Market Prices v. Cost Indexation in Accounting for Steel Inventories

Abstract

Professional accounting prescriptions in the U.S.A., U.K. and Australia suggest cost indexation as a method of approximating the replacement cost of inventories. The behaviour of prices quoted by over ninety steel producing companies in the U.S.A. for ten product groups (thirty‐eight product grades) over the period 1968–77 is examined to determine the appropriateness of using aggregative revaluation procedures within the context of financial statement preparation. The evidence adduced suggests that the use of price indexes to obtain the replacement cost of inventories may distort the financial statements of companies whose inventories do not tally with the regimen of the index. Further, the investigation shows that the problems arising from the use of replacement cost do not arise with the use of selling prices. Reliable selling price data are readily available for a wide range of steel inventories on an up‐to‐date basis, in both domestic and international markets. Not only can selling price data for steel inventories be obtained with reasonable ease compared with the complexities of index‐based valuation procedures, but they are more precise measures.