ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting
At the start of the year a company had net assets of $500,000. During the year it paid dividends of $20,000 and issued no new shares. At the year end net assets were $570,000. Under financial capital maintenance in nominal monetary units, what profit was earned?
Profit is $90,000. Under financial capital maintenance, profit is the increase in net assets of $70,000 plus the $20,000 dividends distributed to owners, because dividends reduce net assets but are not an expense of the period.
- A$50,000
- B$70,000
- C$90,000Correct
- D$20,000
Explanation
Profit equals closing net assets minus opening net assets plus distributions: 570,000 - 500,000 + 20,000 = $90,000. Option $70,000 ignores the dividend paid, which is a distribution and not an expense. Option $50,000 subtracts the dividend instead of adding it back.
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