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The domestic electronics market has been witnessing a replacement of the conventional TVs with Smart TVs and LEDs. Due to this reason, a national company - ZEE Electronics has decided to enter into export business with third world markets having potential for conventional TV sets. The old financial statements of the ZEE have been showing after tax losses and negative net working capital since the year 2010. Yet, Zee managed to stay in the business. Now a day, owing to the government’s huge recent relief for the electronics industry, the company is projecting good profits from its exports in the days to come. Furthermore, ZEE is also expecting to arrange additional financial resources to meet its working capital needs and future expansions. Considering these facts, argue in favor and against the application of “going concern” assumption with reference to the financial statements prepared by ZEE.
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Zee ltd is Favorable financial statements are prepared assuming that the company can and will continue its business in the foreseeable future. The assumption that a business is expected to continue in future affects the timing, nature and amount on which accounting transactions are recorded. For example, one criteria for classification assets and liabilities into current and non-current is whether they are realized/settled within normal course of business .
Zee LTd is required to assess at the date of financial statements whether a business is a going concern. Some accounting frameworks require management to disclose their assessment of going concern. Indicators that jeopardize the going concern status of a business include: (a) situation where liabilities exceed assets, (b) default of a loan(s), (c) tax penalties, heavy fines, etc., (d) very adverse regulations, (e) negative cash flows, (f) extremely adverse legal claims, etc.
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Zee ltd is in favorable; zee ltd should prepare financial statements that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.
It is the responsibility of the management of a company to determine whether the going concern assumption is appropriate in the preparation of financial statements. If the going concern assumption is considered by the management to be invalid, the financial statements of the entity would need to be prepared on break up basis. This means that assets will be recognized at amount which is expected to be realized from its sale (net of selling costs) rather than from its continuing use in the ordinary course of the business. Assets are valued for their individual worth rather than their value as a combined unit. Liabilities shall be recognized at amounts that are likely to be settled.