国际会计学第六版chapter_7 Financial Reporting and Changing Prices.ppt

Choi/Meek, 6/e International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Learning Objectives What do we mean by the term, changing prices? Why are financial statements misleading during periods of changing prices? What are the various ways of adjusting financial statements for changing prices? What Does “Changing Prices” Mean and How are Price Changes Measured? General price level change: refers to a movement in the prices of all goods and services in an economy on average. Positive price movement is termed inflation. A negative price movement is called deflation. Why are Financial Statement Potentially Misleading During Periods of Changing Prices? During periods of inflation, revenues are based on the general purchasing power of the current period. Expenses, such as depreciation and amortization, may be based on currency of higher general purchasing power because their related assets were typically acquired in the past when GPLs were lower. Why are Financial Statements Potentially Misleading During Periods of Changing Prices? (contin) During a period of specific price changes, assets recorded at their original acquisition costs seldom reflect the assets’ current (higher) value resulting in an overstatement in reported income. This, in turn, may lead to: Higher taxes Higher dividends Higher wages Types of Adjustments for Changing Prices Objective of conventional historical cost accounting: maintain a firm’s original investment. Assume a firm begins operations with an initial cash investment of $1,000. Cash is immediately converted to saleable inventory which is all sold at 50% mark-up by the end of the year for $1,500. There are no price changes during the period. General Price Level Adjustments Objective: to measure income such that it represents an amount that could be withdrawn from the business while preserving the general purchasing power of the firm’s original investment. Assume the same facts as previously except that the GPL advances from a