CASE 2-4 CONTINUITY 1
Case 2-4 Continuity
ACCT 632
School of MS: Accounting: Taxation, Liberty University
January 21, 2024
Author Note
I have no known conflict of interest to disclose.
Correspondence concerning this article should be addressed to.
CASE 2-4 CONTINUITY 2
Abstract
This paper pertains to continuity, a fundamental accounting principle influencing how a
company presents information in its published financial statements. The Accounting Act
improves the understanding of financial statements for various stakeholders. An analysis of
corporate operations can be conducted by studying the data presented in publicly available
financial statements accessible from the authorized electronic database dedicated to financial
statements (Martin & Veres, 2021). This paper discusses continuity as the concept of a growing
concern. It is a vital accounting theory that significantly influences the preparation and
presentation of a company's financial statements in the accounting field. In addition, some
sections discuss the description of continuity by Sprouse and Moonitz, the values of the
assets which are important considerations for an investment choice, and it is essential to consider
how the absence of continuity impacts the measurement of assets that are presented in the
balance sheet of a corporation.
Keywords:
Continuity, investment, financial statement
CASE 2-4 CONTINUITY 3
Case 2-4 Continuity
Sprouse and Moonitz described continuity in accounting as an expectation that a
corporation would operate without interruption. It acts as the basis for the creation of financial
statements with the premise that the organization will keep operating for an extended period.
Continuity is a core principle in accounting that often affects how a corporation presents
information in its published financial statements. According to Sprouse and Moonitz, continuity
refers to the assumption that an entity will continue to function indefinitely until evidence
suggests otherwise. If there is information indicating that the entity has a finite lifespan, it should
not be perceived as continuing to operate endlessly (Cathey et al., 2022). Continuity can help us
deal with disruption by enhancing our understanding of how individuals can form patterns that
restore interrupted patterns and establish new work patterns and innovative methods to service
organizations (Feldman et al., 2022).
As for the assumption that the firm will continue to operate as it has in the past,
the previous cost of the company's assets would impact the decision about making investments;
historically, cost becomes irrelevant, as only the fair market value is significant. Bankruptcy
serves as evidence that the business will not sustain its operations. No investment decision would
be made without considering the company's fair market value, presuming that the company will
continue to exist and create future cash flows. This assumption is essential for accurately
reporting financial statements and provides stakeholders with a basis for understanding the
company's financial situation and performance. The textbook states that the primary purpose of
financial statements is to furnish information that is valuable for the process of making
predictions. Financial projections should be presented when they can improve the dependability
of users' predictions. Assuming the business's ongoing operation and its assets' utilization to
CASE 2-4 CONTINUITY 4
generate future value enables stability in financial reporting. The significance of asset values in
an investment decision stems from their capacity to align with the buyer's strategic objectives,
current market value, and potential for future income generation (Cathey et al., 2022).
The fact that the organization filed for bankruptcy proves it cannot continue operating in
its current form. In this circumstance, the net realizable value should be used to measure the
assets on a corporation's balance sheet. If a company is liquidating its assets and declaring
bankruptcy, it is impossible to maintain the presumption of continuity. Under these
circumstances, it is quite improbable that the company will continue to operate for a long time.
Accounting shifts its focus from a going concern basis to a liquidation basis as the primary focus
of the discipline. Without continuity, the assets listed on the company's balance sheet would no
longer be valued at their historical cost or considered a going concern. In their place, assets
would most likely be valued according to their estimated net realizable value, also called the
liquidation value. This value represents the amount of money the company anticipates receiving
from the sale of the assets through a methodical liquidation process. This transition to liquidation
values frequently results in adjustments representing the predicted amounts that could be realized
in a forced sale scenario. These adjustments can significantly impact the reported values of
assets, which can be a significant factor in determining the worth of assets. This indicates that the
stated values of the assets may be lower than their historical cost, which would represent a more
realistic evaluation of the revenues from the sale of the assets when they are in a precarious
position. (Cathey et al., 2022).
In conclusion, when individuals or organizations cannot handle their financial
obligations, it provides them with a structured approach to dealing with their financial issues.
Filing a bankruptcy petition is an option for any individual or organization that cannot repay its
CASE 2-4 CONTINUITY 5
outstanding debts. Furthermore, assessing the assets' earning ability, growth potential, and future
cash flows is more relevant when making judgments. When considering the purchase of a
business, the previous price paid for its assets may not be the sole relevant factor in making an
investment decision. While previous expenditures provide information on the initial capital
invested in assets, they cannot adequately reflect the current market value or potential future
value of the assets.
The Bible is a source of great wisdom that serves as a guide for making decisions in our
lives. When faced with a significant choice, the description suggests that one should put
one's trust in the direction that God provides. In the biblical aspect of decision-making in various
areas, the book of Psalms states that God should instruct us in his ways so that we may rely on
His faithfulness and grant us undivided hearts to honor His name ( Psalms 86: 11 NIV).
CASE 2-4 CONTINUITY 6
References
Bible Gate Way (n.d), Psalms 86: 11 NIV. Retrieved January 2, 2024, from
https://www.biblegateway.com/passage/?search=+Psalms+86%3A+11&version=NIV
Cathey, R.G.S.M.W.C.J. M. (2022). Financial Accounting Theory and Analysis: Text and Cases
(14th ed.). Wiley Global Education US.
https://mbsdirect.vitalsource.com/books/9781119881162
Feldman, M. S., Worline, M., Baker, N., & Lowerson Bredow, V. (2022). Continuity as
patterning: A process perspective on continuity. Strategic Organization., 20(1), 80–109.
https://doi.org/10.1177/14761270211046878
Martin, K., & Veres, T. (2021). The Past, Present, and Future of Financial Statement-Based
Research in Higher Education. Annals of the University of Petroşani Economics, 21(2),
67-78.
https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-
journals/past-present-future-financial-statement-based/docview/2767253427/se-2
