A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 77 - 77 of 93

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Question 77

Question

MCQ▾

Which one of the following is correct with respect to going concern convention?

Choices

Choice (4)

a.

The enterprise is not going to terminate its operations in the period ahead

b.

The enterprise may go out of business in the next accounting period

c.

The enterprise may not divest or diversify its operational spheres

d.

The enterprise may not revalue its assets during the current accounting period

Answer

a.

Explanation

Going Concern Assumption As per this assumption it is assumed that the business will continue to exist for a long period in the future. Business enterprise record transaction on the assumption that it is continuing enterprise. Based on this assumption business record fixed assets at their original cost and depreciation is charged on these assets without reference to their market value. The market value of the fixed assets is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold in future. It is also because of the going concern assumption that outside parties enter long term contracts with the enterprise, give loans and purchase the debentures and shares of the enterprise. Another example of this assumption is that prepaid expenses, which have no realizable value are shown as assets in the balance sheet, because the benefit of such expenses will be received in future. Also, without thus assumption, the classification of current and fixed assets and short- and long-term liabilities cannot be made and such classification would be difficult to justify.

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