Methods of Accounting for Changing Prices Two solutions to deal with the

# Methods of accounting for changing prices two

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Methods of Accounting for Changing Prices Two solutions to deal with the distortions caused by historical cost (HC) accounting in a period of changing prices. General Purchasing Power (GPP) Accounting Updates historical cost accounting for changes in the general purchasing power of the monetary unit. Non-monetary assets and liabilities, stockholders’ equity and income statement items are restated using the General Price Index (GPI). Requires purchasing power gains Example: When the general price level index is 120, \$120 in cash can purchase one whole basket of goods and services. One year later, when the general price level index stands at 132 (10% inflation), the same \$120 in cash can now purchase only 90,9% of a basket. It now takes \$132 to purchase the same amount as at the beginning of the years. The difference between the \$132 needed to maintain purchasing power and the \$120 in cash actually held results in a \$12 purchasing power loss. This can be computed by multiplying the amount of cash at the beginning of the year by the inflation rate of 10% (\$120 x 10% = \$12). Example: Assume a company expects to receive \$120 cash in cash at the end of the current year. If it waits until the cash is received, it will be able to acquire 90,9% of the market basket at that time when the general price level index is 132. Instead, if the company borrows \$120 at the beginning of the year and repays that amount with the cash received at the end of the year, it will be able to acquire 100% of the basket at the beginning of the year when the price level is 120. Holding a \$120 liability during a period of 10% inflation results in a purchasing power gain of \$12 (\$120 x 10%). Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected]) lOMoARcPSD|105219
and losses (resulting for monetary assets and liabilities) to be included in net income. Current Cost (CC) Accounting Updates historical cost of assets to the current cost to replace those assets. Also referred to as Current Replacement Cost (CRC) Accounting. Non-monetary assets are restated to current replacement costs (market costs) and expense items are based on these restated costs. Holding gains and losses are included in equity. Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected]) lOMoARcPSD|105219
Financial Reporting in Hyperinflationary Economies (IAS 29) This applies to the primary financial statements of any company that reports in a currency of a hyperinflation economy. The standard provides a list of characteristics indicative of hyperinflation: 1. The general population keeps its wealth in nonmonetary assets or in a stable foreign currency; receipts of local currency are immediately invested to maintain purchasing power. 2. The general population thinks about prices in terms of a stable foreign currency and prices may actually be quoted in that currency.

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• Spring '16
• Exchange Rate, Inflation, Foreign exchange market, Verspreiden niet toegestaan, Sybe klaas Kappe, Gedownload door Sybe