Inflation accounting
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This document discusses inflation accounting, why it is necessary, what it is, and how it works. Inflation accounting, also known as price level accounting, adjusts financial statements for inflation by preparing them using current price indexes rather than historical costs. It outlines two main methods: current purchasing power, which converts non-monetary items to the consumer price index, and current cost accounting, which adjusts asset balances to their fair market value. While inflation accounting provides a truer picture and better decision making, it also introduces inconsistencies and challenges in comparability and comprehension. The document recommends its application for entities in hyperinflationary economies or times of drastic macroeconomic change.
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Inflation accounting
This document discusses inflation accounting and its objectives, techniques, advantages, and disadvantages. It introduces inflation and deflation as two types of economic conditions caused by changes in price levels. Inflation accounting aims to facilitate comparisons of company performance over periods by adjusting monetary values for inflation, show the current value of assets, and ensure profits reflect real purchasing power. Techniques include adjusting fixed asset and investment values, using current costs and purchasing power. Advantages are maintaining capital intact and showing realistic values, while disadvantages are complexity and challenges valuing assets given changing replacement costs.
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This document discusses inflation accounting and its need. Traditional historical cost accounting fails to accurately match current revenues and costs during inflation as historical costs are much lower than current costs. It also fails to realistically report profits. The document describes two methods of inflation accounting: current purchasing power method and current value systems method. Both methods aim to express financial statement figures in terms of their current purchasing power to provide a more accurate picture during inflationary periods.Gaap (generally accepted accounting principles)
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Inflation accounting or price level accounting refers to methods of adjusting accounting values for changes in the general price level. The objectives of inflation accounting are to reveal the true operational results and financial position of a business by recognizing changes in the value of money and ensuring adequate funds for asset replacement. Advantages include a more realistic portrayal of profits and assets valued at current economic values. Common methods include the current purchase power method, replacement cost accounting, current value accounting, and current cost accounting. Under current cost accounting, assets and inventories are valued at current replacement costs rather than historical costs.
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Difference between financialaccounting and cost accounting
Difference between financialaccounting and cost accounting
Difference between financialaccounting and cost accounting
Difference between financialaccounting and cost accounting
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Inflation accounting
- 1. INFLATION ACCOUNTING WHY? WHAT? HOW?
- 2. ISN’T FINANCIAL ACCOUNTING SUFFICENT? No, it has got Inherent Limitations. COST CONCEPT
- 3. WHAT IS INFLATION ACCOUNTING? A Accounting method FS are prepared according to current price index Price level accounting
- 4. HOW? IAS 29 of International Financial Reporting Standards [IFRS] is the guide for entities whose currency is a currency of ‘Hyperinflationary Economy.’ Hyperinflationary Economy- Prices, interest, and wages linked to a price index rising 100% or more cumulatively over three years. Methods- 1. Current Purchasing Power 2. Current Cost Accounting
- 5. CURRENT PURCHASING POWER Financial items Monetary Net gain or loss Non- Monetary Converted to CPI
- 6. CURRENT COST ACCOUNTING Was applied during Great Depression Balance to be adjusted in accordance with Capital All assets recorded at their FMV
- 7. PROS- True and Fair view Better Financial Management Realistic Breakdown of profitability Maintain Capital Adequacy Reduction in scams and Fraudulent Financial reporting.
- 8. CONS- No Effective Depreciation. Inconsistency in financial reporting due to subjectivity. Lack of Intra and Inter Firm comparability. Over valuation issues. Effects of sudden Macro Economic factors. Difficulty for users of FS to comprehend financial position.
- 9. APPLICATION • Entity operating in a Hyperinflationary economy. • Drastic Macro Economic Changes. • For making realistic financial decisions.
- 10. THANK YOU! VARAD RATHI 1912043 2 B.COM [F&A] ’A’