# Inflation Accounting

f) Fixed Assets and Depreciation g) Other Points i) ii) Taxation Interest on Debentures

50. the conversion process of historical figures into CPP figures involves two steps: · Multiplying the Historical Cost figures by the price index at the end of the period. Monetary Assets. Non-Monetary Asset and 3. Balance sheet at the end of the year a. 2.87 Date of review ± 150 Conversion = 2.85 120 Index on 31. b. cash. These figures are converted into CPP figures as follows: Historical Cost X Index at the end -----------------------------------------------Index on the date of Balance Sheet 2. Non-Monetary Assets These are discussed in 3 heads: i. Balance sheet at the beginning of the year: For the sake of convenience. The CPP method assumes that the value of these assets on the Balance sheet date reflect the CPP as at the end of the previous year. 2.00.1.85 .iii) Dividends iv) Capital Current Purchasing Power (CPP): CPP Method of inflation accounting seeks to use general purchasing power price of money rather than specific indices to convert the historical figures into relevant figures of purchasing power for the end of the period in review. e. Monetary Assets: They comprise of Debtors. the Balance Sheet is viewed as comprising of 3 parts: 1.000 X 150 = Rs.000 120 The conversion process is discussed below in following 3 sections: a.Fixed Assets Rs.000/Index on 1. Balance Sheet at the beginning of the year. 2. : Historical Cost figures 1.g. creditors etc. · Dividing the figures obtained in Step (i) above by the index which existed at the date of original transaction. In simple terms.1. Shareholders Fund 1. Profit and Loss a/c for the year and c.00.12. Fixed Assets Index at the end Historical Cost figures X -----------------------------------------------Index on the date of Acquisition .

Depreciation written off for the year and 4. 2. share capital + Accumulated Reserves on historic cost figures into CPP figure by multiplying with any specific index. 3. Loss of purchasing power for holding net monetary assets: Step I: Loss on opening balance of net monetary assets i. Depreciation written off for the year: First Step: Value assets on CPP basis Second Step: Apply rates of depreciation to cost of assets expressed in CPP terms. It is arrived at by subtracting all liabilities at CPP from the assets both fixed and current at CPP. it is necessary to use a weighted average index or to convert for eg. b.e. Profit and Loss Account: Discussed under four sections: 1. Transactions during the year 3. Loss of purchasing power during the year because of holding monetary assets. In such cases. calculations would have to be made separately for each of the acquisition. 4. Shareholders¶ Funds: It is not possible to convert shareholders funds i. average price index for the year is used. iv. Transactions during the year: Normally the CPP assumes transactions occur evenly throughout the year. 1. Stock In converting Historical cost figures of stock. iii. Stock at the beginning of the year: Same as discussed under Non-Monetary Assets.ii. Stock at the beginning of the year 2. Using each quarters transactions separately. -- Depreciation Accumulated Depreciation X Index at the end ---------------------------------------------Index on the date of Acquisition If assets are acquired over a period of time. But in cases where the transactions occur unevenly.e. Debtors + Cash ± Creditors (Index at the end ± Index at the beginning of the year) Non Monetary Assets at the X ----------------------beginning of the year year -------------------------------------------------Index at the beginning of the Step II: Increase / Decrease in Net Monetary assets . the first step is to identify the period during which the items in stock were purchased and then a price index representative of the price level during such period is identified.

000 CPP Value at the end of the year = 58.000 40. Non-Monetary assets: a) Fixed Assets & Depreciation . Average Index for the year: 300 Solution: Monetary Liabilities at the beginning of the year: Creditors 18.000 40.000 58.000 You are required to work out the net monetary result of the company as at 31st March 2003.Same treatment as in the case of opening balance sheet b) Stock ± Method adopted in Profit and Loss A/c ii.Net Monetary assets at beginning ± Net Monetary assets at the end of the year Step III: Loss on increase / Decrease in Net Monetary Assets Figure in Step II X -----------(Index at the end ± Average Index for the year) ------------------------------------------------------------- Average Index for the year Step IV: Add figure in Step I to figure in Step III The above process of calculation assumes that the figure of net monetary assets at the end of the year comprises of 2 parts: i. 31st March 2003: 360. Opening balance of net monetary assets and ii.000 31st March 2003 4.500 25. Increase / Decrease in Net Monetary assets during the year. Balance Sheet at the end of the year: Discussed under 3 heads: i. c. 1st April 2002: 240.500 30. Monetary ± No need for conversion since monetary assets at the end of the year are already expressed in terms of CPP. Shareholders¶ funds = Assets(CPP) ± Liabilities(CPP) Illustration The following data are available from the books of M/s Manaank Ltd as on 31st March 2003 Particulars Cash Book Debts Creditors Loan 1st April 2002 3. considering the following retail price index number.000 x Index at the end of the year Index at the beginning of the year .000 18.000 22. iii.000 Loan 40.

