Going concern means continuing to operate. Liquidation means winding up the entity's affairs by converting assets to cash and settling its obligations. Ordinary financial statements use the continuation assumption; they do not present every asset as if an immediate closing sale were planned.
The assumption is not a guarantee of survival. A profitable company can still have difficulty paying obligations when due. Management must evaluate the relevant conditions and make the disclosures required by the applicable guidance.
Under US generally accepted accounting principles (GAAP), management evaluates conditions and events in the aggregate for each annual and interim reporting period. ASC 205-40-50-1 states that responsibility. The evaluation asks whether the entity will probably be unable to meet obligations as they become due. ASC 205-40-50-4 defines that period from the financial-statement issuance date.
Relevant facts can include expected cash receipts, payment dates, loan conditions, and access to financing. Management plans count only when the applicable criteria support their implementation and effect. A single ratio does not replace that work or determine the required disclosures.
Doubt about continuing operations and a requirement to use liquidation-basis accounting are not the same conclusion. Separate guidance addresses when liquidation is imminent. Audit reporting is also a separate responsibility; an auditor's work does not replace management's evaluation.
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- Explain the assumption that a business continues operating and why neither that assumption nor a single ratio guarantees survival.
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- Liquidity — Understand
To understand this concept: Helpful. Near-term payment capacity is relevant evidence but does not alone decide the assessment.