Page 23 - Finac1 Test 1 slides - 2. The Conceptual Framwork

THE CONCEPTUAL FRAMEWORK

Capital Maintenance

Capital

• An entity can adopt financial or physical concepts for capital.

• Financial

• capital is viewed as amounts invested (in either historical cost or purchasing
power terms).

• Physical
• capital is viewed as the productive capacity of an entity.

Financial capital maintenance

• Financial capital maintenance seeks to preserve the value of shareholders’
funds, either in monetary terms (historical cost) or real terms (constant
purchasing power).

Physical capital maintenance

• Physical capital maintenance seeks to preserve sufficient shareholders’ funds to
allow the business to continue to operate at current levels of activity, achieved
by some form of CCA, adjusting for specific price changes

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