BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The business is just starting up
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Liquidation appears likely
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Market values are higher than costs
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The business is organised as a sole trader
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Detailed explanation-1: -If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis).
Detailed explanation-2: -Therefore, when the entities are beyond repair or restoration, they are taken the demolition route, which is the bankruptcy or liquidation process. Presumably, an entity is going concern in insolvency, and is a gone concern when it goes into liquidation.
Detailed explanation-3: -What is the Going Concern Principle? The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices.
Detailed explanation-4: -The correct answer is B. The going concern concept assumes that the business will continue for the foreseeable future.
Detailed explanation-5: -Going concern is a basic underlying assumption that is applied in all general purpose financial reporting frameworks. The assumption is that a company, or other entity, will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.