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Chapter 7 Summary
Chapter 7 Summary
CLASSIFICATION – sorting of assets, liabilities, equity, income and expenses on the basis of shared or
similar characteristics
Classification dissimilar elements can obscure relevant information, reduce understandability and
comparability and may not provide a faithful representation of financial information
Income and expenses are classified as components of profit loss and components of other
comprehensive income
Revised Conceptual Framework introduced a new term statement of financial performance to refer to
the statement of profit or loss together with the statement presenting other comprehensive income
AGGREGATION – adding together of assets, liabilities, equity, income and expenses that have similar or
shared characteristics and are included in the same classification.
Makes information useful by summarizing a large volume of detail. However, aggregation may
conceal some of the detail
CAPITAL MAINTENANCE
Financial performance of an entity is determined using two approaches, namely transaction approach
and capital maintenance approach
Shareholders invest in entity to earn a RETURN ON CAPITAL or an amount in excess of their original
investment
FINANCIAL CAPITAL
Such as invested money or invested purchasing power, capital is synonymous with net assets or
equity of the entity
It is the monetary amount of the net assets contributed by shareholders and the amount of the
increase in net assets resulting from earnings retained by the entity
The traditional concept based on historical cost and adopted by most entities
Net income occurs “when the nominal amount of the net assets at the end of the year exceeds
the nominal amount of the net assets at the beginning of the period, after excluding
distributions to and contributions by owners during the period.”
PHYSICAL CAPITAL
The quantitative measure of the physical productive capacity to produce goods and services
Physical productive capacity may be based on, for example, units of output per day or physical
capacity of productive assets to produce goods and services
Productive assets must be measured at current cost , rather than historical cost
Physical capital is equal to the net assets of the entity expressed in terms of current cost
Net income occurs “when the physical productive capital of the entity at the end of the year
exceeds the physical productive capital at the beginning of the period, also after excluding
distributions to and contributions from owners during the period.”