1)Why is the continuity assumption so important for Statement of Financial Position reporting? 2

Ans

1) Why the continuitity assumption so important for statement of Financial position reporting?

Sol: It is very crucial to follow the Continuity or going concern assumption for preparing and presentation of the financial position reporting because of the following:

a) To ensure the reliability of those investors who are deciding to invest in the company for long period.

b) To make it clear to the other stakeholders that in no near future time, the business will cease its operations.

c) To decide the number of years the depreciation expense of Fixed assets will be spread over. If the firm is not expected to continue, the cost of a fixed assets would be expensed in full in the year of acquisition itself.

2) Why is separate entity assumption so important for statement of Financial Position reposting?

Sol: The importance of Seperate entity assumption is important for the statement of Financial Poisition reporting for the following reasons:

a) To prevent the overlapping of the personal and business accounting in terms of expenses, income, capital etc.

b) In order to ensure proper taxation and financial reporing.

c) In order to give the business a separate existence from its owners or shareholders, by ensuring separate liability for the business and the individual owners and  to make it clear that debts incurred are for the company and not the shareholders.

3) Why is the cost principle so important for Statement of Financial Posiiton reporting?

Sol: Adopting of Cost principle for the statement of Financial Position is essential for the given reasons:

a) To maintain a consistent balance sheet reporting for the assets and liabilities.

b) Adopting Cost principle helps to verify costs with the original documents related to the transaction.

c) No adjustments are needed as long as assets are recorded in the historical cost values since there is no requirement to record fluctuations.