Question

If you were to change the underlying capital maintenence concept used in financial statements, how would...

If you were to change the underlying capital maintenence concept used in financial statements, how would the income statements differ?

Homework Answers

Answer #1

As per capital maintenance concept, profit should be recognized only when business has at least maintained the amount of its net assets during an accounting period.

In other words, that profit must result in the increase in net assets during a period.

But in Income measurement approach, income/profit is measured based on transactions.

So, to change financial statement from capital maintaince concept to income measurement approach, it must be prepared based on transactions occured during the period and removing components showing -

1. Changes occured in net assets value like profit on revaluation of inventory, fixed assets, investments, long term liabilities etc. at fair market value,

2. Change in currents assets, current liabilities.

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