Page 32 - DCOM409_CONTEMPORARY_ACCOUNTING
P. 32

Unit 2: Price Level Accounting




                                                                                                Notes
                 Example: From the following details ascertain (a) Cost of Sales and (b) Closing Inventory
          as per CPP Method when the firm is following FIFO Method:
                                                                 Historical     Price
                                                                     `          Index
            Opening stock on 1-1-2008                                    4,000     80
            Purchases during 2008                                       20,000    125
            Closing stock (out of purchases made in the last quarter)    3,000    120
            Index No on 31st December, 2008                                       140

          Solution:
                              Cost of Sales and Closing Inventory (FIFO)

                                                                             Converted
                                                        Historical   Conversion
                             Particulars                                      amount
                                                        cost basis   factor
                                                                             under CPP
            Opening inventory                               4,000    140/80      7,000
            Add: Purchases                                 20,000   140/125     22,400
            Total                                          24,000               29,400
            Less: Closing inventory (b)                     3,000   140/120      3,500
            Cost of goods sold (a)                         21,000               25,900

          Determination of Profits and Preparing Balance Sheet

          For determining the profits under the current purchasing power method, any of the following
          two methods can be used:
          1.   Net Change Method: Under this method, profit is the change in equity over the period.
               Thus, both the opening balance sheet and the closing balance sheet are converted to reflect
               the changes in price level and any increase in equity is taken as profit and any reduction in
               equity is taken as loss. It may be worthwhile to mention here that while converting the
               figures of the opening balance sheet both monetary and non-monetary items except equity
               are to be converted and while converting the closing balance sheet, only non-monetary
               items are converted as they already are reported at current values. Monetary items are not
               to be converted. Thus, this method is based on the normal accounting principal that profit
               is the change in the equity during the accounting period.

          2.   Conversion or Restatement of Income Statement Method: Under the second method, all
               items of profit or loss account are converted. Sales and operating expenses are converted
               using the average index. The index to be used for conversion of cost of sales and inventory
               will depend upon the method used for valuation of inventory, i.e., LIFO or FIFO as discussed
               above. Fixed assets are converted on the basis of the indices prevailing on the dates they
               were purchased. The same principle applies for charging depreciation on them. Taxes and
               dividend paid are to be converted using the indices of the date on which they were paid.
               Gain on account of monetary items should be calculated and stated separately in the
               restated income statement.








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