First time, I am using this hope can help me out for basic understanding. My pro

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First time, I am using this hope can help me out for basic understanding. My professor does not lecture even though she knows many things with experiences...


From ch5, income statement and statement of cash flow, I am learning a Capri cal maintenance concept, and tried to apply it. Example was calculate total income. But, why do I need to know the changes of assets? Since income is measured between revenue and expenses?
And why it is plus? Capital distributed in dividends? I understand, cash $10,000 was added cuz they put money in. But why is it less? It should increase assets by $10,000? I am totally lost. Help me please. the shalreno asserts that sharcholders' capital must be l as the company cis m the beginning and ending common equity capital (net ases n as the total amount of cash d areholders as a return on the increase in capital. To use this concept, the companyll ompari ing for any additional investn shares) or distributions to owners (e.g., concept, lifetime income would be computed to sharcholders (all of the dividends paid over the life of the company n proceeds received from the liquidation of the net assets) minus the total capital invested by shareholders. Applying this concept to a given period any additional investments by owners (e.g., proceeds fro dividends) during the period, plus t amo ending net assets, after any adjustments for additional investments b to sharcholders.3 mpany income would be computed as the difference between the be ginni rib y or dist Example: Capital Maintenance Concept Layla Company had net assets of $45,000 at the beginning and $80,000 at the the year, shareholders made additional capital investments of $10,000 during th and Layla distributed cash dividends of $2,500 to shareholders during the year. C ing the ending and the beginning net assets and adjusting for additional inves and dividends, the capital maintenance approach would measure Layla's total i as follows: Ending net assets Less: Beginning net assets Net change in assets Less: Additional investment of capital Plus: Capital distributed in dividends Total income for the year $ 80,000 (45,000) $35,000 (10,000) 2,500 27,500 %, S Alen de, "reo e Measurement na Dynamic Economy," Five Monographs on Business Income Economy. Five Monographs See for instance,E.O.Edwards and P. W.Bell, The Theory and Measurement of Business Income (Berkeley Press, 1970 on Business Income (New Yok A

Explanation / Answer

Net asset here means the difference between total assets and total liabilities,

So according to accounting equation, Capital = Total assets - Total liabilities

So we found the capital balance at the end and beginning. And we started finding the income by analyzing capital account

Closing capital = opening capital + capital issued + profit – dividend distributed

80,000 = 45,000 + 10,000 + Profit – 2,500

Profit = 80,000 – 45,000 – 10,000 + 2,500

(this is what they show you as ‘Profit = Closing capital - opening capital - capital issued + dividend distributed)

          = 27,500

Usually we find income from profit and loss account, but here we are finding the profit from balance sheet. Just imagine a capital account and take opening balance of capital account = net assets at the beginning and closing balance of capital account = net assets at the end

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