of the $3,300,000 in Capital Contributions on March 31, 2021. . The remaining $6,700,000 in Capital Contributions is an unsecured promise to pay.Required: Part 1 1. State whether you believe there is or is not substantial doubt about the Company's ability to continue as a Going Concern. Provide your supporting arguments, specifically addressing: Conditions and Events Management's Plans Stating that you believe there is substantial doubt means that your Audit Firm's Independent Auditor's Report for the year ended December 31, 2020 will include an emphasis of a matter paragraph with the supporting footnote. (There is no need to formally draft the paragraph & supporting footnote.) Stating that you believe there is not substantial doubt means that your Audit Firm's Independent Auditor's Report for the year ended December 31, 2020 will not include an emphasis of a matter paragraph but the Audited Financial Statements will include a footnote describing the conditions and events and how management's plans alleviated the conditions and events. (There is no need to formally draft the footnote.)
