CHAPTER 9 - Impact of Inflation on Accounting Information

Abstract

This chapter discusses the impact of inflation on accounting information and reviews the history and present state of accounting attitudes and practice. If the inflationary uplift in potential cash flow from operations is inadequate to meet the additional cash requirement, there would be a negative pressure on actual cash flow from operations, which may have to be financed by costly borrowing. When the annual rate of inflation is very low, the cumulative impact of inflation on the replacement value of longer lived fixed assets or of stocks held for lengthy maturation could cause cash flow problems. If the falling value of money caused by inflation is not taken into account, the practical impact upon a company through its traditional financial statements would result in over-statement of profits due to under charge of certain expenditures. It would result in over-distribution of dividends out of the over-stated profits created and inability to finance replacement of assets due to over distribution of profits at and to the excessive tax charge.