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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 capital maintenance and profit is correct?

Profit is the residual amount remaining after expenses, including capital maintenance adjustments where appropriate, have been deducted from income. Capital maintenance provides the reference point for measuring profit, distinguishing return on capital from return of capital. It is not simply cash received less cash paid.

  1. AProfit is the residual amount after expenses, including capital maintenance adjustments where appropriate, are deducted from incomeCorrect
  2. BProfit is always the excess of cash received over cash paid
  3. CUnder physical capital maintenance, profit arises only if money net assets rise
  4. DCapital maintenance has no connection with the measurement of profit

Explanation

The Framework says profit is the residual after expenses (including capital maintenance adjustments, where appropriate) are deducted from income. Capital maintenance gives the reference point for measuring profit. Physical capital maintenance looks at productive capacity, not money net assets, so the third option is wrong.

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