Appendix I
Review Exercise Solutions
390
The Going Concern Assumption
(requires critical thinking)
• There is evidence that the company may not exist and operate in the foreseeable future
HRI has experienced a significant net loss for each of the past three years (even before
adjusting for the unverified expense amounts).
The cash balance and inventory balances are extremely low in 2016.
The company’s property, plant and equipment balance declined significantly from 2015 and
2016 (even after adjusting for exchange rates). It is possible some of these assets were sold
during 2016.
The above examples of HRI’s poor financial performance occurred during a time when the
economy was booming. HRI’s performance is normally aligned with the state of economy.
This discrepancy should cause shareholders to question the going concern assumption with
respect to HRI.
