Lecture 1 - accounting for inflation

Question 1

What is the definition of income?

Answer 1

The maximum amount that can be consumed during the period while still expecting to be as well of at the end of the period as at the beginning of the period

Question 2

What is capital maintenance

Answer 2

An accounting concept based on a principle that a companies income should only be recognised after it has fully recovered its costs or its capital has been maintained

Question 3

what is retail price index (RPI)?

Answer 3

the monthly change in prices of goods and services used by most households (cost of living, inflation etc)

Question 4

What are the 3 capital market perspectives?

Answer 4

1. Financial capital maintenance
2. Purchasing power maintenance
3. Physical operating capital maintenance

Question 5

What is financial capital maintenance?

Answer 5

Perspective taken in historical cost accounting

Question 6

What is purchasing power maintenance?

Answer 6

Historical cost accounts adjusted for changes the purchasing power (inflation)

Question 7

What is physical operating capital maintenance?

Answer 7

Revaluing transactions to current costs to maintain funds for the same level of operations

Question 8

What does historic cost assume?

Answer 8

Money holds constant purchasing power

Question 9

What are the 3 components of the economy that make historic cost assumption less valid?

Answer 9

1. Specific price level changes
2. inflation
3. Fluctuation in exchange rates

Question 10

What are the supporting arguments for historic cost accounting?

Answer 10

• predominant method today so maintains support from professionals
• If noy useful, businesses’ would abandon it