If management intends to liquidate the entity's operations, financial statements are prepared on the basis of
A) Historical cost
B) Historical cost with a note that the entity is about to liquidate
C) Expected liquidation values
D) Financial statements do not have to be prepared.

Question

Quizplus · Accepted Answer

When an entity intends to liquidate its operations, financial statements are prepared on the basis of expected liquidation values. This is because the entity is no longer a going concern and its assets are expected to be sold off in the near future, rather than continuing to be used in the entity's operations. Historical cost may not represent the current value of the assets, and historical cost with a note is not sufficient to fully disclose the impact of liquidation on the financial statements. Financial statements must still be prepared to meet reporting requirements.

If Management Intends to Liquidate the Entity's Operations, Financial Statements