FAR 27 - INFLATION ACCOUNTING

Question 1

For monetary Assets:

What happens to purchasing power during periods of inflation (rising prices)?

Answer 1

Purchasing power does down

Question 2

For monetary Assets:

What happens to purchasing power during periods of declining prices?

Answer 2

Purchasing power goes up

Question 3

For monetary Liabilities:

What happens to purchasing power during periods of inflation (rising prices)?

Answer 3

Purchasing power goes up

Question 4

For monetary Liabilities:

What happens to purchasing power during periods of declining prices?

Answer 4

Purchasing power goes down

Question 5

What is the difference between monetary vs non monetary instruments?

Answer 5

Monetary instruments are financial instruments that are fixed. This results in purchasing power loss or gain during periods of inflation or deflation

Non-monetary instruments are financial instruments that fluctuate with the market. When prices rise, the value of the asset also rises.

Question 6

Define the following:

1. historical cost/nominal dollar approach
2. historical cost/constant dollar approach
3. Current cost/nominal dollar approach
4. Current cost/constant dollar approach

Answer 6

1. items are recorded at their original amounts and are not adjusted for price level changes
2. items are recorded at their original cost but are adjusted for changes in the general price level
3. items are adjusted to their current amounts (specific price change), but are not adjusted for changes in the general price level
4. items adjusted to their current amounts (specific price change) and adjusted for changes in the general price level