FINANCE THEORY



Finance Theory

Finance Theory

Introduction

This essay will define and analyze the advantages and disadvantages of the key concepts that underlie all financial statements. We will explain the reasons why the concepts may be difficult to apply or may be inconsistent with each in terms of applicability and usage.

Advantages and Disadvantages of Going Concern Principle

In this concept of Going Concern, an enterprise or corporation assumes that the entity will have an unlimited existence and that it is going to operate “forever”. According to historical evidences and experiences, it is found that companies mainly possess high continuance rates in spite of suffering from a number of business failures. Certain business entities are existing over centuries now, and they do not have any chances of dissolution or liquidation in near future (AICPA, 2003, p. 12).

Going Concern Principle is one of the key accounting principles that help accountants in assessing and forecasting nay future problems and hurdles that might occur in a business. It is one of the advantages of Going Concern Principle that it gives leverage to the company whereby the accountants can sort out any future, financial difficulty and gather money to resolve any financial difficulties (Mednick, 2001, p. 7-96).

Advantages are as follows:

1. It provides a sound foundation to measure and account for the profits that a company earns. This implies that the items in the future sight, which have great economic potential are recorded as a fixed asset rather than as an expense due to the economic benefit that it [provides to the company.

2. It classifies the accounting and recording of certain assets and liabilities as being long-term or short-term respectively. Thus companies have a clear idea about each item that provides it with significant economic benefits (Mednick, 2001, p. 7-96).

3. It accounts for recording the assets and liabilities as per their cost value since the market value of the asset may not be considered, because it is not meant for sale purposes.

4. This assumption is highly beneficial to the investors because the business enterprises shows clear coherence between its activities and the forecasts and due to this reason, it continues to perform on the basis of expected goals (Nobes, Parker, 2001, p. 75).

Drawbacks of the going concern principle include the following:

If a business prepares its financial statements keeping in consideration, the going concern principle, it may mislead the owners and investors since many companies operating on this principle closed down after recessionary periods (Mednick, 2001, p. 7-96).

The principle does not make an assumption that a company may liquidate in the near future. Hence, if it does, there are many liabilities that immediately emerge for the company in case of liquidation (ASB, 2005, p. 90). This is not forecasted for the company before hand and so the unsecured creditors do not receive any authentic information because of this principle. Hence we can say that the principle does not provide any information about the consequences of liquidation (AICPA, 2003, ...