Decrease in purchasing power of money due to an increase in the general price level

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

The Penguin Dictionary of Economics “Rise in prices brought about by the expansion

of the supply of bank money, credit, etc.”Oxford Advanced Learner’s Dictionary of Current English

Problems: Subjectivity Often complicated calculations Benefits: maintaining production capacity shows the internal logic of accounting

General indexes◦ Price Index of Gross Domestic Product◦ Cost-of-living Index◦ Consumer Price Index◦ Wholesale Price Index◦ Production Price Index

Special indexes◦ Industry indexes◦ Commodity group indexes◦ Commodity indexes

CPP - Current Purchasing Power CCA - Current Cost Accounting The Finnish AHI-Method (Aktivoitujen

Hankintamenojen Indeksointisovellutus)

Retains historic cost accounting conventions In U.S. General Purchasing Power (GPP) Expresses accounts in terms of “purchasing

units” The purchase power of money at the end of the

accounting period as the base Maintains the general purchasing power of the

invested capital The original purchasing costs are corrected by

correction coefficients applying some general index, for example Retail Price Index

Monetary items - financial assets and liabilities - remain unchanged

Inventories: FIFO purchase cost is corrected by a suitable correction coefficient to correspond the purchase power of the end of accounting period

Fixed assets: ◦ The purchase cost is corrected to correspond the

purchase power of the end of the accounting period◦ The balance value of the fixed assets is the same

percentage of the corrected purchase cost as the book value is of the original purchase cost

Equity is defined as Assets - Liabilities Shareholders’ point of view Unsuitable for financing decisions Work intensive method

TO - VC= GP - FC= OP - IC - D= NP

TO = TurnoverVC = Variable CostsGP = Gross ProfitFC = Fixed CostsOP = Operating ProfitIC = Interest CostsD = DepreciationNP = Net ProfitBelow we also need:[ NG = Net Gain from Liabilities TP = Total Profit ]

FAInv

FixAssAssets

Debt Eq

FA = Financial AssetsInv = InventoriesFixAss = Fixed AssetsAssets = Total Assets

Debt = LiabilitiesEq = Owners’ Equity

TOCPP

- VCCPP

= GPCPP

- FCCPP

= OPCPP

- ICCPP

- DCPP

= NPCPP

+/- NG =TPCPP

,6

,12CPP

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- FCCPP

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- ICCPP

- DCPP

= NPCPP

+/- NG =TPCPP

CPP,

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CPI

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tt DebtDebtCPP

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Maintaining the production level of the company

Main focus on replacement of production capacity

Money is retained as the unit of measurement

Different special indexes are applied to different items

Work intensive

A combination of the CPP and CCA-methods Specially developed for firm analysis Calculations simple Little extra information needed Change in the general price level is described

by the wholesale price index Adjustments are made on a yearly basis

◦ the price level at the middle of the accounting period as the base

Adjustments on ◦ Variable Costs◦ Depreciation

Other posts remain unchangedAdjustment on variable costs is computed by

multiplying the opening inventory value by the relative change in the index

Adjustment on depreciation is the difference between AHI-depreciation and the depreciation in the income statement

TOAHI

- VCAHI

= GPAHI

- FCAHI

= OPAHI

- ICAHI

- DAHI

= NPAHI

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