lec7_GPL_Blackboard

# Lec7_GPL_Blackboard - Donut 4 Overstating Income by Ignoring Inflation Learning Objectives Understand why financial statements based on historical

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Donut 4 Overstating Income by Ignoring Inflation

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Learning Objectives Understand why financial statements based on historical costs may be misleading during periods of changing prices Distinguish between general price level changes and specific price changes Learn how to adjust historical cost numbers for inflation
Review of Conventional Measures of Performance

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Assuming no additional investments, withdrawals, gains or losses: NOI NI Disposable wealth Performance I/S approach = R - E B/S approach = ▲OE
Historical Cost Model GPL = 100 GPL = 100 |-----------------------------------------------------------------| 1,000 1,500 Accounting Equation Worksheet A = L + OE Cash + Inventory = OE 1/1 1,000 1,000 1/2 (1,000) 1,000 1/3-12/31 1,500 1,500 R 12/31 _____ (1,000) (1,000 ) E End. Bal. 1, 500 -0- 1,500

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Historical Cost Accounting Model GPL = 0 GPL = 0 1,000 1,500 Revenues \$ 1,500 -Expenses 1,000 Net income \$ 500
Historical Cost Accounting Model GPL = 0 GPL = 0 1,000 1,500 -500 1,000 Revenues \$ 1,500 -Expenses 1,000 Net income \$ 500 OE end - OE beg = 1,500 – 1,000 = 500

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Objective of HC Model: “Measure earnings so as to preserve a firm’s original money capital.”
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## This note was uploaded on 05/24/2008 for the course ACC 203 taught by Professor Choi during the Spring '08 term at NYU.

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Lec7_GPL_Blackboard - Donut 4 Overstating Income by Ignoring Inflation Learning Objectives Understand why financial statements based on historical

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