(d) Taxes and dividends paid are converted on the basis of indices that were prevalent on the dates they were paid. Compute the net monetary result of X Company Ltd. as at 31st December 2004. The percent inflation rate is calculated as the CPI at the accounting for price level changes end of the period divided by the CPI at the beginning of the period multiplied by 100. The value of goods sold is equal to the cost of opening raw materials plus purchases and wages minus closing raw materials.
- This method takes into consideration the changes in the value of items as a result of the general price level, but it does not account for changes in the value of individual items.
- These include difficulties in training personnel to use and interpret adjusted figures, choosing an appropriate price index, and resistance from managers and labor unions.
- The increase in stock of Rs 3,000 in CCA method over Historical Cost basis will be credited to Current Cost Account Reserve.
- The current purchasing power technique or CPP of price level accounting make the companies keep the records and show the financial statements on a historical cost basis.
- Monetary accounts are those assets and liabilities which are not subject to reassessment of their recorded values owing to change of purchasing power of money.
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For conversion of such items, average index of the year can be taken as the one index for all such items. If such an average is not available, the index of the mid-year is taken for this purpose. And, if the index of the mid year is also not available, then the average of index at the beginning and at the end of the period may be taken. (iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. (b) Conversely, when materials and services are purchased from suppliers who offer trade credit, price changes are financed by the supplier during the credit period.
In order to convert historical figures into their current purchasing power equivalents, the average index of the year or mid-year can be used. Monetary accounts are those that remain unaffected by changes in purchasing power, while non-monetary accounts are subject to reassessment. During a period of rising prices, holding monetary assets results in a loss of purchasing power. Monetary items are translated at the current rate while non-monetary items (such as fixed assets, stock, plant and buildings) are translated at historical rates.
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Profit and loss items and balance sheet items are adjusted with the price index. This states that when financial statements are denoted according to the price changes, the profitability can be compared for two concerns developed at different times. The price level accounting presents a more realistic view of the company’s profitability. This happens because the current expenses/costs are matched with the current revenues only.
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In case the information regarding average index is not available, it may be calculated by taking the average of the index numbers at the beginning and at the end of the period. Both IFRS and GAAP have been treating Argentina as “hyperinflationary” since 2018 because cumulative inflation there over the prior three years has exceeded 100%. However, the requirements they impose on companies operating in the country vary. Revenue is the amount of money that a company makes by selling its products or services. So, if there is an increase in the price level, it increases the revenue of the company by increasing the number of units sold. But if there is a decrease in the price level, its revenue decreases because it will be able to sell less number of units.
Valuation of Closing Stock
The company reports very high profits during high inflation but on the other way faced financial difficulties. This happens because the taxes and dividends have been paid from the capital as a result of overstated profits arisen out of adopting the historical cost concept. Therefore, to alter this historical cost concept, price level accounting is recommended. Current cost operating profit is the profit as per historical cost accounting before charging interest and taxation but after charging adjustments of cost of sales, depreciation and monetary working capital.