The ‘going concern concept’ is the underlying basis fora)Stating fixed assets at their realizable values.b)Disclosing the market value of securities.c)Disclosing the sales and other operating information in the income statement.d)None of the above.Correct answer is option 'A'. Can you explain this answer?

Question

The &#8216;going concern concept&#8217; is the underlying basis fora)Stating fixed assets at their realizable values.b)Disclosing the market value of securities.c)Disclosing the sales and other operating information in the income statement.d)None of the above.Correct answer is option 'A'. Can you explain this answer?

Answer

The 'going concern' concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets means obtaining the complete benefit from their earning potential.

Answer

D
this concept states that business will run for infinite period of time

Answer

A

Answer

The going concern assumption is universally understood and accepted by accounting professionals; however, it has never been formally incorporated into U.S GAAP. In October 2008, FASB issued an Exposure Draft called 'Going Concern.' It discusses the following possible pronouncements for the going concern:

Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP

The time horizon over which management would evaluate the entity's ability to meet its obligations

The type of information that management should consider in evaluating the entity's ability to meet its obligations

The effect of subsequent events on management's evaluation of the entity's ability to meet its obligations

Whether to provide guidance on the liquidation basis of accounting .

A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “ The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern”(AU Section 341). The 'going concern' concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets means obtaining the complete benefit from their earning potential. (i.e. if you recently purchased equipment costing $5,000 that had 5 years of productive/useful life, then under the going concern assumption, the accountant would only write off one year's value $1,000 (1/5th) this year, leaving $4,000 to be treated as a fixed asset with future economic value for the business)

Answer

The going concern concept refers to the assumption that a business will continue its operations in the foreseeable future without any intention or necessity of liquidation or cessation. It is a fundamental accounting principle that guides the preparation of financial statements.

The correct answer to the question is option 'A', which states that the going concern concept is the underlying basis for stating fixed assets at their realizable values. Let's understand why this answer is correct:

- Fixed Assets: Fixed assets are long-term assets that are used in the production or provision of goods and services by a business. Examples include property, plant, and equipment (such as buildings, machinery, and vehicles). According to the going concern concept, fixed assets are assumed to be used by the business for an extended period of time, rather than being sold or disposed of immediately.

- Realizable Value: Realizable value refers to the amount of money that a business can expect to receive from the sale of its fixed assets. It represents the estimated market value of the assets if they were to be sold in an open and competitive market. However, under the going concern concept, fixed assets are not considered for immediate sale, but rather for continued use in the business operations.

- Underlying Basis: The going concern concept provides the underlying basis for preparing financial statements. It assumes that the business will continue its operations in the future, and therefore, the fixed assets are reported at their historical cost (or cost of acquisition) rather than their realizable value. This is because the realizable value is relevant only if the business is in liquidation or cessation.

- Importance: Stating fixed assets at their realizable values would be contradictory to the going concern concept. If fixed assets were reported at their realizable values, it would imply that the business is planning to sell or dispose of these assets in the near future. This would undermine the assumption of the business continuing its operations, leading to misleading financial statements.

In conclusion, the going concern concept is the underlying basis for stating fixed assets at their historical cost rather than their realizable values. This concept ensures that financial statements reflect the assumption of the business continuing its operations in the foreseeable future.

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