Section 27 - Inflation Accounting

Question 1

Where should a company that wishes to disclose information about the effect of changing prices report this information?

Answer 1

Supplementary information to the financial statements

Question 2

What are asset and liability monetary (fixed in terms of money) items?

Answer 2

• Cash
• Accounts and note receivable
• Bond investments that will be held to maturity
• Prepaid expenses
• Accounts, notes, and bonds payable

Question 3

What are asset and liability NON-monetary items - does not guarantee a fixed amount of money being received or paid?

Answer 3

• Inventories
• Plant and equipment
• Intangibles
• Marketable securities (including bonds that may be sold prior to maturity)

Question 4

What happens to the purchasing power of MONETARY asset and liability during an inflation?

Answer 4

Monetary asset = Purchasing power loss

Monetary liability = Purchasing power gain

Opposite happens when a deflation occur