P-T Case 2-4 Continuity
Case 2-4: Continuity
Samuel Parsons
School of Accounting, Liberty University
Author Note
Samuel Parsons
I have no known conflict of interest to disclose.
Correspondence concerning this article should be addressed to Samuel Parsons.
Email: separsons@liberty.edu
1
P-T Case 2-4 Continuity2
Abstract
In the case of 2-4, the concept of continuity will be explored through set of questions proposed
in the Financial Accounting Theory and Analysis textbook. Firstly, we will examined how Robert T.
Sprouse and Maurice Moonitz describes the concept of continuity. Secondly, we will see how
continuity is continually applied by business entities and how the historical costs affect it. Thirdly, we
will looked at how continuity is no longer applied when a business entity must liquidate its assets.
Lastly, we will see how continuity can be applied outside of accounting in a biblical interpretation.
P-T Case 2-4 Continuity3
Continuity is often cited as a basic accounting postulate that affects how a company presents
information in published financial statements. (Schroeder, Clark, and Cathy, 2009)
How did Sprouse and Moonitz describe continuity?
Robert T. Sprouse and Maurice Moonitz created a group called the Basic Postulates of
Accounting and its purpose is to explore the economic and political environments upon which
accounting exists. One of the postulate of interest is called continuity and they describe it as “the
absence of evidence to the contrary; the entity should be viewed as remaining in operation indefinitely.
While the entity has a limited life in the presence of evidence, shouldn't be viewed as remaining in
operation indefinitely.” (Schroeder, Clark, and Cathy, 2009) Basically, the purpose of continuity is to
show that a business entity should be able to operate indefinitely. Usually, a bare minimum of twelve
months within the fiscal year; but any business entity should strive to practice continuity by preparing
their yearly financial statements as an ongoing basis.
Given the presumption of continuity, if you are planning to buy a business, would the historical
cost of the company's assets be relevant to your decision to invest? Explain. If your answer is no,
what asset values would be relevant to your decision to invest?
Under the presumption of continuity, historical costs plays a vital role for the potential
investment of a business. According to Christian Blecher, “historical cost accounting is influenced by
the uncertainty of the underlying assets, if the standard-setter wants to minimize the social costs of his
standard-setting decision.” (Blecher, 2019) Investors will look at the historical costs and determined
whether or not the business entity’s assets has future value. If the business entity is able to increase the
value of the assets, then the future value will be able to outweighed the historical costs upon which the
business entity’s assets were first invested in. However, if the business entity is unable to increase the
value of the assets, then, it becomes a challenge for the investor to see any potential value of the assets.
P-T Case 2-4 Continuity4
If a company is bankrupt and plans to liquidate its assets can continuity still be presumed?
Explain. If you answer is no, how do you think the lack of continuity should affect the
measurement of assets reported in a company's balance sheet?
A company would no longer maintain the concept of continuity if it can’t maintain its
operations. When a company plans to liquidate its assets, it is a strong indication that bankruptcy will
be declared in a short time. “The practical relevance of bankruptcy prediction has to be emphasized
because there is a considerable interest from creditors, bankers and regulators in accurate forecasting
the future existence of companies.” (Nyitrai and Virag, 2019) Bankruptcy is not a decision that should
be taken lightly and many pareties are involved before the final decision is made. Investors will use the
accuracy of balance sheets to help them with their decision in investing assets. Without a consistent
continuity within a company’s operations, the business will eventually not be able to operate.
Biblical Application
The concept of continuity need not be to solely accounting. As Christians, we are required to
have a consistent relationship with God through prayer, reading through His book the Bible, and to
have faith in Him. Granted, humanity is imperfect and each of us will stumble due to our sin nature.
However, there are those who seek to liquidate the continuity of God despite knowing it for
themselves. In Galatians 1:8, it states “but even if we or an angel from heaven should preach a gospel
other than the one we preached to you, let them be under God’s curse!” (NIV) This is why we must
guard our hearts and continually walk in the continuity of God’s love. Otherwise, we all fall under the
curse of God for purposely misleading the loss.
P-T Case 2-4 Continuity5
References
Blecher, C. (2019). The influence of uncertainty on the standard-setting decision between fair value
and historical cost accounting under asymmetric information. Proquest.
https://www.proquest.com/docview/2047955212?
_oafollow=false&accountid=12085&forcedol=true&pq-origsite=summon
Galatians 1:6-9. Galatians 1:6-9 NIV - - bible gateway. (n.d.).
https://www.biblegateway.com/passage/?search=Galatians%2B1%3A6-9&version=NIV
Nyitrai, T., & Virág, M. (2018, August 28). The effects of handling outliers on the performance of
bankruptcy prediction models. Socio-Economic Planning Sciences.
https://www.sciencedirect.com/science/article/pii/S003801211730232X?via%3Dihub
Schroeder, R. G., Schroeder, R. G., Clark, M., & Cathey, J. M. (2009). Accounting theory and analysis:
Text and cases. John Wiley & Sons.
