Going concern company to last long enough to fulfill

Going Concern - company to last long enough to
fulfill objectives and commitments.
Monetary Unit - money is the common
denominator.
Periodicity - company can divide its economic
activities into time periods.
Accrual Basis of Accounting – transactions are
recorded in the periods in which the events occur.
THIRD LEVEL: ASSUMPTIONS
•
Basic Assumptions

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Going Concern

The entity is normally viewed as a going concern, that
is, as continuing in operation for the foreseeable
future. It is assumed that the entity has neither the
intention nor the necessity of liquidation or of
curtailing materially the scale of its operations.

Financial statements are prepared under the going
concern assumption
•
Implications of going concern:

Allocation of depreciation over useful life

Supports inclusion of good will in statement of
financial position
 Set aside if management intends to liquidate the
entity’s operations
ASSUMPTION UNDERLYING FINANCIAL
STATEMENTS

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
Going concern concept assumes that, when
preparing a normal set of accounts, the business will
continue to operate in approximately the same
manner for the foreseeable future (at least the next
12 months). In particular, the entity will not go into
liquidation or scale down its operations in a material
way.

The main significance of a going concern is that the
assets should not be valued at their 'break-up' value;
the amount they would sell for if they were sold off
piecemeal and the business were broken up.
ASSUMPTION UNDERLYING FINANCIAL
STATEMENTS

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Example: A retailer commences business on 1 January
and buys inventory of 20 washing machines, each
costing Br.100. During the year he sells 17 machines at
Br.150 each. How should the remaining machines be
valued at 31 December in the following circumstances?
Case 1: He is forced to close down his business at the
end of the year and the remaining machines will realise
only Br.60 each in a forced sale.

If the business is to be closed down, the remaining
three machines must be valued at the amount they
will realise in a forced sale, ie 3 × Br.60 = Br.180.
Case 2: He intends to continue his business into the
next year.

If the business is regarded as a going concern, the
inventory unsold at 31 December will be carried
forward into the following year, when the cost of the
three machines will be matched against the eventual
sale proceeds in computing that year's profits. The
three machines will therefore be valued at cost, 3 ×
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STATEMENTS

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Accrual Basis

In the accruals basis of accounting, items are
recognised as assets, liabilities, equity, income and
expenses (the elements of financial statements) when
they satisfy the definitions and recognition criteria for
those elements in the Framework.

Entities should prepare their financial statements on
the basis that transactions are recorded in them, not
as the cash is paid or received, but as the revenues or
expenses are earned or incurred in the accounting
period to which they relate. According to the accrual
assumption, in computing profit revenue earned must
be matched against the expenditure incurred in
earning it.