国际会计第七版英文版课后答案(第七章)

Chapter7

FinancialReportingandChangingPrices

DiscussionQuestionsSolutions

1.Historical-basedfinancialstatementsmaybemisleadingduringperiodsofsignificantinflation.Manyresourcesmayhavebeenacquiredinperiodswhenthepurchasingpowerofthemonetaryunitwasmuchhigher.Theseexpensesthentypicallyaredeductedfromrevenuesthatreflectcurrentpurchasingpower.Theresultingincomenumberisunintelligible.Anotherproblemforstatementreadersisthatthevalueofassetsrecordedattheirhistoricalacquisitioncostistypicallyunderstatedasaresultofinflation.Understatedassetvaluesproduceunderstatedexpensesandoverstatedearnings.

Financialtrendsarealsodifficulttointerpret,astrendstatisticsgenerallyincludemonetaryunitsofdifferentpurchasingpower.Apositivetrendinsalesmaybeduetopricechanges,notrealincreasesinsales.

2.Apriceindexisacostratio,thatis,theratioofarepresentative“basket”ofgoodsandservicesconsumedbyanaveragefamily,comparedtothepriceofthatsamebasketinabenchmark(“base”)year.Thepriceindexisinvaluableinenablingastatementreadertotranslatesumsofmoneypaidinthepasttotheircurrentpurchasingpowerequivalents.

3.Thisstatementispartlytrueandshowstheconfusionthatsurroundsinflationaccounting.Inaccountingforchangingprices,usersmustdistinguishbetweengeneralpricechangesandspecificpricechanges.Generalpricesrefertothepricesofallgoodsandservicesintheeconomy.Theobjectofaccountingforgeneralpricelevelchangesistopreservethegeneralpurchasingpowerofacompany’smoneycapital.Specificpricechangesrefertochangesinthepricesofspecificcommodities.Theobjectofaccountingforspecificpricechangesistopreserveacompany’sproductivecapacityoroperatingcapability.

4.Thecongressmaniswrong.Theobjectofinflationaccountingistoclarifythedistinctionbetweencapitalandincome,nottominimizecorporatetaxes.Inflationaccountingshowshowmuchmoneythecompanycanpayinexpenses,taxes,anddividends,whilekeepingenoughresourcestomaintainitscapital.

5.Althoughitisgenerallyconcededinprinciplethatpricelevel-adjustedfinancialstatementsaremoreusefulthanconventionalaccountingstatementsduringperiodsofsignificantinflation,itisajudgmentcalltoidentifyexactlywhenpricelevel-adjustedstatementsbecomemoremeaningful.Asaruleofthumb,executivesinBraziluseaninflationrategreaterthan10%permonth.InvestorsinGermanyorSwitzerlandmaybelievethat5%inflationperyearisalarming.Unfortunately,noonehasyetdevelopedaformal,rigorous,easy-to-applydefinitionofmeaningfulness.

Howdoesonedeterminewhetherthebenefitsofpricelevel-adjustedaccountinginformationexceedthecosts?Whilethecoststogeneratesuchinformationcanbemeasured,itismuchhardertoquantifythebenefits.Financialaccountingdealswithinformationproducedbybusinessenterprisesforusebyexternaldecisionmakers.Consequently,measurementofthebenefitsofpricelevel-adjustedinformationmustcoverallusergroupsinaneconomy.Multipleusergroups,unevendistributionsofbenefits(bothwithinandbetweengroups),andfavorableeconomy-widespillovereffectsofpricelevelinformationcomplicatethetask.Addinginternationaldimensionsmakestheproblemevenworse.

Chapter7

FinancialReportingandChangingPrices

DiscussionQuestionsSolutions

1.Historical-basedfinancialstatementsmaybemisleadingduringperiodsofsignificantinflation.Manyresourcesmayhavebeenacquiredinperiodswhenthepurchasingpowerofthemonetaryunitwasmuchhigher.Theseexpensesthentypicallyaredeductedfromrevenuesthatreflectcurrentpurchasingpower.Theresultingincomenumberisunintelligible.Anotherproblemforstatementreadersisthatthevalueofassetsrecordedattheirhistoricalacquisitioncostistypicallyunderstatedasaresultofinflation.Understatedassetvaluesproduceunderstatedexpensesandoverstatedearnings.

