Question

Gretta Cat Co. (GCC) has assets at January 1, 20X4, which consist of $8,000 in inventory. It did not have any liabilities at that date. During the year ended December 31, 20X4, GCC sold the inventory for $10,000 cash and distributed $1,000 to the owners by way of dividends. GCC replaced the inventory on December 31, 20X4, at a cost of $8,300. It did not have any other transactions during the year. The inflation rate during 20X4 was 5%. How much profit did GCC make according to the physical (productive capacity) concept of capital maintenance?

Question 1 options:

$1,000

$1,600

$1,700

$2,000

The primary objectives of financial reporting are to provide useful, relevant information that faithfully represents an entity’s financial position. However, in meeting these objectives, an entity is limited by which of the following?

Question 2 options:

The cost-benefit constraint

The going-concern assumption

The capital maintenance concept

The materiality characteristic

Answer 1

Ans-1) $1600.

WORKING -: CAPITAL MAINTENANCE CONCEPT MEANS THAT COMPANY'S INCOME MUST ONLY BE RECOGNISED AFTER IT HAS FULLY ADJUSTED THE COSTS , INFLATION RELATED TO THE OPERATIONS . IT EXCLUDES ANY OWNER'S CONTRIBUTION OR DISTRIBUTION.

Beginning Value of asset = $8000.

Due to inflation , the value of the asset has risen .

Increase in value = 5% of 8000 = 400

New Value of asset = 8000 + 400 = $8400

Proceeds from sale of asset = $10,000

Net Profit = 10,000 - 8400

= $1,600