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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Which statement about the going concern assumption is correct?

Financial statements are prepared on the assumption that the business will continue operating in the foreseeable future. Because of this, assets are held at cost less depreciation and prepaid expenses are carried forward, rather than being valued at liquidation values.

  1. AAssets are valued at their immediate liquidation values
  2. BPrepaid expenses are written off as the business may close
  3. CFinancial statements are prepared assuming the business will continue operating in the foreseeable futureCorrect
  4. DFixed assets are valued at current market price every year

Explanation

The going concern assumption presumes the enterprise will continue operations for the foreseeable future, with no intention or need to liquidate. Therefore fixed assets are carried at cost less depreciation and prepaid items are carried forward. Liquidation values apply only when this assumption fails.

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