Submitted by:-GUNJAN RANA

(1213004)DEEPIKA KALYAN

(1213009)ANJU

(1213031)

INTRODUCTIONPrice tend to change due to various economic, social or political factors. Two types of economic conditions are caused due to change in price levels :-

Inflation(increase in the prices of factors of production)

Deflation(fall in price level)

EFFECT OF PRICE LEVEL CHANGES Reported profits may exceed the earning that could be

distributed to shareholders.

The asset values for inventory, equipment & plant do not reflect their economic value to the business.

Future earnings are not easily projected from historical earnings.

The impact of price changes on monetary assets & liabilities is not clear.

Future capital needs are difficult to forecast .

When real economic performance is distorted, these lead to social & political consequences that damage the business.

DEFINITION OF INFLATION ACCOUNTING

A state in which the value of money is falling that is prices are rising.

A process of steadily rising prices resulting in diminishing purchasing power of a given nominal sum of money.

OBJECTIVESThe user or decision maker gets an information which shows the performance.

To facilitate the comparison of the performance of two different periods it is necessary that the figures are adjusted for inflation.

The monetary items, income & expenses do not show the correct purchasing power of money therefore, their values should be adjusted for inflation.

To ascertain the current value of assets.

TECHNIQUES OF INFLATION ACCOUNTING1. Replacement Cost Method of Dealing with Fixed

Assets Only

2. Writing up of Fixed Assets

3. Replacement Cost Method (Covering Fixed Assets and Investments)

4. Present (Current) Value Accounting

5. Continuously Contemporary Accounting

6. Current Cost Accounting

Cont…7. Current Purchasing Power Accounting

8.Replacement Cost-Cum-Current Purchasing Power Accounting

ADVANTAGESIt enables the maintenance of capital intact which is essential in a limited liability business.

Profit/loss is determined by matching the cost & the revenue at current values which are comparable.

The assets are shown at real values uniformly instead of at distorted values.

Trade unions, employees, shareholders & public are not misled by giving an exaggerated profit figures.

By showing the current values of fixed assets it enables the establishment of realistic price for the company’s shares.

DISADVANTAGESDepreciation being the process of distribution of original cost, charging anything in excess does not fit into the concept of depreciation.

Replacement cost is an indefinite figure coloured by future technological developments & the time period at which the asset will be scrapped.

Charging depreciation on replacement cost basis will be acceptable to income-tax authorities & hence there is no purpose in doing the exercise.

The calculations are so involved that an average shareholder will not be able to comprehend the financial stmt.

THANKU