b) Using relevant examples, clearly distinguish between monetary items and non-monetary items as they relate to accounting for price-level changes. (2 marks)
View Solution
Monetary items are those items whose amounts are fixed by contract or otherwise in terms of numbers of currency units (e.g. cedis), regardless of changes in general price levels whiles non-monetary items are those items whose amounts changes with respect to changes in general price level. Examples of monetary items are cash, receivables, payables and loan capital. Examples of non-monetary items are PPE and inventories.
c) An entity is considering adjusting its historical cost based financial statements to reflect economic reality. Make an argument for and against the use of current purchasing power accounting as a method of adjusting financial statements for price-level changes. (4 marks)
View Solution
Arguments for:
• Profit is measured in real terms excluding inflationary value increments. This enables better forecasts of future prospects to be made.
• It provides a stable monetary unit with which profit and capital can be valued. It therefore measures the impact on the company in terms of shareholders purchasing power.
• By applying a single price index to all non-monetary assets, subjective valuation of current value accounting is avoided.
• The restatement of asset values in terms of a stable money value provides a more meaningful basis of comparison with other companies.
• CPP accounting is based on historical cost data which is readily verifiable and hence free from subjectivity.
Arguments against:
• The use of indices inevitably involves approximations in the measurement of value.
• CPP does not show the current values of assets and liabilities. Retail price index is not necessarily appropriate for all assets in the business. In addition, the physical capital of the business is not maintained.
• An objection of CPP accounting is raised by some authorities who believe that there is no such thing as generalised purchasing power.
• CPP deals with changes in the general price level and not with changes in prices of individual items.