Monetary loss on account of increase in Assets (B) = Rs. 14.800 Monetary Assets at the beginning of the year: Cash 3.000) 4.000 Monetary Gain on account of increase in Liabilities (A) = Rs.500 ± 3. 87.75 31.000 20.12.= 58000 x 360/240 = Rs.500 Book Debts 25.000 5.000 19.000 Assets Fixed Assets 40.000 = Rs.000 30.950 (-) Actual value (as per HCA) at the end of the year = 4.000 CPP Value at the end of the year = 4.750 Increase in Monetary Assets during the year: Cash: 4.000+40.500 CPP value of above at the end of the year = 28.000 x Index at the end of the year Average Index for the year = 4.000 Less: Depreciation 27.000 Increase in Monetary Liabilities during the year: Creditor: (22.200 CPP Value of monetary Assets at the end of the year = 42.800 (-) Actual value (as per HCA) at the end of the year = 22.000 18.000 Book Debts: 30.750+7.000 10.000 12.000 6.75 31.350 Problem No.000 Total 47.500 Thus.91.000 Stock Debtors Cash 67.000 47.000 CPP value of Increase at the end of the year = 6.450 = Rs. 4.29.76 30.000 5.200 = Rs. 15.62.000 11.12.000 8. on Historic cost figures: Liabilities Share holders Equity Creditors 31.000 x 36/300 = Rs.000 25.000 x 360/300 = Rs. 1 Balance Sheet of Rama Co.12. 34.000 9.500 x 36/240 = 42.000 = Rs.000 Loan: (40.76 35.500+30.000+48.000 Profit and Loss a/c for year ended 31/12/76: Rs.000 ± 40.000 10.800 ± 15.000 ± 25. .000 . CPP value of Monetary Liabilities at the end of the year = 87.12.000 28.18.000 67.000 Total 31.500 1. 49.000) 0 4.000 = Rs.450 Net Monetary Gain = A ± B = 29. 7.800 Thus.

9000 x 105/90 = 10500 Since date of purchase of stock is not given.12. Opening Stock 90 .12.76.75 and 31.000 8000 18000 12000 6000 Conversion 10.000 35.59 60 31.000 a. Fixed Assets acquired on 1 st January. Net Monetary Assets: Particulars Debtors Cash Creditors HC 10.12.000 5.000/c. Purchase of Stock on credit ± Rs. Cash received from debtors ± Rs. 20.12. 18.12. Cash payments to supplier ± Rs. it is assumed to be purchased at the end of previous year and hence the closing index of P.Sales Less: Cost of Sales 34.000/e.76. 1960. Non Monetary Assets ( Comprising of Fixed Assets and Stock) a.76 in terms of CPP ± 31.12.9000 Closing index 105 .76 105 evenly i.75 90 31.12.000 Profit 40. 2. General Price indexes were: Year Index 31.12. ii. Prepare Profit and Loss a/c for year ended 31.000 Depreciation 1. Transactions assumed to have occurred throughout the year.000 x 105/90 8000 x 105/90 12000 x 105/90 CC 11667 9333 21000 14000 7000 Opening Balance Sheet at CPP: Liabilities Share Capital (Balance figure) Creditors Amount Assets 52500 Fixed Assets 14000 Stock Debtors Cash Amount 35000 10500 11667 9333 . Sales were made on credit b. Fixed assets at 60 ± 20000 Closing Index 105 20000 x105/60 = 35000 b. PART ± I Conversion of Opening Balance Sheet Working Note: 1. Prepare Balance Sheet as at 31. 43.Y is considered.000/d.76 in terms of CPP ± 31.

It is assumed that closing stock is out of goods purchased during the year and is hence converted with reference to Average index = 18000 x 105/97. Loss in Holding Opening Net Monetary Assets = 6000 x 105/90 ± 6000 = 7000 ± 6000 = 1000 c. Closing stock at CPP ± Since the date of purchase of stock and the relevant index is not given.66500 66500 PART ± II Profit & Loss A/c 1.5 = 46308 d. Gain in reduction of Net Monetary Assets = 3000 x 105/97. Loss on Holding Net Monetary Assets a) Net Monetary Asset ± Historical Cost Particulars Opening Closing Debtors 10.5 b. Fixed Assets = 19000 x 105/60 = 33250 b. Cost of goods sold at CPP= Opening+Purchases-closing = 10500+46308-19385 = 37423 at CPP 3. Non Monetary Assets: a.5 = 43077 2.000 = 9000+ purchases-closing stock Purchases = 43. Cost of the goods sold: a.000 25000 Cash 8000 5000 18000 30000 Creditors 12000 27000 6000 3000 Composition of closing Net Monetary Assets 6000-3000 = 3000 b.5 ± 3000 = 3231 ± 3000 = 321 d. opening stock CPP WN1b ± Rs. cost of the goods sold = opening stock+purchases-closing stock 34. Stock ± CPP = 19385 . Purchases at CPP = 43000 x 105/97.000 b. 10500 c. Depreciation at CPP = 1000 x 105/60 = 1750 4. a. Sales Average Index = (Opening+Closing)/2 = (90+105)/2 = 97.5 = 19385 e. Sales at CPP = 40000 x 105/97. Net Monetary Loss = 1000 ± 321 = 769 Profit & Loss A/c ± CPP Sales 43077 (-) Cost of goods sold 37423 Depreciation 1750 39173 3904 (-) Monetary Loss 769 3135 PART ± III Working note: 1.