Download - Inflation accounting
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
Problems: Subjectivity Often complicated calculations Benefits: maintaining production capacity shows the internal logic of accounting
General indexes◦ Price Index of Gross Domestic Product◦ Cost-of-living Index◦ Consumer Price Index◦ Wholesale Price Index◦ Production Price Index
Special indexes◦ Industry indexes◦ Commodity group indexes◦ Commodity indexes
CPP - Current Purchasing Power CCA - Current Cost Accounting The Finnish AHI-Method (Aktivoitujen
Hankintamenojen Indeksointisovellutus)
Retains historic cost accounting conventions In U.S. General Purchasing Power (GPP) Expresses accounts in terms of “purchasing
units” The purchase power of money at the end of the
accounting period as the base Maintains the general purchasing power of the
invested capital The original purchasing costs are corrected by
correction coefficients applying some general index, for example Retail Price Index
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
Equity is defined as Assets - Liabilities Shareholders’ point of view Unsuitable for financing decisions Work intensive method
TO - VC= GP - FC= OP - IC - D= NP
TO = TurnoverVC = Variable CostsGP = Gross ProfitFC = Fixed CostsOP = Operating ProfitIC = Interest CostsD = DepreciationNP = Net ProfitBelow we also need:[ NG = Net Gain from Liabilities TP = Total Profit ]
FAInv
FixAssAssets
Debt Eq
FA = Financial AssetsInv = InventoriesFixAss = Fixed AssetsAssets = Total Assets
Debt = LiabilitiesEq = Owners’ Equity
TOCPP
- VCCPP
= GPCPP
- FCCPP
= OPCPP
- ICCPP
- DCPP
= NPCPP
+/- NG =TPCPP
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TOCPP
- VCCPP
= GPCPP
- FCCPP
= OPCPP
- ICCPP
- DCPP
= NPCPP
+/- NG =TPCPP
CPP,
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CPI
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Maintaining the production level of the company
Main focus on replacement of production capacity
Money is retained as the unit of measurement
Different special indexes are applied to different items
Work intensive
A combination of the CPP and CCA-methods Specially developed for firm analysis Calculations simple Little extra information needed Change in the general price level is described
by the wholesale price index Adjustments are made on a yearly basis
◦ the price level at the middle of the accounting period as the base
Adjustments on ◦ Variable Costs◦ Depreciation
Other posts remain unchangedAdjustment on variable costs is computed by
multiplying the opening inventory value by the relative change in the index
Adjustment on depreciation is the difference between AHI-depreciation and the depreciation in the income statement
TOAHI
- VCAHI
= GPAHI
- FCAHI
= OPAHI
- ICAHI
- DAHI
= NPAHI
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InflResAHI
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