Skip to content

CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Gupta Electronics Ltd. is preparing its financial statements and finds that a customer owes Rs 6 lakh, but the customer has been declared insolvent and recovery is highly unlikely. The company continues to show the Rs 6 lakh as a receivable at full value, reasoning that the debt is still legally due. Which qualitative characteristic of financial statements is mainly compromised?

Faithful representation is compromised. The insolvent customer's Rs 6 lakh is unlikely to yield economic benefits, so carrying it at full value overstates assets and profit. Information must reflect economic reality and prudence, not merely the legal claim that the debt remains due.

  1. AComparability, as other years had different receivables
  2. BFaithful representation, as the receivable overstates the asset that is expected to yield benefitsCorrect
  3. CUnderstandability, as the note is too complex
  4. DTimeliness, as the report is delayed

Explanation

Financial statements must faithfully represent the transactions and events, and prudence requires not overstating assets. Showing an irrecoverable debt at full value overstates assets and profit, so the information does not represent economic reality. Legal form alone does not justify this; substance over form applies.

Did you get it right without looking?

One question tells you little. A timed set on Framework for Preparation and Presentation of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Framework for Preparation and Presentation of Financial StatementsFree diagnostic mock

More Framework for Preparation and Presentation of Financial Statements questions