IM_CH_14 - Chapter 14: Accounting for Inflation and...

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Chapter 14: Accounting for Inflation and Changing Prices Instructor’s Manual 7 th edition Page 1 of 6 C HAPTER H IGHLIGHTS Chapter 14 begins with a brief history of inflation accounting in the United States prior to SFAS No. 33. The history provides a foundation of how we got to where we are today in U.S. GAAP. The sections on purchasing power gains and losses and holding gains and losses form the building blocks of the income measurement systems section. It is also important to compare purchasing power gains and losses and holding gains and losses with each other. A discussion of the principal requirements of SFAS No. 33 covers why this standard failed. The resolution of inflation accounting in SFAS Nos. 82 and 89 follows. A significant portion of the chapter is devoted to SFAS No. 157, Fair Value Measurements , and its extension in SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. The shift towards current value (now called fair value) is clear, one that will bring about significant changes in all aspects of accounting in the coming years. The accountant’s role appears to be changing from one of an objective reviewer to one of a subjective valuation expert. Q UESTIONS Q-1 How would you explain a purchasing power loss to someone who says you have not really lost either money or real assets? Reference the uncle who stashes all his savings under his mattress, not trusting banks or the stock market. He places $25,000 under the mattress in 1955 planning to pay cash for a new home after he marries later that year. $25,000 is sufficient to purchase a very nice home in suburban Chicago in 1955. At the last moment the planned marriage is cancelled. He decides to leave the cash where it is until he finds a new bride. In 2008 he finally marries and removes the cash to buy his bride a new home. Describe the home that his $25,000 stash will purchase in 2008. Q-2 What is the relationship between fair value and deprival value. Deprival value is the opportunity cost to the enterprise of being deprived of the asset. It is the lower of two calculations: (A) net realizable value (essentially exit value) or the present value of future cash flows and (B) replacement cost. Fair value will be the higher of the two.
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Chapter 14: Accounting for Inflation and Changing Prices Instructor’s Manual 7 th edition Page 2 of 6 Q-3 In addition to inflation subsiding, what other reasons underlie why SFAS No. 33 would most likely have failed? SFAS No. 33
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This note was uploaded on 02/12/2012 for the course ACCOUNTING 632 taught by Professor Johnlynch during the Fall '11 term at St. John's.

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IM_CH_14 - Chapter 14: Accounting for Inflation and...

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