While finalising the Financial Accounts XYZ Associates did not consideration the financial condition of a debtor amounting to Rs.25,000 who has been declared insolvent. How does this affect the true and fair view of the financial results of XYZ Associates.

Gross profit understated to the extent

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Net worth overstated to that extent

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Stock overvalued to that extent

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Net profit and debtors overstated to that extent

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Solution

The correct option is D Net profit and debtors overstated to that extent
If a debtor declared insolvent it means nothing could be recovered from his estate, this is known as bad debts. It is a loss for the company and it is shown in debit side of profit and loss account. If this loss is not taken into consideration debit side of profit and loss account will be 25000 less so net profit will be overstated and this amount is not deducted from debtors so debtors will also be overstated.

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