Accounting & Auditing
Going Concern Concept
A temporary loss does not automatically mean:
A. The entity is not a going concern
B. Expenses exist
C. Revenue exists
D. Accounts must be prepared
Correct Answer: A
A single loss is not conclusive; all relevant facts, plans and financing are considered.
Accounting & Auditing
Going Concern Concept
The existence of uncertainty about future events means management should:
A. Use judgment based on available information
B. Automatically liquidate
C. Ignore the uncertainty
D. Recognize all future losses regardless of probability
Correct Answer: A
Going-concern assessment necessarily involves judgment about uncertain future outcomes.
Accounting & Auditing
Going Concern Concept
Going concern assessment requires consideration of:
A. Future events and conditions as well as current facts
B. Past cash only
C. Inventory count only
D. Audit fee only
Correct Answer: A
The assessment is forward-looking and considers relevant events and conditions.
Accounting & Auditing
Going Concern Concept
Which is an external indicator relevant to going concern?
A. Adverse change in law affecting operations
B. Routine depreciation
C. Owner drawings only
D. Petty cash shortage of trivial amount
Correct Answer: A
Legal or regulatory changes can materially affect an entity's viability.
Accounting & Auditing
Going Concern Concept
Which is an operating indicator of possible going-concern problems?
A. Loss of key management without replacement
B. Higher bank balance
C. New equity injection
D. Lower interest rate
Correct Answer: A
Loss of key personnel can impair the entity's ability to continue operations.
Accounting & Auditing
Going Concern Concept
Which is a financial indicator of possible going-concern problems?
A. Inability to pay creditors on due dates
B. Increase in customer satisfaction
C. New profitable contract
D. Strong cash reserves
Correct Answer: A
Difficulty meeting obligations as they fall due is a significant warning indicator.
Accounting & Auditing
Going Concern Concept
If going concern is inappropriate, financial statements may need:
A. A different basis of preparation with relevant disclosure
B. No accounting policies
C. No liabilities
D. Only a cash book
Correct Answer: A
A non-going-concern basis may be required and the basis and reasons should be disclosed.
Accounting & Auditing
Going Concern Concept
Going concern is important to depreciation because assets are assumed to:
A. Be used over their expected useful lives
B. Be sold immediately at scrap value
C. Never lose value
D. Be expensed only when cash is paid
Correct Answer: A
Continued use supports allocation of depreciable amounts over useful lives.
Accounting & Auditing
Going Concern Concept
A strong profitable order book and adequate financing generally:
A. Support the going-concern assessment
B. Require liquidation accounting
C. Prove no business risk exists
D. Eliminate need for judgment
Correct Answer: A
Positive operational and financing evidence can support continuation.
Accounting & Auditing
Going Concern Concept
Expiry of major financing facilities without realistic renewal may:
A. Raise going-concern uncertainty
B. Always be immaterial
C. Increase revenue
D. Eliminate debt
Correct Answer: A
Lack of financing can threaten the entity's ability to meet obligations and continue operations.
Accounting & Auditing
Going Concern Concept
Loss of a major market without replacement may:
A. Create business risk relevant to going concern
B. Always increase profit
C. Have no relevance
D. Convert liabilities into equity
Correct Answer: A
Loss of a key market can threaten future operations and is relevant to assessment.
Accounting & Auditing
Going Concern Concept
Negative operating cash flows may:
A. Raise going-concern concerns
B. Always prove insolvency
C. Increase share capital automatically
D. Eliminate liabilities
Correct Answer: A
Sustained negative cash flows can be an adverse indicator, though assessment depends on all facts.
Accounting & Auditing
Going Concern Concept
A recurring pattern of substantial operating losses may be:
A. A warning indicator for going concern
B. Proof of fraud
C. Evidence of higher liquidity
D. Irrelevant
Correct Answer: A
Persistent losses can indicate financial stress requiring going-concern assessment.
Accounting & Auditing
Going Concern Concept
Material uncertainty about going concern should generally be:
A. Appropriately disclosed
B. Always hidden
C. Recorded as sales
D. Ignored if cash exists today
Correct Answer: A
Material uncertainties that may cast significant doubt require appropriate disclosure under applicable reporting requirements.
Accounting & Auditing
Going Concern Concept
Who is primarily responsible for assessing an entity's ability to continue as a going concern when preparing financial statements?
A. Management
B. External customers
C. Bank cashier
D. Inventory clerk
Correct Answer: A
Management assesses the entity's ability to continue as a going concern in preparing financial statements.
Accounting & Auditing
Going Concern Concept
If management intends to liquidate an entity, the going concern basis may be:
A. Inappropriate
B. Mandatory
C. Irrelevant to disclosure
D. The same as cash basis
Correct Answer: A
An intention to liquidate can make the going-concern basis inappropriate.
Accounting & Auditing
Going Concern Concept
Under going concern, assets are generally not measured on the assumption of:
A. Forced liquidation
B. Continued use
C. Normal operations
D. Recovery through use or sale in ordinary course
Correct Answer: A
Going-concern financial statements are not prepared on a forced-liquidation basis.
Accounting & Auditing
Going Concern Concept
The going concern assumption means an entity is expected to:
A. Continue in operation for the foreseeable future
B. Liquidate immediately
C. Cease trading at every year-end
D. Sell all assets annually
Correct Answer: A
Going concern assumes continuation of operations for the foreseeable future unless liquidation or cessation is intended or unavoidable.
Accounting & Auditing
Accrual and Matching Concepts
Accrual accounting improves comparability of performance because it:
A. Reduces timing distortions caused solely by cash receipts and payments
B. Eliminates all estimates
C. Guarantees equal profits
D. Records no liabilities
Correct Answer: A
Recognizing events in the periods they relate to makes performance less dependent on cash timing.
Accounting & Auditing
Accrual and Matching Concepts
Which concept prevents charging the entire cost of a multi-year machine as expense merely when cash is paid?
A. Accrual/matching through capitalization and depreciation
B. Cash basis
C. Materiality in every case
D. Entity concept alone
Correct Answer: A
A long-term asset is capitalized and its depreciable amount allocated over useful periods rather than expensed solely based on cash payment.