Going Concern Concept Extensive Look With Examples

going concern example

A case of such information is a company’s inability to continue operating without significant asset sales or debt restructurings. If such was not the situation, a company would basically be acquiring assets when it knows that it will be shutting down its activities and reselling those assets to another organization. If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. The government gives National company a bailout and a guarantee of all payments to creditors.

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. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. The going concern concept is extremely important to generally accepted accounting principles. Without the going concern assumption, companies wouldn’t have the ability to prepay or accrue expenses.

Going Concern Concept FAQs

The expectation of continued cash flow generation from the assets belonging to a company is inherent to the discounted cash flow (DCF) model. If a company receives a negative audit and may not be a going concern, there are several implications. Companies that are not a going concern represent a significantly higher level of risk compared to other companies.

going concern example

Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets. Unless it is categorically stated otherwise, all accounting records and income statements or balance sheets are prepared on the assumption that the business will continue to function for an indefinite future period. The going concern concept of accounting implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. A company is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future.

Going Concern Definition in Accounting (FASB / GAAP)

A company may not be a going concern for a number of reasons, and management must disclose the reason why. If a company is not a going concern, that means there is risk the company may not survive the next 12 months. Management is required to disclose this fact and must provide the reasons why they may not be a going concern. Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion. Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. A small business cannot make payments to its creditors due to an extremely poor liquidity position. The court grants the purchase price of liquidating the company upon the petition of one of the firm’s creditors. The going concern is very important in the accounting world because it gives investors and creditors an idea of how long a business will be around.

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Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. This company filed for bankruptcy in 2011 and was expected to close its doors because the demand for the product or service had decreased significantly over time. This concept not only helps build a more systematic approach to the recording of financial information, but it also provides a reasonable understanding of the business, its growth, and long-term financial stability. On the off chance that there is an issue, the audit firm should qualify its audit report with a statement about the issue.

  • If a company acquires assets during a time of restructuring, it may plan to resell them later.
  • Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others.
  • Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity.
  • The concept of going concern states that all records are made on the assumption that the business will continue for the foreseeable future.

– In 2011, Gibson Guitar Factory was raided by the Federal government for illegally smuggling endangered wood into the country. The Federal government took more than $250,000 worth or Gibson’s inventory and slapped them with large fines for violating international laws. Gibson is still considered a going concern, because it is not likely the fines and punishment will stop its operations. There are also a number of quantifiable, measurable indicators that auditors use to measure going concern.