Methods of Inflation Accounting

Current Purchasing Power (CPP) Method

This method was evolved by the Institute of Chartered Accountants of England and Wales under standard accounting practice. According to this, all items in the financial statements are restated in terms of changes in the price level. This is done by multiplying the historical figure by the conversion factor as calculated below :

Mathematically,

Conversion Factor = Price Index on the date of conversion/Price Index on the date items arose,or example,

(a) Cost of machine in 1990 Rs. 60000

Price Index in 1990 150

Price Index in 1996 200

Value of the machine in 1996 Rs. ((200/150)x 60000)= Rs.80000

(b) Cost of land in 1992  Rs. 1200 per sq foot

Price Index in 1992 87

Price Index in 1998 167

Value of the land in 1998 ((167/87) x 1200)= Rs. 2103 per sq feet

Example

Determine (a) closing inventory, and (b) cost of sales as per CPP method under FIFO (first in f i s t oul) and LIFO (lasl in first out) methodology.

Solution
Conlputation of Cosl of Sales and Closing Inventory utzder FIFO                             
                                        Historical       Price Index

Opening stock as on 1.1.1990 Rs. 4000        80

Purchasing during the year 1990 Rs. 20000  125
 

Closing stock             Rs. 3000                    120
(Out of purchase inade in the last quarter)

Price Index on 3 1.12.1990   140

Closing Inventory and Cost of SaIes (FIFO)

Computation of Cost of Sales and Closing Inventory under LIFO
                  
                             Historical           Price Index
Inventory as on 1.1.1990 Rs. 8000                     100

hrchasiiig during the year 1990 Rs ,48000             125

Inventory as on 3 1.12.90 Rs. 12000                   140



Closing Inventory and Cost of Sales (LIFO)