Page 31 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes However, the liabilities on 31.12.2008 stood at 4.000
Gain on holding of monetary liabilities 1,875
(iii) Monetary assets as on 1.1.2008 should have
gone up with increase in price indices
(` 2,500x1.5) 3,750
(iv) Increase in monetary assets during 2008
should have gone up with increase in
price indices (` 1,000 x 1.25) 1,250
Monetary assets on 31.12.2008 should have stood at 5,000
However, the monetary assets on 31.12.2008 stood at 3.500
Loss on holding monetary assets ( - ) 1.500
Net gain on monetary items 375

Cost of Sales and Inventories

The cost of sales and value of inventories depend upon the cost flow assumptions, i.e., first in,
first out (FIFO) or ‘last in, first out’ (LIFO). According to the ‘first in, first out’ method, inventories
first purchased are taken to be first issued to production or sold to customers; while according to
“last in, first out” method inventories purchased in the last are taken to have been first issued to
production or sold to customers. While restating the figures under CPP Method, it would be
appropriate to keep in mind the cost flow assumptions, since they affect both the cost of sales
and closing inventory as shown below:
1. First in First out (FIFO) Method: If this method is followed the composition of cost of
sales and inventory will be as under:
Cost of sales: Cost of sales will comprise of the total opening stock and current
purchases less closing stock.
Closing inventory: The composition of closing stock will normally include current
purchases only. However in cases where total sales are even less than the opening
stock a part of the opening stock may also be the part of closing stock.

2. Last in First out (LIFO) Method: If this method is followed the composition of cost of sales
and inventory will be as detailed below:

Cost of Sales: Under LIFO method the cost of sales will normally comprise of current
purchases only. However, if the purchases of the current year are less than the cost
of sales, then a part of opening stock may also become a part of cost of sales.
Closing stock: Closing stock in this case shall comprise of the purchases made in the
previous year or even of earlier years.
Indices to be used for conversion under Current Purchasing Method

In order to convert the historical cost based financial statements to the financial statements
prepared considering the current purchasing power method the indices are used:

Current purchases Average index of the year
Opening stock Index at the beginning of the year
Purchases of previous year(s) Relevant index

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