This document discusses inflation accounting and various techniques used to adjust accounting information for inflation. It defines inflation and outlines problems it causes for costing, capital maintenance, and financial statement analysis. The document then describes several inflation adjustment techniques including partial adjustments, current purchasing power method, current cost accounting, and cash flow accounting. It provides details on the current purchasing power and current cost accounting methods.
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This document discusses inflation accounting and various techniques used to adjust accounting information for inflation. It defines inflation and outlines problems it causes for costing, capital maintenance, and financial statement analysis. The document then describes several inflation adjustment techniques including partial adjustments, current purchasing power method, current cost accounting, and cash flow accounting. It provides details on the current purchasing power and current cost accounting methods.
This document discusses inflation accounting and various techniques used to adjust accounting information for inflation. It defines inflation and outlines problems it causes for costing, capital maintenance, and financial statement analysis. The document then describes several inflation adjustment techniques including partial adjustments, current purchasing power method, current cost accounting, and cash flow accounting. It provides details on the current purchasing power and current cost accounting methods.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
This document discusses inflation accounting and various techniques used to adjust accounting information for inflation. It defines inflation and outlines problems it causes for costing, capital maintenance, and financial statement analysis. The document then describes several inflation adjustment techniques including partial adjustments, current purchasing power method, current cost accounting, and cash flow accounting. It provides details on the current purchasing power and current cost accounting methods.
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INFLATION ACCOUNTING
By: Trina Bhagat
PRN: 09020242005 MBA-AB 2009-11 Inflation: Definitions Decrease in purchasing power of money due to an increase in the general price level “A process of steadily rising prices resulting in diminishing purchasing power of a given nominal sum of money” The Penguin Dictionary of Economics “Rise in prices brought about by the expansion of the supply of bank money, credit, etc.” Oxford Advanced Learner’s Dictionary of Current English. INTRODUCTION One of the chief functions of money is to act as the measure of value. During the period a country is either under the grip of inflation or depression and thus the value of its currency constantly and radically changes. As a result, the use of money as the yardstick for the measurement of performance for a period of time or value of anything at any point 'of time is subject to severe doubts. Continued.. This phenomenon became glaringly apparent during the post World War II period when the value of money began to steadily fall all the world over.. Accountants all over the world faced challenges primarily in two spheres: how to have a true measure of performance and how to prevent erosion of real capital caused by widespread inflation. As a result of this some tools and techniques such as revaluation accounting, stabilized accounting, inflationary accounting came in to picture. PROBLEMS IN ACCOUNTING AND FINANCE DURING INFLATION Costing and pricing of product, Replacement of capital assets, Maintenance of real capital, Payment of taxes and dividends. Valuation of inventory, Analysis and interpretation of financial statements, Liquidity of funds. All these problems are interrelated.
During inflation input costs tend to rise continuously.
In order to maintain the same level of profitability, prices of products have to be continuously increased. But this is neither desirable nor practicable every time. Even if it is possible, there would always be a time-lag between cost increase and price increase Continued… During the period of inflation the price of assets like plant, machinery, furniture, etc also keeps on increasing. This would lead to constant depletion of capital in real terms. The depletion of real capital is caused by a number of factors, namely: inadequate depreciation as it is charged on historical cost, payment of higher taxes on the basis of monetary profit, payment of dividend also on the basis of monetary profit, holding of fewer items or smaller quantity of inventory compared with the amount of money locked up in inventory, etc INFLATION ACCOUNTING/ ADJUSTMENT TECHNIQUES These can be broadly divided into the following groups: Partial Adjustments The Current Purchasing Power (CPP) Method Value Accounting Cash Flow Accounting Current Cost Accounting (CCA) Current Purchasing Power [CPP]
It is a simple method of presenting the published data
prepared on historical cost basis after suitably adjusting these using appropriate price indices. Retains historic cost accounting conventions In U.S. General Purchasing Power (GPP) Expresses accounts in terms of “purchasing units” Maintains the general purchasing power of the invested capital Current Purchasing Power [CPP] Monetary items - financial assets and liabilities - remain unchanged Inventories: FIFO purchase cost is corrected by a suitable correction coefficient to correspond the purchase power of the end of accounting period Fixed assets: The purchase cost is corrected to correspond the purchase power of the end of the accounting period The balance value of the fixed assets is the same percentage of the corrected purchase cost as the book value is of the original purchase cost Current Cost Accounting [CCA] This has been developed by a committee with F Sandilands (therefore, called The Sandilands Committee) set up in UK in 1974. Subsequently, through what is known as Hyde Guidelines, CCA has been given a more concrete shape. The guidelines require that published financial statements of companies listed on the Stock Exchange should include a prominent separate statement showing the financial results as amended by 4 separate adjustments: (a) a Depreciation Adjustment (b) a Cost of Sales Adjustment (COSA) (c) Monetary Working Capital Adjustment (MWCA) (d) Gearing Adjustment Current Cost Accounting [CCA]
The guidelines deal only with the items in the profit
and loss account and leave balance sheet items untouched. Although there have been numerous deliberations on CCA, particularly in UK, it is yet to be officially accepted as an inflation accounting method in UK itself- let alone in other countries. Reference http://www.xrefer.com/entry/445526 http://www.drury-online.com/ www.google.com www.wikipedia.org