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CMA Foundation · Fundamentals of Business Economics and Management · Utility, Wealth, Production

Wealth is a 'stock' concept while income is a 'flow' concept. Mr. Nair owns a house worth ₹60 lakh and a bank deposit of ₹10 lakh, owes a bank loan of ₹15 lakh, and earns ₹8 lakh as salary during the year. On the basis of net wealth (assets minus liabilities), what is his net wealth, and which statement about the salary is correct?

Net wealth is ₹55 lakh, found by adding the house ₹60 lakh and deposit ₹10 lakh and deducting the ₹15 lakh loan. The ₹8 lakh salary is income, a flow measured over a period, whereas wealth is a stock measured at a point of time.

  1. A₹55 lakh; the salary is part of the stock of wealth
  2. B₹70 lakh; the salary is a flow measured over a period
  3. C₹55 lakh; the salary is a flow measured over a periodCorrect
  4. D₹63 lakh; the salary is a flow measured over a period

Explanation

Net wealth = 60 + 10 - 15 = ₹55 lakh, measured at a point of time (a stock). Salary of ₹8 lakh is earned over a year, so it is a flow. ₹70 lakh ignores the loan; ₹63 lakh wrongly adds salary and subtracts nothing properly (55+8) and also mixes stock with flow.

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