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Which concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital?
Which concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital?
What is the main concern of users if a physical concept of capital is chosen?
What is the main concern of users if a physical concept of capital is chosen?
What are the two concepts of capital maintenance mentioned in the text?
What are the two concepts of capital maintenance mentioned in the text?
According to the text, which concept of capital maintenance requires the adoption of the current cost basis of measurement?
According to the text, which concept of capital maintenance requires the adoption of the current cost basis of measurement?
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Under the concept of financial capital maintenance, how is profit defined when capital is defined in terms of nominal monetary units?
Under the concept of financial capital maintenance, how is profit defined when capital is defined in terms of nominal monetary units?
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According to the text, under the concept of physical capital maintenance, how are price changes affecting the assets and liabilities of the entity treated?
According to the text, under the concept of physical capital maintenance, how are price changes affecting the assets and liabilities of the entity treated?
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According to the text, what does profit represent under the concept of financial capital maintenance when capital is defined in terms of constant purchasing power units?
According to the text, what does profit represent under the concept of financial capital maintenance when capital is defined in terms of constant purchasing power units?
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True or false: Under a financial concept of capital, capital is synonymous with the productive capacity of the entity based on units of output per day.
True or false: Under a financial concept of capital, capital is synonymous with the productive capacity of the entity based on units of output per day.
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True or false: The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements.
True or false: The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements.
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True or false: Financial capital maintenance is measured in either nominal monetary units or units of constant purchasing power.
True or false: Financial capital maintenance is measured in either nominal monetary units or units of constant purchasing power.
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True or false: The concept of capital maintenance provides the point of reference by which profit is measured.
True or false: The concept of capital maintenance provides the point of reference by which profit is measured.
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True or false: Under the physical capital maintenance concept, profit represents the increase in physical productive capacity over the period.
True or false: Under the physical capital maintenance concept, profit represents the increase in physical productive capacity over the period.
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True or false: The financial capital maintenance concept requires the use of a specific basis of measurement.
True or false: The financial capital maintenance concept requires the use of a specific basis of measurement.
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True or false: According to the text, profit under the concept of financial capital maintenance is defined as the increase in invested purchasing power over the period.
True or false: According to the text, profit under the concept of financial capital maintenance is defined as the increase in invested purchasing power over the period.
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Study Notes
Capital Concepts
- If users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital, the financial concept of capital should be adopted.
Physical Concept of Capital
- The main concern of users if a physical concept of capital is chosen is the maintenance of physical productive capacity.
Capital Maintenance Concepts
- Two concepts of capital maintenance mentioned in the text are:
- Financial capital maintenance
- Physical capital maintenance
Measurement Basis
- The concept of physical capital maintenance requires the adoption of the current cost basis of measurement.
Profit Definition
- Under the concept of financial capital maintenance, when capital is defined in terms of nominal monetary units, profit is defined as the increase in nominal money value of net assets over the period.
- Under the concept of financial capital maintenance, when capital is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period.
- Under the concept of physical capital maintenance, profit represents the increase in physical productive capacity over the period.
True or False Statements
- True: Under a physical concept of capital, capital is synonymous with the productive capacity of the entity based on units of output per day.
- True: The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements.
- True: Financial capital maintenance is measured in either nominal monetary units or units of constant purchasing power.
- True: The concept of capital maintenance provides the point of reference by which profit is measured.
- True: Under the physical capital maintenance concept, profit represents the increase in physical productive capacity over the period.
- True: The financial capital maintenance concept requires the use of a specific basis of measurement.
- False: Profit under the concept of financial capital maintenance is defined as the increase in invested purchasing power over the period (this is a correct definition for the concept of financial capital maintenance when capital is defined in terms of constant purchasing power units, but not in general).
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Description
Test your knowledge on the financial concept of capital and its role in preparing financial statements. Explore the differences between a financial concept and a physical concept of capital, and understand how capital is defined in each context.
