Inflation accounting

[munna99185]

Inflation accounting is a special accounting technique, which can be used during periods of high inflation. Inflation accounting requires statements to be adjusted according to price indexes, rather than rely solely on a cost accounting basis. Companies operating in countries experiencing hyperinflation, may be required to update their statements periodically, in order to make them relevant to current economic and financial conditions. Most developed countries have relatively stable rates of inflation. For countries with high rates of inflation, examining the books is difficult, because historical information is less likely to be relevant as prices increase rapidly.  [Source: http://www.investopedia.com]

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University

[sajib]

Adjusting financial statements to show a firm's real financial position in inflationary times. It aims to indicate how rising prices and lower purchasing power of the currency affect a firm's cost of refinancing its productive assets, and of its ability to maintain an adequate level of profit on the capital employed. One method is to adjust every figure in the balance sheet on the basis of a price index (such as consumer price index) which reflects the current purchasing power of the currency. Another method suggests to revalue tangible assets at their replacement cost. In valuation of an inventory, inflation accounting treatment can effect the firm's taxable income, cash position, and reported earnings, depending on whether the firm uses FIFO or LIFO methods. FIFO method, shows a higher profit, therefore higher tax burden and a decrease in net cash flow. LIFO method lowers the profit and tax burden and increases the net cash flow.

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[mohsina]

Thanks for sharing..