During periods of inflation, will be a lot of related issues about it. Which strongly influences the financial reporting and price changes. Value of the assets initially recorded at acquisition cost less to reflect its current value (the higher). Values ​​of the assets yield lower assessed expenses lower and profits are valued more highly. Values ​​of the assets yield lower assessed expenses lower and profits are valued more highly. From the management point of view, this inaccuracy distorts the financial projections based on historical time series of data, the budget is the basis of performance measurement, and performance data can not isolate the effect of inflation that can not be controlled. This causes an increase in the proportion of tax, demand more dividends than shareholders, salaries and demand higher wages than workers, and adverse actions of the host country (such as tax benefits are huge.
And if the company has distributed its profits then most likely the company can not do the replacement of certain assets has increased the price due to lack of resources. Financial statements are not adjusted to purchasing power will also affect the reader in interpreting the report and compare the performance of the company oprerasi. If revenues are recorded in accordance with the present value of purchasing power, while the cost of purchasing power are recorded at historical earnings will make measurements inaccurate. Conventional accounting procedures also ignore the purchasing power gains and losses arising from the ownership of cash (or equivalent) during the period of inflation.
Now we briefly review its terms of conventional corporate profits. Traditionally, profit (ie wealth that can be used) is part of the company's assets (ie net assets) that can be withdrawn by the company during an accounting period without reducing his fortune to be in the starting position.
Thus, the conventional accounting measure of profit as the maximum amount that can be drawn from the company without reducing the amount of money into capital initially. Model of constant purchasing power historical cost consider this difference by measuring the difference in earnings that the company is able to pay all its earnings as dividends, while the purchasing power at the end of the period equal to the initial period.
Monetary damages where it is coming? During the inflation will be many issues about it, companies will experience no change in wealth associated with its operations. These changes arise from monetary assets or liabilities, claims against or obligations to pay a currency with a fixed amount in the future. Monetary assets include cash and piutangusaha, which generally will lose purchasing power during inflationary periods. Monetary liabilities include most of the debt, which generally will lead to gain purchasing power during inflation.
Contrary to conventional accounting, the profit is calculated by the model of constant purchasing power historical prices. However, it takes money to make the company's assets at the end of the period becomes large, thus giving the company the same purchasing power at the end of the beginning of the period.