Two approaches in

determining income
 Transaction approach

 Capital Maintenance Approach

 Capital Maintenance
Approach

The “Capital Maintenance Approach” means that

net income occurs only after the capital used
from the beginning of the period is maintained.
Distinction between
return of capital and
return on capital
Two concepts of capital
maintenance
 Financial Capital

 Physical Capital
 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.
 Computation of net income

Net assets – December 31 P 1,300,000

Add: Dividends paid 300,000
Total P 1 600 000
Less: Net assets – Jan. 1 500 000
Additional Investments 400 000 900 000
Net Income P 700 000
Physical Capital

It is the quantitative measure of the physical

productive capacity to produce goods and
services.
 Computation of net income

Net assets – December 31 P 1 300 000

Add: Dividends paid 300 000
Total P 1 600 000
Less: Net assets at current cost– Jan. 1 800 000
Additional Investments 400 000 1 200 000
Net Income P 400 000
Problem 7-1
RELIABLE COMPANY
Statement of Retained Earnings
Year Ended December 31, 2017
Retained Earnings – Jan. 1 P 200 000
Overdepreciation 0f 2016 due to prior period errors 100 000
Change from FIFO to weighted average – credit 150 000
Corrected beginning balance P 450 000
Net income for current year 1 300 000
Decrease in appropriation for treasury share 200 000
Total P 1 950 000
Cash dividend paid to shareholders (500 000)
Current appropriation for contingencies (100 000)
Retained Earnings – Dec. 31 P 1 350 000
Problem 7-3
ANGOLA COMPANY
Comparative Income Statement
Year Ended December 31, 2017 and 2018

2018 2017
Sales P 6 000 000 P 4 500 000
Cost of goods sold ( 2 900 000) ( 2 300 000)
Gross income P 3 100 000 P 2 200 000
Expenses ( 1 490 000) ( 1 800 000)
Net Income P 1 610 000 P 400 000
Problem 7-3
ANGOLA COMPANY
Statement of Retained Earnings
Year Ended December 31, 2017 and 2018

2018 2017
Retained Earnings – Jan. 1 P 1 150 000 P 1 000 000
Net Income 1 610 000 400 000
Dividends paid ( 500 000) ( 150 000)
Retained Earnings – Dec. 1 P 2 360 000 P 1 250 000
Problem 7-4
MARTHA COMPANY
Statement of Changes in Equity
Year Ended December 31, 2017
Share Retained Treasury
Ordinary Preference
Premium Earnings Share
Balances – Jan. 1 10 000 000 7 500 000 3 250 000
Issuance of preference 5 000 000 400 000
Purchase of treasury – ordinary 320 000
Issuance of ordinary 2 500 000 3 500 000
Dividend to ordinary (2 480 000)
Reissuance of Treasury Share 50 000 (160 000)
Dividend to preference (450 000)
Overstatement of 2016 ending
(140 000)
inventory
Net Income 2 250 000
Balances – Dec. 31 P 12 500 000 P 5 000 000 P 11 450 000 P 2 430 000 P 160 000
Problem 7-5
CARR COMPANY
Statement of Changes in Equity
Year Ended December 31, 2017
Share Retained Treasury
Ordinary Preference
Premium Earnings Share
Balances – Jan. 1 5 150 000 1 800 000 3 590 000 4 000 000 270 000
Retirement of Treasury Share (150 000) (120 000) ( 270 000)
Property Dividend (750 000)
Dividend to preference (180 000)
Error (350 000)
Net income 2 600 000
Balances – Dec. 31 P 5 000 000 P 1 800 000 P 3 470 000 P 5 320 000 ---