Going Concern is defined as the entity will continue in the foreseeable future and has neither the intention nor the need to liquidate or curtail materially the scale of its operations. Which statement best describes its effect?

Going Concern is defined as the entity will continue in the foreseeable future and has neither the intention nor the need to liquidate or curtail materially the scale of its operations. Which statement best describes its effect?

• A. It dictates that assets and liabilities are valued at cost
• B. It affects the way assets and liabilities are valued
• C. It means the company will liquidate soon
• D. It has no effect on accounting estimates

Answer: (B)

The going concern assumption means the entity is expected to continue operating for the foreseeable future. Because of that, financial statements are prepared using measurement and presentation that assume ongoing use of assets and normal settlement of liabilities, not a liquidation scenario. This affects how assets and liabilities are valued: assets are carried at amounts appropriate for continued use in the business (for example, depreciation over the asset’s useful life, impairment based on expected future cash flows from continuing use, and inventories measured at cost or net realizable value in the ordinary course), and liabilities are recognized and measured with the expectation they will be settled in the normal course. If the business were not a going concern, measurement would shift toward liquidation values and a different basis. So the going concern assumption directly influences the valuation basis for both assets and liabilities, which is why this option is the best description. The other statements misstate its impact or implications by implying assets must be valued strictly at cost, asserting imminent liquidation, or claiming it has no effect on estimates.

The going concern assumption means the entity is expected to continue operating for the foreseeable future. Because of that, financial statements are prepared using measurement and presentation that assume ongoing use of assets and normal settlement of liabilities, not a liquidation scenario. This affects how assets and liabilities are valued: assets are carried at amounts appropriate for continued use in the business (for example, depreciation over the asset’s useful life, impairment based on expected future cash flows from continuing use, and inventories measured at cost or net realizable value in the ordinary course), and liabilities are recognized and measured with the expectation they will be settled in the normal course. If the business were not a going concern, measurement would shift toward liquidation values and a different basis.

So the going concern assumption directly influences the valuation basis for both assets and liabilities, which is why this option is the best description. The other statements misstate its impact or implications by implying assets must be valued strictly at cost, asserting imminent liquidation, or claiming it has no effect on estimates.