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Inflation accounting - Unitedworld School of Business
 

Inflation accounting - Unitedworld School of Business

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    Inflation accounting - Unitedworld School of Business Inflation accounting - Unitedworld School of Business Presentation Transcript

    •  Decrease in purchasing power of money due to anincrease in the general price level “A process of steadily rising prices resulting indiminishing purchasing power of a given nominal sumof money”The Penguin Dictionary of Economics “Rise in prices brought about by the expansion of thesupply of bank money, credit, etc.”Oxford Advanced Learner’s Dictionary of CurrentEnglish
    • Problems: Subjectivity Often complicated calculationsBenefits: 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 (AktivoitujenHankintamenojen 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 theaccounting period as the base Maintains the general purchasing power of theinvested capital The original purchasing costs are corrected bycorrection 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 asuitable correction coefficient to correspond thepurchase power of the end of accounting period Fixed assets:◦ The purchase cost is corrected to correspond the purchasepower of the end of the accounting period◦ The balance value of the fixed assets is the samepercentage of the corrected purchase cost as the book valueis 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= NPTO = TurnoverVC = Variable CostsGP = Gross ProfitFC = Fixed CostsOP = Operating ProfitIC = Interest CostsD = DepreciationNP = Net ProfitBelow we also need:[ NG = Net Gain fromLiabilitiesTP = Total Profit ]
    • FAInvFixAssAssetsDebtEqFA = Financial AssetsInv = InventoriesFixAss = Fixed AssetsAssets = Total AssetsDebt = LiabilitiesEq = Owners’ Equity
    • TOCPP- VCCPP= GPCPP- FCCPP= OPCPP- ICCPP- DCPP= NPCPP+/- NG=TPCPP,6,12CPPCPICPI*TOTOtttt =CPP,12,,121,CPP1,12CPPInvCPICPI*PurchInvVCtkttKkkttt−+=∑=−t,6t,12tCPPtCPICPI*FCFC =t,6t,12tCPPtCPICPI*ICIC =
    • TOCPP- VCCPP= GPCPP- FCCPP= OPCPP- ICCPP- DCPP= NPCPP+/- NG=TPCPPCPP,1 ,,CPPFixAss*FixAssDD itNi ititt ∑==,6,121,12,121,121,12,6,121,121,12,121,12CPICPI*ΔFAΔFACPICPI*FAFAΔLiabCPICPI*ΔLiabLiabCPICPI*LiabNGtttttttttttttttt−+−+−+−=−−−−−−
    • FACPPInvCPPFixAssCPPAssetsCPPDebtCPPEqCPP∑==Kk ktkt1,12CPPCPICPI*PurchInv∑==Ni pttit1,12,CPPCPICPI*FixAssFixAsstt FAFACPP=tt DebtDebtCPP=ttt DebtAssetsEq CPPCPP−=
    •  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 differentitems 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 thewholesale price index Adjustments are made on a yearly basis◦ the price level at the middle of the accounting period as thebase
    •  Adjustments on◦ Variable Costs◦ Depreciation Other posts remain unchangedAdjustment on variable costs is computed bymultiplying the opening inventory value by therelative change in the indexAdjustment on depreciation is the difference betweenAHI-depreciation and the depreciation in the incomestatement
    • TOAHI- VCAHI= GPAHI- FCAHI= OPAHI- ICAHI- DAHI= NPAHIttTOTOAHI=1-1-1-AHIInvInvWPIWPIVCVC tttttt−+= *ttFCFCAHI=ttICICAHI=iipassetdate,purchase*==== ∑=ipipttiNititEconLifeFixAssWPIWPIDDD,AHI,1AHI,AHI
    • FAAHIInvAHIFixAssAHIAssetsAHIDebtAHIEqAHIInflResAHIttInvInvAHI=( )∑=+−−=Nitiptpit1AHI,,AHIDWPIWPI*FixAssFixAss *1ptttFAFAAHI=ttDebtDebtAHI=AHIAHI1-AHINPEqEq ttt+=
    • FAAHIInvAHIFixAssAHIAssetsAHIDebtAHIEqAHIInflResAHI( ) ( )∑ −+−==tjttjjt1AHIAHIAHIFixAssFixAssDDFixAssRes( )ttttVCVCInvResInvRes AHIAHI1-AHI−+=AHIAHIAHIFixAssResInvResIflRes ttt+=
    •  http://www.xrefer.com/entry/445526 http://www.drury-online.com/