Question

2. From the below list pick 3 and discuss their meaning in Financial Accounting (5 Points each) Going Concern Historical Cost Principle Concept Transactions Double Entry Accounting Working Capital Monetary Unit

Answer 1

*Going Concern concept:

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, it means it's gone bankrupt and its assets were liquidated.

As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.

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.

*Working capital:

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and Negative Working capital.

A company can be endowed with assets and profitability but may fall short of liquidity if its assets cannot be readily converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

* Historical cost principle:

Under the historical cost basis of accounting, assets and liabilities are recorded at their values when first acquired. They are not then generally restated for changes in values.

Costs recorded in the Income Statement are based on the historical cost of items sold or used, rather than their replacement costs.