Final answer:
An entity not operating as a going concern will use liquidation basis of accounting, which alters financial statements to reflect net realizable values of assets and the expected settlement amounts of liabilities. This approach provides information relevant to the liquidation process rather than ongoing operations.
Step-by-step explanation:
When an entity is no longer a going concern, it means that the business is not expected to continue its operations into the foreseeable future. In such cases, the basis of accounting that will be used is the liquidation basis of accounting. This approach significantly affects the financial statements because it requires the entity to adjust its assets to their net realizable values, the estimated amounts for which they could be sold minus the costs of disposal.
Under liquidation accounting, liabilities are also adjusted to the amount expected to be settled during the liquidation process. Revenues and expenses may also be reported differently as they are recognized only to the extent that they are earned or incurred directly in the liquidation process. This results in financial statements that provide users with information that is relevant to the liquidation process rather than to the going concern operations of the entity.
It is important to understand why businesses sell their financial assets and the influence of market conditions on the value of these assets, as well as why financial markets and assets experience cycles of growth and decline. These factors can contribute to a business no longer operating as a going concern, leading to the need for liquidation.