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Accounting For Inflation & Changing Prices
Accounting For Inflation & Changing Prices
Inflation Price indexes Inflation accounting Income measurement systems SFAS No. 33
Inflation
The rise in the average price level for all goods and services produced in an economy Under a historical cost-based system of accounting inflation leads to two basic problems
Many historical numbers are not economically relevant Historical numbers are not additive
Price Indexes
Is a weighted average of the current prices of goods and services
Averages are related to prices in a base period Purpose is to determine how much change has occurred
Price Indexes
Paasche-type indexes
Uses current-year quantities Wholesale Price Index Consumer price Index
Laspeyres-type indexes
Uses base-year quantities Less costly to construct
Inflation Accounting
General purchasing power adjustment translates historical dollars into dollars having equivalent purchasing power Current valuation, also called current cost, attempts to derive the specific value or worth for a particular point ...
Entry values Exit values
Exit values
Are a form of opportunity costs The balance sheet becomes the principal financial statement
Methods differ in terms of disposition of real holding gains and the resulting type of capital maintenance measure
SFAS No. 33
FASB decided to keep nominal historical costs as the basis of primary financial statements Specified that the effects of changing prices should be presented as supplementary information in annual reports FASB realized that a consensus could not be obtained on which method of accounting should be adopted
SFAS No. 33
Not all enterprises had to comply with SFAS No. 33 For constant dollar reporting, the SFAS required disclosure of
Information on income from continuing operations for the current fiscal year on a historical cost/constant dollar basis . . . The purchasing power gain or loss on net monetary items for the current fiscal year. .
SFAS No. 89
Two parts of SFAS No. 33 remained in effect; were encouraged but not required
current cost income measurement, purchasing power gain or loss, and holding gain information
FASB beat a hasty retreat from the problem of accounting for changing prices