what is the underlying assumption on which financial statements are prepared
What is the underlying assumption on which financial statements are prepared?
Answer: Financial statements are prepared based on several fundamental assumptions that provide a foundation for accurate representation of a company’s financial position. One of the key underlying assumptions is the “Going Concern Principle.” This principle assumes that the entity will continue to operate in the foreseeable future, allowing for assets to be valued based on the assumption that the company will continue its operations. In other words, it assumes that the company is not facing the risk of liquidation or closure. This assumption affects how assets and liabilities are valued in the financial statements. If an entity is considered a going concern, assets are valued at historical cost or fair market value, whereas if it is not a going concern, assets might be valued at liquidation values. This fundamental principle is essential for preparing financial statements that accurately reflect the financial health of a business.