What is a Going Concern?
Going concern refers to the assumption that a company has the resources to continue operating in the foreseeable future. A bankrupt company or a company near bankruptcy is the opposite of a going concern.
How Does a Going Concern Work?
Financial statements are prepared as though the firm is a going concern unless a) management intends to liquidate the company, b) the company will stop trading for some reason, and/or c) the auditors or management believe there's reason that the firm will not survive into the foreseeable future.
If a firm is not a going concern, audited financial statements must explain why it's not, and what management intends to do about it.
Why Does a Going Concern Matter?
To uphold the integrity of financial markets, financial statements must be prepared to reflect the most accurate value of firms and their assets. Because so many people use financial statements to make decisions (investors, employees, analysts, lenders, etc.), rules are in place to ensure that, to the greatest extent possible, financial information is presented in a fair and useful way.
For example, a firm on the brink of bankruptcy may have to sell its inventory at fire-sale prices rather than the market prices it could get if it had a normal amount of time to sell its goods. In this case, the firm's assets (and therefore its balance sheet) would be valued very differently depending on whether it is a going concern or not.
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