Chapter 7 – Presentation and Disclosure Concepts of Capital

1. Explain the presentation and disclosure as an effective communication tool.

→ Classifying information in a manner that groups similar items and separates
dissimilar items, and aggregating information in such a way that it is not obscured
either by unnecessary detail or by excessive aggregation.
2. Explain classification of assets, liabilities, and equity.
→ It can be obscure relevant information, reduce understandability and
comparability and may not provide a faithful representation of financial
information.
3. Explain classification of income and expenses.
→ Are classified as components of profit loss and components of other
comprehensive income.
4. What is aggregation?
→ It is the adding together of assets, liabilities, equity, income, and expenses that
have similar or shared characteristics and are included in the same classification.
5. Explain capital maintenance.
→ This approach means that net income occurs only after the capital used from the
beginning of the period is maintained.
6. Distinguish return on capital and return of capital.
→ Shareholders invest in entity to earn a return on capital or an amount in excess of
their original investment.
→ Return of capital is an erosion of the capital invested in the entity.
7. Explain financial capital.
→ 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.
8. Explain the net income under the financial capital concept.
→ 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.
9. Explain physical capital.
→ It is the quantitative measure of the physical productive capacity to produce goods
and services.
→ This concept requires that productive assets be measured at current cost, rather
than historical cost.
10. Explain the net income under the physical capital concept.
→ 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.