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In some cases, a reporting entity may file for bankruptcy because of a single event, such as a significant unfavorable litigation judgment or other severe financial event. In other cases, a bankruptcy is preceded by a continued decline in financial condition that gives rise to certain accounting considerations that might not be present when a reporting entity is profitable. Some of the indicators of financial distress include:
Decreasing
Increasing
Market share
Management and employee turnover
Revenue / EBITDA
Unit costs
Margins
Low margin sales
Liquidity
Shareholder pressure
Dividends
Creditor pressure
Capital expenditures
Leverage ratios
Credit ratings
Risk of covenant default
Demand for product/services
Collateral requirements
This chapter highlights items to consider when a reporting entity encounters significant financial difficulties, which could result in a bankruptcy filing, and serves as a reminder of the applicable US Generally Accepted Accounting Principles (GAAP) in several important areas.
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