Going concern business finance will assist you with acquiring an existing business. Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy.
If a business is not a going concern, that means it is now bankrupt and its assets are liquidated. Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern. If a company is no longer a going concern, it must start reporting certain information on its financial statements. Negative trends that lead to no longer being a going concern include denial of credit, continued losses and litigation.
Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are going concerns may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.
Accountants who view a company as a going concern generally believe that a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products. Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the Generally Accepted Auditing Standards (GAAS).
Red Flags Indicating a Business is not a Going Concern
Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets.
A firm’s inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later.
Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. Financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans.
In general, an auditor examines a company’s financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, litigation against the company, and denial of credit by suppliers.
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