Abstract

Klaus-Peter Kistner and Timo Salmi

General Price Level Accounting and Inventory Valuation: A Comment

Journal of Accounting Research, Vol. 18, No 1, Spring 1980, 297-311.

This paper provides a rigorous derivation of the restatement of inventories and cost of goods sold for the restated balance sheet and the restated income statement in the general price level adjusted accounting. It is demonstrated that the method advocated in current literature is actually a very good approximation for the exact solution instead of the exact solution.

Plan of the Paper.

In this paper, we derive a method restating values of acquisitions and cost of goods sold, assuming that the physical rather than the monetary flows stay even throughout the period. A comparison to conventional GPLA (general price level adjusted accounting) computations is then made, indicating that although the conventional GPLA method slightly overestimates the correct solution, it gives an approximation which is probably good enough for all practical purposes. Thus, it is quite possible that conventional GPLA computations, too, are intended as an approximation for constant flows of physical units.

We shall only discuss first-in-first-out (FIFO) inventory valuation and omit the case of discrete (integer) inventories, because this is sufficient to state our case.

In the discussion on our method, we also review the conventional GPLA computations on the basis of the data given by the relevant unrestated financial statements. In inflation accounting literature, these computations are explained in prose and/or by numerical example. Our mathematical formulations for the conventional GPLA computations are made congruent with the literature.

At the end of the paper, we give a numerical example of the exact and the conventional GPLA restatements in order to illustrate the results derived.

Klaus-Peter Kistner
Professor of Business Administration
Faculty of Economics
University of Bielefeld

Timo Salmi
Professor of Accounting and Business Finance
University of Vaasa

Link to EBSCOhost PDF.


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