Financialtrendsarealsodifficulttointerpret,astrendstatisticsgenerallyincludemonetaryunitsofdifferentpurchasingpower.Apositivetrendinsalesmaybeduetopricechanges,notrealincreasesinsales.

2.Apriceindexisacostratio,thatis,theratioofarepresentative“basket”ofgoodsandservicesconsumedbyanaveragefamily,comparedtothepriceofthatsamebasketinabenchmark(“base”)year.Thepriceindexisinvaluableinenablingastatementreadertotranslatesumsofmoneypaidinthepasttotheircurrentpurchasingpowerequivalents.

3.Thisstatementispartlytrueandshowstheconfusionthatsurroundsinflationaccounting.Inaccountingforchangingprices,usersmustdistinguishbetweengeneralpricechangesandspecificpricechanges.Generalpricesrefertothepricesofallgoodsandservicesintheeconomy.Theobjectofaccountingforgeneralpricelevelchangesistopreservethegeneralpurchasingpowerofacompany’smoneycapital.Specificpricechangesrefertochangesinthepricesofspecificcommodities.Theobjectofaccountingforspecificpricechangesistopreserveacompany’sproductivecapacityoroperatingcapability.

4.Thecongressmaniswrong.Theobjectofinflationaccountingistoclarifythedistinctionbetweencapitalandincome,nottominimizecorporatetaxes.Inflationaccountingshowshowmuchmoneythecompanycanpayinexpenses,taxes,anddividends,whilekeepingenoughresourcestomaintainitscapital.

5.Althoughitisgenerallyconcededinprinciplethatpricelevel-adjustedfinancialstatementsaremoreusefulthanconventionalaccountingstatementsduringperiodsofsignificantinflation,itisajudgmentcalltoidentifyexactlywhenpricelevel-adjustedstatementsbecomemoremeaningful.Asaruleofthumb,executivesinBraziluseaninflationrategreaterthan10%permonth.InvestorsinGermanyorSwitzerlandmaybelievethat5%inflationperyearisalarming.Unfortunately,noonehasyetdevelopedaformal,rigorous,easy-to-applydefinitionofmeaningfulness.

Howdoesonedeterminewhetherthebenefitsofpricelevel-adjustedaccountinginformationexceedthecosts?Whilethecoststogeneratesuchinformationcanbemeasured,itismuchhardertoquantifythebenefits.Financialaccountingdealswithinformationproducedbybusinessenterprisesforusebyexternaldecisionmakers.Consequently,measurementofthebenefitsofpricelevel-adjustedinformationmustcoverallusergroupsinaneconomy.Multipleusergroups,unevendistributionsofbenefits(bothwithinandbetweengroups),andfavorableeconomy-widespillovereffectsofpricelevelinformationcomplicatethetask.Addinginternationaldimensionsmakestheproblemevenworse.

yieldsatranslationloss.Sincethechangeintheexchangerateitselfwascausedbyinflation,theresultisadoublechargeforinflation.

ExerciseSolutions

1.Thisexerciseisagoodwaytoteststudents’understandingofthevariousapproachesto

accountingforchangingprices.Vestel’searningsnumbersarebasedonthegeneralpricelevel

modelwhereasInfosysismeasuringitsperformancebasedonacurrentcostframework.Modellogoesastepfurtherandadjustsitscurrentcoststatementsforchangesinthegeneralpricelevel.

