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Advance financial accounting ( FIN611) Gdb (solution)

Going Concern Assumptions As Per IASB Framework

The business is said to be going concern if the relevant financial statements of the business show
that the company is not going to be liquidated, has reasonable working capital available, and can pay
off current liabilities at least for a foreseeable future.

Information from the Question

We have also been told that current transformation in the demand of electronic products (TVS<-
>LEDs) in the market has led ZEE Electronics to enter into an export business to target third world
countries because of the potential of selling their conventional TVs there. However, ZEE electronics
FS(s) have been showing a consecutive after tax losses and negative working capital.

Arguments against the application of Going Concern Assumptions:

1) Since the Financial Statements of Zee Electronics have been showing continuous after tax
losses and negative working capital, it is unlikely that the business is going to survive for the
foreseeable future. Here we are not concerned about profit, but the availability of cash since
business can survive even without making any profits as long as the current obligations are
being met such as payments to suppliers, workers, tax authorities etc. But the negative
working capital is the alarming situation here.
2) ZEE Electronic is now considering to enter the export business and therefore be needing
approval from concerned regulatory authorities that can take a while.
3) Although, considering, the recent relief from the government for the electronics industry
can benefit the company but projecting profits for a business that you don’t have any
experience, and you also don’t know what the demand and supply factors are going be in
third world countries? cannot be considered, reasonable. Because the company doesn’t
have any ground basis for projecting profits.
4) There are many risks associated with an export business such as inflation, interest rates and
exchange rates of the respective countries that need to be taken into account. Economic,
transaction and translational risks can still be a problem for ZEE electronics.

Arguments in favour of the application of Going Concern Assumptions:

1) Likewise, ZEE electronics have survived as yet; this indicates that the company has sound
liquid resources available to meet current and some non-current obligations.
2) Plan to enter a completely new line of business indicates that ZEE electronic have no plan to
liquidate the company and is confident that It can survive for as minimum as six months
considering the relief from government may ease the process of getting a license to export
its product.
3) It could well be the case that the government lifts up massive custom or provides a major
relief on the exports making the company able to generate sound profit.
4) ZEE electronics may have already considered all the pros and cons of entering an export
business and may have already located the potential dealers to sell its product and
incorporating all the tax reliefs in its prospected cash flows is now able to project profits.

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