 Decrease in purchasing power of money due to an
increase in the general price level
 “A process of steadily rising pric...
Problems:
 Subjectivity
 Often complicated calculations
Benefits:
 maintaining production capacity
 shows the internal...
 General indexes
◦ Price Index of Gross Domestic Product
◦ Cost-of-living Index
◦ Consumer Price Index
◦ Wholesale Price ...
 CPP - Current Purchasing Power
 CCA - Current Cost Accounting
 The Finnish AHI-Method (Aktivoitujen
Hankintamenojen In...
 Retains historic cost accounting conventions
 In U.S. General Purchasing Power (GPP)
 Expresses accounts in terms of “...
 Monetary items - financial assets and liabilities -
remain unchanged
 Inventories: FIFO purchase cost is corrected by a...
 Equity is defined as Assets - Liabilities
 Shareholders’ point of view
 Unsuitable for financing decisions
 Work inte...
TO
- VC
= GP
- FC
= OP
- IC
- D
= NP
TO = Turnover
VC = Variable Costs
GP = Gross Profit
FC = Fixed Costs
OP = Operating P...
FA
Inv
FixAss
Assets
Debt
Eq
FA = Financial Assets
Inv = Inventories
FixAss = Fixed Assets
Assets = Total Assets
Debt = Li...
TOCPP
- VCCPP
= GPCPP
- FCCPP
= OPCPP
- ICCPP
- DCPP
= NPCPP
+/- NG
=TPCPP
,6
,12CPP
CPI
CPI
*TOTO
t
t
tt =
CPP
,12
,
,12
...
TOCPP
- VCCPP
= GPCPP
- FCCPP
= OPCPP
- ICCPP
- DCPP
= NPCPP
+/- NG
=TPCPP
CPP
,
1 ,
,CPP
FixAss*
FixAss
D
D it
N
i it
it
...
FACPP
InvCPP
FixAssCPP
AssetsCPP
DebtCPP
EqCPP
∑=
=
K
k k
t
kt
1
,12CPP
CPI
CPI
*PurchInv
∑=
=
N
i p
t
tit
1
,12
,
CPP
CPI...
 Maintaining the production level of the company
 Main focus on replacement of production capacity
 Money is retained a...
 A combination of the CPP and CCA-methods
 Specially developed for firm analysis
 Calculations simple
 Little extra in...
 Adjustments on
◦ Variable Costs
◦ Depreciation
 Other posts remain unchanged
Adjustment on variable costs is computed b...
TOAHI
- VCAHI
= GPAHI
- FCAHI
= OPAHI
- ICAHI
- DAHI
= NPAHI
tt
TOTOAHI
=
1-1-
1-
AHI
InvInv
WPI
WPI
VCVC tt
t
t
tt
−+= *
...
FAAHI
InvAHI
FixAssAHI
AssetsAHI
DebtAHI
EqAHI
InflResAHI
tt
InvInvAHI
=
( )∑
=
+−−=
N
i
ti
p
t
pit
1
AHI
,,
AHI
D
WPI
WPI...
FAAHI
InvAHI
FixAssAHI
AssetsAHI
DebtAHI
EqAHI
InflResAHI
( ) ( )∑ −+−=
=
t
j
ttjjt
1
AHIAHIAHI
FixAssFixAssDDFixAssRes
( ...
 http://www.xrefer.com/entry/445526
 http://www.drury-online.com/
907/A Uvarshad,
Gandhinagar
Highway,
Ahmedabad –
382422.
Ahmedabad Kolkata
Infinity Benchmark, 10th
Floor, Plot G1,
Block ...
Inflation accounting
Inflation accounting
Inflation accounting
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Inflation accounting

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Inflation accounting - Unitedworld School of Business

