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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

The Conceptual Framework states that the financial statements of an entity are normally prepared on a particular underlying assumption. What is that assumption, and what does it imply?

The underlying assumption is going concern. The financial statements assume the entity will keep operating for the foreseeable future, with no intention or need to liquidate or materially curtail its operations. If this does not hold, a different basis of preparation is required.

  1. AGoing concern: the entity will continue in operation for the foreseeable future, with no intention or need to liquidate or curtail operations materiallyCorrect
  2. BAccruals: income is recorded only when cash is received
  3. CPrudence: assets are always carried at the lowest possible value
  4. DEntity: owners' personal assets are included in the entity's statement of financial position

Explanation

Going concern is the underlying assumption in IFRS financial statements. If it did not apply, the statements would need to be prepared on a different basis such as break-up values. Accruals means recording items when they occur, not on cash receipt, so that option is wrong.

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