Question

a) The Conceptual Framework includes the Going Concern Assumption. What is the going concern assumption, and how does it affect the financial statements we prepare?

b) Why is it important that a manufacturer disclose the cost of each classification of ending inventory that it holds at year end?

Answer 1

Part a) The conceptual framework lays down the set of accounting standards basis to rule/govern the path to prepare the financial statements. In this fare of accounting standards, the Going Concern concept would guide a concern to prepare the financial statements assuming that the entity will last for foreseeable future in its operation without any plan to liquidate. As per the concept, the concern is different from the stakeholders and owners. The Stakeholders and owners may come and go but the concern carries on its operations for foreseeable future. The going concern concept effects the financial statements in following way:

a) All the outstanding at the close of the accounting year should be transferred to the opening balances of the next accounting year.

b) All assets should be transferred to the next accounting year at their book value from the current accounting year.

c) The accumulated earnings of the concern are transferred to the next accounting year under head Retained Earnings.

d) All liabilities towards outsiders and stakeholders are carried forward to next accounting year at the payable value.

e) The future’s contingent liabilities should be considered and provided for in the financial statements.

Part b) It is important for a manufacturer to disclose the cost of each classified Ending Inventory because

1) All the assets at the end of the accounting year should be transferred to the opening balances of the next accounting year.

2) All the cost of the inventory are used to generate the next year’s revenues, so the related cost should be referred to that year only.

3) Raising the closing inventory stock at the end of the current year will release the accurate income of the current year because it reduces the expenses for the current year.

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