Which statement about going concern is correct?

Which statement about going concern is correct?

• A. The business will be liquidated within 12 months.
• B. The business is expected to continue operating into the future.
• C. The business must distribute profits before tax.
• D. The business should always prepare cash-basis statements.

Answer: (B)

Going concern is the assumption that the business will continue to operate for the foreseeable future, so its assets and liabilities are measured with the expectation that the entity will not be wound up soon. This statement is the best because it directly reflects that assumption—that the business is expected to keep operating into the future. If a business were planned to be liquidated, or there were plans to cease operations, the going concern assumption would not apply and different reporting bases would be used. The other ideas don’t fit this concept: expecting liquidation within 12 months describes a scenario where the business is not a going concern, so the usual accounting treatment under this assumption wouldn’t apply. Distributing profits before tax is a policy choice about distributions, not a statement about the entity’s ability to continue. Preparing cash-basis statements relates to the basis of accounting, which is separate from the going concern assumption.

Going concern is the assumption that the business will continue to operate for the foreseeable future, so its assets and liabilities are measured with the expectation that the entity will not be wound up soon.

This statement is the best because it directly reflects that assumption—that the business is expected to keep operating into the future. If a business were planned to be liquidated, or there were plans to cease operations, the going concern assumption would not apply and different reporting bases would be used.

The other ideas don’t fit this concept: expecting liquidation within 12 months describes a scenario where the business is not a going concern, so the usual accounting treatment under this assumption wouldn’t apply. Distributing profits before tax is a policy choice about distributions, not a statement about the entity’s ability to continue. Preparing cash-basis statements relates to the basis of accounting, which is separate from the going concern assumption.