Accounting · Accounting Concepts
A software company, 'Tech Solutions Co.', has incurred losses for five consecutive years and faces severe liquidity issues, with current liabilities exceeding current assets by 50 percent. The bank has recently refused to renew its working capital loan, and rumors of potential closure are circulating in the market. Despite these facts, the CFO prepares the financial statements for the year ended March 31, 2025, without any adjustments for asset write-downs or liability reclassification. Which of the following accounting concepts is being violated by the CFO's preparation of the financial statements, and what is the correct accounting treatment required if this concept is deemed no longer applicable?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Violated Concept: Consistency Concept. Correct Treatment: The company must switch from the Straight-Line Method of depreciation to the Written Down Value Method.
- 2Violated Concept: Materiality Concept. Correct Treatment: Contingent liabilities should be fully recognized as actual liabilities.
- 3Violated Concept: Going Concern Concept. Correct Treatment: Assets should be valued at their net realizable value (liquidation value) and liabilities should be presented at the amount required to be settled immediately.✓
- 4Violated Concept: Accrual Concept. Correct Treatment: Assets should be valued at historical cost minus depreciation.
Correct answer
Violated Concept: Going Concern Concept. Correct Treatment: Assets should be valued at their net realizable value (liquidation value) and liabilities should be presented at the amount required to be settled immediately.
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