Continuity
- Also
known
as the going concern assumption.
- In
absence
of evidence to the contrary, there is an assumption that a
business
entity
will continue on into the future must as it has in the
past.
- An
entity
will be in existence long enough to complete all
incomplete
transactions
currently engaged in.
- The
entity
will continue on into the future for an indefinite period.
- refers to an entity's ability
to continue to operate such that it will be able to realize
its assets and meet its obligations in the ordinary course
of business
- Auditors
are
expected to comment upon situations where there is doubt
that a client
entity will be able to continue as a going concern.
- Under U.S. generally accepted
accounting principles (GAAP), financial statements are
prepared under the inherent presumption that the reporting
organization will be able to continue as a going concern.
The going concern presumption is critical to financial
reporting because it establishes the fundamental basis for
measuring and classifying assets and liabilities.
- Does
the
continuity assumption mean that an entity has an unlimited
life? Why or
why not?
- Proposed FASB
Statement, Going
Concern
(issued 10/09/08) [Download]
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Separate
Business Entity
- Activities
of
the business can be kept separate and apart from its
owners and other
business entities.
- Does
not
necessarily refer to legal entities, but to
an
accounting,
or reporting, entity.
- Necessary
to
establish the boundaries of accountability.
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Periodicity
- The
life
of an entity can be broken down into smaller periods of
time, often a
year
but perhaps a month or a quarter, and the results of the
entity's
operations
over that time period can be measured and reported and the
results of
that
process will be useful to the users of the financial
statements.
- Most
accurate
measurement of the results of an entity's operations would
occur at the
end of its life. Given the going concern assumption,
however, the end
of
the entity's life is not definite. Users cannot wait
until then
for
the information.
- The
time
period chosen is an artificial period. The shorter
the period,
the
less precise, but more relevant, the information will be.
Leads to the
trade-off between relevance and reliability in compiling
and presenting
financial information
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(Stable)
Monetary Unit
- All
transactions
and events are measured and denominated in a monetary
unit.
- The
monetary
unit provides an appropriate basis for accounting
measurement.
- The
monetary
unit utilized remains stable over time.
- Ignores
the
impact of inflation on the unit of measure.
- In
periods
of relatively high inflation, this assumption is suspect
and may lead
to
less meaningful financial statements.
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