Question

Peterpau Corporation has been having severe financial difficulties for the past year, and the President believes that the company will go bankrupt within the next few months.

Indicate which foundational principle Peterpau’s accountant must consider when preparing the company’s financial statements.

Answer 1

1. Generally, Goingconcern is the basic assumption that the entity should follow while preparing financial statements unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.

2. If an entity goes into liquidation/ bankruptcy, it should not follow the Going concern assumption  because it will mislead the stakeholders of the entity instead it can follow the Break-up basis of accounting

3. The objective of a financial statement is no longer to assess the performance on the going concern basis.

4. The financial report will show the entity's ability to realize the assets and pay off liabilities and if any balance remains it will be paid to shareholders.

5. Eg: Fixed Asset will be recorded as "Asset available for sale " and recognize at net recoverable amounts, Long term borrowings will be reclassified as current liabilities

(Hope you will understand this, please give your valuable feedback)