The Qualitative Characteristics of Financial Information — ACCA Practice Question 06

How to approach this question

Assess the going concern assumption. If management intends to liquidate or has no realistic alternative but to do so, the going concern basis is invalid.

Full Answer

B.On a break-up basis, with assets written down to their recoverable amounts and all liabilities classified as current.✓ Correct

The going concern assumption assumes the entity will continue in operation for the foreseeable future. Since SkyLink intends to liquidate, this assumption is invalid. The financial statements must be prepared on a break-up basis, meaning assets are valued at their net realizable value and all long-term liabilities are reclassified as current.

Common mistakes

Believing that a disclosure note is enough to save the going concern basis when liquidation is imminent.

SkyLink Airways has suffered severe losses and its banking covenants have been breached. The bank has demanded immediate repayment of all loans, which SkyLink cannot afford. The directors intend to liquidate the company. How should the financial statements be prepared?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 4

More questions from this exam