Going-Concern Concept Fly-By-Day Airlines was established shortly after World War II to provide crop dusting and spraying services for local farmers on weekdays and pleasure flights for tourists on weekends. The company has never been more than marginally profitable; however, it has never missed a payroll and has always paid its bills on time. Although no formal agreement was ever established, the founder and former president of Fly-By-Day Airlines retired five years ago and is being paid an annual retirement benefit of $30,000. The outside auditors have approached the current president and proposed that a formal liability be established for the pension benefit. One of the members of the board of directors has questioned whether the liability should be shown in the balance sheet because she is not sure the company meets the going-concern assumption.

a. What is the going-concern concept? What factors should be considered in determining whether or not the company is a going concern?

b. What effect might violation of the going-concern assumption have on the financial statements of Fly-By-Day Airlines?

c. What effect might the going-concern assumption have on whether the company recognizes a liability for the future pension payments to the former president?