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Inflation accounting

  1. 1.  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
  2. 2. Problems:  Subjectivity  Often complicated calculations Benefits:  maintaining production capacity  shows the internal logic of accounting
  3. 3.  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
  4. 4.  CPP - Current Purchasing Power  CCA - Current Cost Accounting  The Finnish AHI-Method (Aktivoitujen Hankintamenojen Indeksointisovellutus)
  5. 5.  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
  6. 6.  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
  7. 7.  Equity is defined as Assets - Liabilities  Shareholders’ point of view  Unsuitable for financing decisions  Work intensive method
  8. 8. TO - VC = GP - FC = OP - IC - D = NP TO = Turnover VC = Variable Costs GP = Gross Profit FC = Fixed Costs OP = Operating Profit IC = Interest Costs D = Depreciation NP = Net Profit Below we also need: [ NG = Net Gain from Liabilities TP = Total Profit ]
  9. 9. FA Inv FixAss Assets Debt Eq FA = Financial Assets Inv = Inventories FixAss = Fixed Assets Assets = Total Assets Debt = Liabilities Eq = Owners’ Equity
  10. 10. TOCPP - VCCPP = GPCPP - FCCPP = OPCPP - ICCPP - DCPP = NPCPP +/- NG =TPCPP ,6 ,12CPP CPI CPI *TOTO t t tt = CPP ,12 , ,12 1 , CPP 1,12 CPP Inv CPI CPI *Purch InvVC t kt t K k kt tt −+ = ∑= − t,6 t,12 t CPP t CPI CPI *FCFC = t,6 t,12 t CPP t CPI CPI *ICIC =
  11. 11. TOCPP - VCCPP = GPCPP - FCCPP = OPCPP - ICCPP - DCPP = NPCPP +/- NG =TPCPP CPP , 1 , ,CPP FixAss* FixAss D D it N i it it t ∑= = ,6 ,12 1,12 ,12 1,121,12 ,6 ,12 1,12 1,12 ,12 1,12 CPI CPI *ΔFAΔFA CPI CPI *FAFA ΔLiab CPI CPI *ΔLiab Liab CPI CPI *LiabNG t t tt t t tt t t t t t t t t −+ −+ −+ −= − −− − − −
  12. 12. FACPP InvCPP FixAssCPP AssetsCPP DebtCPP EqCPP ∑= = K k k t kt 1 ,12CPP CPI CPI *PurchInv ∑= = N i p t tit 1 ,12 , CPP CPI CPI *FixAssFixAss tt FAFACPP = tt DebtDebtCPP = ttt DebtAssetsEq CPPCPP −=
  13. 13.  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
  14. 14.  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
  15. 15.  Adjustments on ◦ Variable Costs ◦ Depreciation  Other posts remain unchanged Adjustment 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
  16. 16. TOAHI - VCAHI = GPAHI - FCAHI = OPAHI - ICAHI - DAHI = NPAHI tt TOTOAHI = 1-1- 1- AHI InvInv WPI WPI VCVC tt t t tt −+= * tt FCFCAHI = tt ICICAHI = ii p asset date,purchase * = =         = = ∑ = ipi p t ti N i tit EconLifeFixAss WPI WPI D DD , AHI , 1 AHI , AHI
  17. 17. FAAHI InvAHI FixAssAHI AssetsAHI DebtAHI EqAHI InflResAHI tt InvInvAHI = ( )∑ = +−−= N i ti p t pit 1 AHI ,, AHI D WPI WPI *FixAssFixAss *1pt tt FAFAAHI = tt DebtDebtAHI = AHIAHI 1- AHI NPEqEq ttt +=
  18. 18. FAAHI InvAHI FixAssAHI AssetsAHI DebtAHI EqAHI InflResAHI ( ) ( )∑ −+−= = t j ttjjt 1 AHIAHIAHI FixAssFixAssDDFixAssRes ( )tttt VCVCInvResInvRes AHIAHI 1- AHI −+= AHIAHIAHI FixAssResInvResIflRes ttt +=
  19. 19.  http://www.xrefer.com/entry/445526  http://www.drury-online.com/
  20. 20. 907/A Uvarshad, Gandhinagar Highway, Ahmedabad – 382422. Ahmedabad Kolkata Infinity Benchmark, 10th Floor, Plot G1, Block EP & GP, Sector V, Salt-Lake, Kolkata – 700091. Mumbai Goldline Business Centre Linkway Estate, Next to Chincholi Fire Brigade, Malad (West), Mumbai – 400 064.

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