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Lesson 5
Lesson 5
Lesson 5
Craig Deegan
CHAPTER 5
Measurement issues: accounting
for the effects of changing prices
and changing market conditions
Slides written by Craig Deegan
22
Development of accounting for
changing prices
• Perceived problems associated with historical cost
in times of changing prices lead to different
proposals for change away from historical cost
continued
The difference between the adjusted closing net monetary assets and the unadjusted net monetary assets is treated as a loss -
the company would have needed to have $2194 more to have the same ‘purchasing power’ they had at the beginning of the year
31
Advantages of current
purchasing power adjustments
• Relies on data already available under historical
cost accounting
• No need to incur cost or effort to collect data about
current asset values
• CPI data also readily available
200,000
Rs.
Sales Revenue
95,000
Cost of Sales (105 ,000)
(47,5 00)
47,5 00
Other Expenses
7,500
Current Cost Operating Profit
Realized Savings
26,000
Historical Cost Profit 55, 000
Unrealized Savings
Business Profit 81,000
40
Advantages of current cost
accounting
• Differentiating operating profit from holding gains
and losses can enhance the usefulness of
information provided
– holding gains different to trading income as due to
market-wide movements that are often beyond
management’s control
continued
• The ability of the firm to ‘go into the market with cash
for the purposes of adapting oneself to contemporary
conditions’ (Chambers 1966, p.91)
continued
continued
continued
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