Somemayfeelthatcurrentcostdata,whichisbasedonthenotionofreplacementcosts,istoo

subjectiveanotiontobereliable.Sincegeneralpriceleveldataarebasedongeneralpricelevelindices,thenumbersappearinginVestel’sincomestatementaremuchmoreobjectiveand

facilitatescomparisonsamongcompaniesusingasimilarmethodology.Moreover,Vestel’s

statementsdonotviolatethehistoricalcostdoctrine.Otherswillarguethatthevalueofstock

investmentsarebasedondiscountedfuturecashflows.Accordingly,thecurrentcostframeworkprovidedbyInfosysismoregermanetoinvestordecisionsasitmeasurestheamountofearningsthatcouldbedistributedasdividendswithoutreducingthefirm’sfuturedividendgenerating

potential.Moreover,currentcostearnings,includingthegearingadjustment,reflectshowthefirmisimpactedbypricesthataremoregermanetothefirm,asopposedtothegeneralpublic.SomewillarguethatModello’sincomestatementcombinesthebestofbothworlds.However,thereismerittotheargumentthattheincomestatementshouldmeasuretheperformanceofthefirmandthatthisisbestaccomplishedwiththecurrentcostframework.Sinceindividual

investorsareaffectedbythegeneralpricelevel,theyshouldadjusttheirshareofafirm’scurrentcostearningsdistributionsforgeneralinflation.

2.a.

IncomeStatement

Revenue

OperatingexpensesDepreciation

OperatingincomeaMonetarygains

(losses)

Netincome

BalanceSheet

Cash

Land

Building

Acc.DepreciationTotal

Owners'equity

(beg.)

Netincome(loss)

Owner'sequity

(end)

Historical

Cost

MXP144,000,000

(86,400,000)(36,000,000)

MXP21,600,000

PriceLevelAdjustment

420/340

420/340

420/263

HistoricalCost-ConstantDollar

MXP177,882,353

(106,729,412)(57,490,494)

MXP13,662,447

-

MXP53,280,000

(73,248,759)MXP(59,586,312)

MX(P157,600,000180,000,000720,000,000(36,000,000)

MXP1,021,600,000

420/420

420/263

420/263

420/263

MXP157,600,000 287,452,471 1,149,809,885 (57,490,494)MXP1,537,371,862

MXP1,000,000,000rolledforwardb 21,600,000

MXP1,021,600,000

MXP1,596,958,174(59,586,312)

MXP1,537,371,862

aMonetaryloss:

Cash

Beginningbalance

Purchaseof

realestate

Rentalrevenues

Operatingexpenses

Monetaryloss

1,000,000,000420/2631,596,958,174

(900,000,000)420/263(1,437,262,356)

144,000,000420/340177,882,353

(86,400,000)420/340106,729,412)

157,600,000230,848,759

-157,600,000

(73,248,759)

bBeginningequityxpriceleveladjustment=adjustedamount

=P1,000,000,000x420/263=P1,596,958,174

2.b.

Cost

ReturnonAssets21,600,000

1,021,600,000

=2.1%

HC/ConstantDollar

(59,586,312)

1,537,371,862

=-3.9%

Cost-basedprofitabilityratiostendtoprovideadistorted(overstated)pictureofacompany'soperatingperformanceduringaperiodofinflation.

3.

Cash

Currentliabilities

LT-Debt

Netmonetaryliabilities

20X7

MJR2,500

(1,000)

(3,000)

MJR(1,500)

20X8

MJR5,100

(1,200)

(4,000)

MJR(100)

ZonoliaEnterprise’snetmonetaryliabilitypositionchangedbyMJR1,400duringtheyear(MJR100)–(MJR1,500).

4.

Netmonetaryliab.'s

12/31/X7

Decreaseduringyear

Netmonetaryliab.'s

12/31/X8

Nominal

MJR’s

MJR1,500x

(1,400)MJR100x

Restatefor

MajikstanGPL

32,900/30,000=

=32,900/36,000=

Constant

MJR’s

MJR1,645

(1,400)

MJR91

Monetary(generalpurchasingpower)gainMJR154

5.

