inflation

Examples of inflation in the following topics:

• Advantages of LIFO

  • Using LIFO accounting for inventory, a company generally pays lower taxes in periods of inflation.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation.

• Impacts of Costing Methods on Financial Statements

  • Without inflation, all three inventory valuation methods would produce the same results.
  • During periods of inflation, the FIFO gives a more accurate value for ending inventory on the balance sheet.
  • Using LIFO during periods of inflation tend to show and ending inventory amount on the balance sheet that is much lower than what the inventory is truly worth at current prices, this means lower net income due to a higher cost of goods sold.

• Introduction to IFRS

  • Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm
  • Financial capital maintenance in nominal monetary units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm
  • Financial capital maintenance in units of constant purchasing power, i.e., Constant Item Purchasing Power Accounting – CIPPA – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm and Constant Purchasing Power Accounting – CPPA – during hyperinflation under the Historical Cost paradigm.
  • Units of constant purchasing power: capital maintenance in units of constant purchasing power at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily rate only under the Capital Maintenance in Units of Constant Purchasing Power paradigm.

• The LIFO Reserve

  • Suppose a company uses FIFO for its internal accounting system, but wants to use LIFO for financial and income tax reporting (due to continuous inflation of its costs).
  • The change in the balance during the current year represents the current year's inflation in costs.

• Selecting an Inventory Method

  • The disadvantages of FIFO include the recognition of paper profits and a heavier tax burden if used for tax purposes in periods of inflation.
  • During periods of inflation, LIFO shows the largest cost of goods sold of any of the costing methods because the newest costs charged to cost of goods sold are also the highest costs.

• Comparability

  • The LIFO method results in lower ending (and beginning) inventory on a company's balance sheet because the oldest (and therefore usually less expensive due to inflation) items remain in the inventory.

• Dollar-Value LIFO

  • If inflation did not affect the statements of companies, dollar-value and non-dollar-value accounting methods would have the same results.

• Introduction to GAAP

  • The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation.

• Liquidation

  • Due to inflation and general price increases, the amount of money companies pay for inventory will usually increase over time.

• Income Statement Analyses

  • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.