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CSEET · Fundamentals of Accounting · Basic Concepts and Principles of Accounting

Under the Framework for the Preparation and Presentation of Financial Statements, which statement about the concepts of capital maintenance is correct?

The correct statement is that the principal difference between the two capital maintenance concepts is the treatment of the effects of changes in prices of assets and liabilities. Both exclude owner contributions and distributions, and profit arises only when closing capital exceeds the amount needed to maintain opening capital.

  1. AThe principal difference between the two concepts is the treatment of the effects of changes in the prices of assets and liabilities of the enterpriseCorrect
  2. BThe two concepts differ mainly in whether owners' drawings are deducted in arriving at profit
  3. CPhysical capital maintenance can be measured only in units of constant purchasing power
  4. DProfit is earned only if closing net assets equal opening net assets

Explanation

The Framework states that the principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in prices of assets and liabilities. Both concepts exclude owner distributions and contributions. Constant purchasing power is a measurement unit for financial capital maintenance, and profit arises only when closing amounts exceed opening amounts, not equal them.

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