Question

A classic definition of income states that income is the amount one could consume at the end of a period and still be as well off as at the beginning of the period. Embedded in this definition of income is the concept of capital maintenance. Conceptually, income can occur only after the beginning capital has been recovered. When accountants adopt different measuring units, they are attempting to maintain different concepts of capital.

Identify the type of capital maintained when the measuring unit is (a) nominal dollars, (b) constant dollars, and (c) current costs. When would nominal cost and constant dollar measurements provide equivalent results?

Please include a reference.

Answer 1

(a) Nominal dollar income statement are required to maintain the number of dollars originally invested in the running business without considering the purchasing power of dollars.

(b) Constant dollar income statement is required to maintain the purchasing powers of dollars in the original investment.

(c) Current costing are attempted to maintain the capacity to produce a constant supply of all goods and services in the economy

when there is no change in the purchasing power of the dollars occur between the date of original investment to the date of financial statements then nominal dollar and constant dollar financial statement will provide equivalent results.

Purchasing power can be understood as the command for over all goods and services within the economy.