IncomeStatement

Revenues

OperatingexpensesDepreciation

NetIncome(loss)

Historical

Cost

MXP144,000,000

86,400,000

(36,000.000)

MXP21,600,000

CurrentCostAdjustment

-

-

1.8

CurrentCost

MXP144,000,00086,400,000

64,800,000MXP(7,200,000)

BalanceSheet

Cash

MXP157,600,000

-

P157,600,000

Land

180,000,000

1.9

342,000,000

Building

720,000,000

1.8

1,296,000,000

Acc.Depreciation

(36,000,000)

1.8

(64,800,000)

TotalMXP1,021,600,000MXP1,730,800,000

Owners'Equity

Beg.Balance

OErevaluationa

Netincome(loss)

MXP1,000,000,000

-

21,600,000

MXP1,000,000,000

738,000,000

(7,200,000)

a

TotalMXP1,021,600,000

RevaluationoflandMXP162,000,000

Revaluationofbuilding576,000,000MXP738,000,000

MXP1,730,800,000

6.Solutionin000,000's:

MJR8,000X137.5/100.0=MJR11,000

20X720X8

CurrentcostMJR8,000MJR11,000

Acc.depreciation(1,600)(3,300)a

NetcurrentcostMJR6,400MJR7,700

aCurrentcostdepreciation=MJR800X137.5/100.0=1,100peryearfor3years.

7.Asnonewassetswereacquiredduringtheyear,wemustdeterminetowhatextenttheMJR3,000increaseinthecurrentcostofZonolia'sequipmentexceededthechangeinthegeneralpricelevelduringtheyear.Theappropriatecalculationfollows:

MJR11,000-[MJR8,000X36,000/30,000]

=MJR11,000-MJR9,600

=MJR1,400

Alternatively,ifwefollowtheFASB’ssuggestedmethodology,wherecalculationsareexpressedinaverage(20X8)dollars,currentcostdepreciationwouldbecomputedbyreferencetotheaveragecurrentcostoftherelatedassets.Thus,

Currentcost,12/31/X7MJR8,000,000

Currentcost,12/31/X811,000,000

MJR19,000,000

AveragecurrentcostMJR19,000,000/2=MJR9,500,000

Currentcostdepreciationat10%=MJR950,000

Increaseincurrentcostofequipment,netofinflation(000's):

CurrentCost

Restatefor

Inflation

Currentcost/

ConstantZonos

Currentcost,net

12/31/X7MJR6,400X32,900/30,000MJR7,019

Depreciation(950)(950)

Currentcost,net

12/31/X87,700X32,900/36,0007,037

MJR2,250MJR968

Theincreaseinthecurrentcostofequipment,netofinflationisMJR968.Thedifferencebetweenthenominalrengeamount(MJR2,250)andconstantrenges(MJR968)istheinflationcomponentoftheequipment'scurrentcostincrease.

8.Restate-translatemethod:

Increaseincurrent

costofequip.,net

ofinflation

Constant

renges

MJR968,000X

Translate

1/4,800

=

$Equivalents

ofconstant

renges

$202

Translate-restatemethod:

CC(MJR)

TranslateCC($)

Restate

U.S.GPL

CC/Constant$

CC,netMJR6,400,000x12/31/X7

Dep.(950,000)x

CC,net7,700,000x

12/31/X8

MJR2,250,000

x

1/4,800=$1,333

x

1/4,800=(198)

1/4,800=1,604

$469

292.5/281.5=$1,385

=(198)

292.5/303.5=1,546

$359

9.

Tradereceivables

-Tradepayables(170)

Netmonetaryworkingcapital72

20X7

£m

242

20X8£m

270

(160)

110

Changeinmonetaryworkingcapital=£38(£110-£72)

NetmonetaryW/C12/31/20X7

IncreaseduringyearNetmonetaryW/C12/31/20X8

Nominal

£

72X

38

110

X

Restatefor

BritishPPI

110/100=

=

110/120=

Constant

£

79.2

38.0

100.8

Monetaryworkingcapitaladjustment

=

(16.4)a

aThisamountisaddedtothecurrentcostadjustmentsfordepreciationandcostofsalesbecausetrade

receivablesexceededtradepayables,thustyingupworkingcapitalinanassetthatlostpurchasingpower.

