1.2.2 Going-concern

The going-concern assumption means the business activities of an accounting entity will continue indefinitely, and will not disappear for bankruptcy, liquidation, and dissolution in the foreseeable future. Meanwhile, if a specific entity is actually threatened by bankruptcy or liquidation, the going-concern assumption should be abandoned. Under this situation, what we are interested in is the liquidation value,but not the value assuming that the business will continue. If the going-concern assumption is not applicable because of threatens from liquidation or bankruptcy, the financial statements must clearly disclose this situation.

Only on the premise of normal operation of an enterprise, the acquisition of fixed assets can be priced on the historical cost, the debt can be repaid according to the original provisions, the accounting treatment methods can be remaining unchanged, and the information contained in the accounting records and financial statements can be true and reliable. For example, a company purchases a production line, which is expected to last 10 years. Under the going-concern assumption, since the enterprise will stay in business indefinitely, we could assume that this production line will keep bringing benefits to the enterprise and serving its production until the life of this line is over. Therefore, the original value of this production line can be determined by historical cost and then be depreciated with certain depreciation method to allocate the historical cost to related products that are produced by this production line. Moreover, the going-concern assumption also influences the identification and classification of assets and liabilities. The audit opinion could show the attitude of an auditor to the going-concern status of an enterprise.