PRICE LEVEL CHANGES AND FINANCIAL ACCOUNTING MEASUREMENT

Author: Stanley C. W. Salvary, Canisius College

Research Papers in Economics – RePEc:wpa:wuwpot:0410009 – 2004-10-23

ABSTRACT:

Debates on inflation have subsided, but the issue is not dead. Debates on this issue are as perennial as the grass; as soon as there are continuous and significant increases in the level of prices, the debates will be resumed with much vigor. Therefore, the issue has to be addressed in spite of the cessation of debate at this time. Many arguments have been presented that under conditions of changes in the general level of prices financial statements are irrelevant and uninterpretable. According to the argument for change, a real (constant) money measure of performance indicates that management is failing to maintain its physical stock of capital. The nominal money measure is considered to be the problem, since it cannot provide a constant measure of the physical quantities. Attempts have been made to alter financial accounting information in order to measure the impact of inflation on a business enterprise to assist the firm in making  its investment decisions and the firm’s shareholders in making their investment and consumption decisions. However, in great part these attempts have not withstood the test of relevance and interpretability. Given the functioning of a surplusoriented money economy, the argument in support of accounting for changes in the general level of prices is examined in light of the following questions: What is it that is entrusted to management? Is it a physical stock or a financial stock of capital? Does a firm seek to accumulate a physical stock or a nominal money stock? Are the suppliers of money-capital concerned with physical flow prediction or with nominal money flow prediction? This paper simply sets out to examine the issues and reveal the fallacy of the argument in support of alteration of financial accounting information in the absence of monetary dislocation.

Full Text: 0410009

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