What happens to the financial statements if management determines to cease trading?

When management determines to cease trading, the financial statements must not be prepared on a going concern basis. This means that the underlying assumption of the financial statements shifts from the expectation that the entity will continue to operate for the foreseeable future, to recognizing that the entity will be winding down its operations and may not be able to fulfill its obligations as they come due.

In such scenarios, the assets and liabilities need to be valued based on liquidation value rather than going concern value, reflecting what could be realized or settled in the process of winding down its operations. This impacts the measurement and presentation of various items within the financial statements, as they would now reflect the imminent cessation of business activities rather than ongoing operations.

Other options do not align with this fundamental change in perspective. For example, preparing financial statements on a going concern basis (one of the other choices) would misrepresent the entity's situation when management has determined that trading will cease. Similarly, reflecting continued operations would be misleading, as would be the approach of merely disclosing potential future activities without addressing the immediate implications of ceasing trading.