GOING CONCERN

In accounting, "going concern" refers to a company's ability to continue functioning as a

business entity (concern being an early-20th century term for "business" or "enterprise").
It is the responsibility of the directors to assess whether the going concern assumption is
appropriate when preparing the financial statements. A company is required to disclose in
the notes to the financial statements whether there are any factors that may put the
company's status as a going concern in doubt.

Financial statements are prepared on the assumption that the entity is a going concern,
meaning it will continue in operation for the foreseeable future and will be able to realize
assets and discharge liabilities in the normal course of operations. Different bases of
measurement may be appropriate when the entity is not expected to continue in operation
for the foreseeable future. Where a company is not a going concern, the break-up basis is
used where all assets and liabilities are stated at Net Realizable Value.

The company's auditor must consider whether the use of the going concern assumption is
appropriate, and whether there are material uncertainties about the entity's ability to
continue to operate as a going concern that need to be disclosed in the financial
statements. An auditor who concludes that substantial doubt exists with regard to the
appropriateness of the going concern assumption is required to issue an opinion reflecting
this; a modified opinion if the company has appropriately disclosed the doubt and risks;
and a qualified opinion if the company has not made appropriate disclosures. These are
called "going concern" opinions (the terminology is counter-intuitive; such opinions are
issued because the company is NOT expected to remain a going concern).

Financial statement users, businesses, and legislators believe that auditors can make two
types of errors in such opinions - issuing a modified report for a company that remains
viable and failing to issue a modified report for a company that becomes bankrupt before
the next audit. Research has shown that only a small fraction of companies receiving
modified reports become bankrupt and that receiving such a report increases the
likelihood that the company will change auditors. Through 2001, roughly half of
companies that do become bankrupt had a modified opinion on their immediately prior
financial statements, though this percentage has since risen higher. Auditors are at risk of
being sued by financial statement users if a company that did not receive a modified
opinion becomes bankrupt, although litigation reform in the 1990s lowered the risk of
being sued and the liability if such a suit is successful.

Monetary unit assumption

The monetary unit assumption is that in the long run, the dollar is stable—it does not lose
its purchasing power. This assumption allows the accountant to add the cost of a parcel of
land purchased in 2006 to the cost of land purchased in 1956. For example, if a two-acre
parcel cost the company $20,000 in 1956 and in 2006 a two-acre parcel adjacent to the
original parcel is purchased for a cost of $800,000, the accountant will add the $800,000
to the land account and will report the land account’s balance of $820,000 on the
company’s balance sheet.

To say that the purchasing power of the dollar has not changed significantly from 1956 to
2006 is quite a stretch. However, the assumption is that the purchasing power of the
dollar has not changed.

Part of the monetary unit assumption is that accountants report assets as dollar amounts,
rather than reporting in detail all of the specific assets. If an asset cannot be expressed as
a dollar amount, it cannot be entered in the general ledger. For example, the management
team of a very successful corporation is by far its most valuable asset. However, the
accountant is not able to objectively convert those talented people into a dollar or
monetary amount. Hence, the team will not be included in the amounts reported on the
balance sheet.

Monetary Unit Assumption

The monetary unit assumption requires that only transaction data that can be expressed
in terms of money be included in the accounting records.This assumption
enables accounting to quantify (measure) economic events.The monetary unit assumption
is vital to applying the cost principle discussed earlier. This assumption
does prevent some relevant information from being included in the accounting
records. For example, the health of the owner, the quality of service, and the morale
of employees would not be included because they cannot be quantified in terms
of money.
An important part of the monetary unit assumption is the added assumption
that the unit of measure remains sufficiently constant over time. However, the assumption
of a stable monetary unit has been challenged because of the significant
decline in the purchasing power of the dollar. For example, what used to cost $1.00
in 1960 cost more than $4.00 in 2004. In such situations, adding, subtracting, or
comparing 1960 dollars with 2004 dollars is highly questionable. The profession
has recognized this problem and encourages companies to disclose the effects of
changing prices.
Economic Entity Assumption
An economic entity can be any organization or unit in society. It may be a business
enterprise (such as Marriott International, Inc.), a governmental unit (the
state of Ohio), a municipality (Seattle), a school district (St. Louis District 48), or

a church (Southern Baptist).The economic entity assumption requires that the activities
of the entity be kept separate and distinct from the activities of its owner
and all other economic entities. To illustrate, Sally Rider, owner of Sally’s Boutique,
should keep her personal living costs separate from the expenses of the boutique.
Disney’s Parks and Resorts and its Studio Entertainment are segregated
into separate economic entities for accounting purposes.