Gearingadjustment:

[(TL–CA)/(FA+I+MWC)][CCDep.Adj.+CCSalesAdj.+MWCA]

whereTL=totalliabilitiesotherthantradepayables

CA=currentassetsotherthantradereceivablesandinventory

FA=fixedassetsincludinginvestments

I=inventory

MWC=monetaryworkingcapital

CCDep.Adj.=currentcostdepreciationadjustment

CCSalesadj.=currentcostofsalesadjustment

MWCA=monetaryworkingcapitaladjustment

=[(128–75)/(479+220+110][£m216]

=[.066][216]

=£14.3

TheonlynumberIcouldreadilyidentifyinproblem9isinventoryof220.ThenextnumberIcouldcomecloseonisfixedassets.Lookslikethesolutionabovesays479,thetextfor08indicates473.Icouldnotseewherethe110(MWC)camefrom.Neitherisitclearwheretheother3itemsinbracketscamefrom.ThesolutionneedstobeclearerbeforeIcancheckthenumbers.

Thisgearingadjustmentof£14.3millionissubtractedfromthecurrentcostofsalesanddepreciation

adjustments.Itrepresentsthepurchasingpowergainfromusingdebttofinancepartofthefirm'soperatingassets.

10.

a.

NominalThaiHistoricalTranslationU.S.

bahtinflationcost/constantratedollar

adjustmentbahtequivalent

Inven-

toryBHT500,000x100/200=BHT250,000x.02=$5,000

b.

NominalTranslationU.S.U.S.Historical

bahtratedollarinflationcost/constant

equivalentadjustmentdollars

Inven-

toryBHT500,000x.02=10,000x180/198=$9,090

Sorrythisseemsconfusingcomparedtonumber2wheretheyearendindexwasinthenumeratorandeitherthebeginningoraverageindexwasinthedenominator(e.g.420/340or420/263).ItisnotclearwhywedotheoppositeherewheretheThaipriceleveldoublesandweputthe200inthedenominatorand100inthenumerator.

c.Moststudentswillprefertherestate-translatemethod.Thisapproachhasmeritifgeneralandspecificpricelevelsmoveintandem.Ifnot,neitherapproachissatisfactoryasbotharebasedonahistoricalcostvaluationframeworkthatisgenerallyirrelevantforinvestmentdecisions.

d.Forreasonsenumeratedinthischapter,wefavorrestatinglocalcurrencyassetsforspecificpricechangesandthentranslatingthesecurrentcostequivalentstodollarsusingthecurrentexchangerate.

11.WeassumethatDoosanEnterprisestranslatesitsinventoryatthecurrentrateandadjustsitscostofsalesforinflationbysimulatingwhatitwouldhavebeenonaLIFObasis.Twoadjustmentsarenecessary

becauselocalinflationimpactsexchangeratesusedtotranslateforeigncurrencyinventorybalancestodollars.WithFIFOinventories,atranslationlossisrecordedin"asreported"earningswhenitisoriginallytranslatedtoU.S.dollarsbyacurrentexchangeratethatchanged(devalued)duringtheperiod.Thistranslationlossis

anindirectchargeforlocalinflation.Theinflationadjustment(simulatedLIFOcharge)toincrease"as

reported"costofsalestoacurrentcostbasisisanadditionalchargeforinflation.Absentsomeoffsetting

entry,consolidatedresultswouldbechargedtwiceforinflation.Toavoidthisdoublecharge,thetranslationlossembodiedinreportedearningsisdeductedfromthesimulatedLIFOchargetoarriveatanetU.S.dollarcurrentcostofsalesadjustment.Stepsintheadjustmentprocessareasfollows:

1.

2.

3.

4.

FIFOinventorysubjecttosimulatedLIFOcharge

Restateline1toJanuary1currencyunits

(KRW10,920,000x100/120).TheresultisanapproximationofDecember31LIFOinventory

DifferencebetweenFIFOandLIFOinventory

balances(line1minusline2)istheadditional

liraLIFOexpense(currentcostadjustment)

forthecurrentyear.

Translateline3todollarsattheJanuary1

exchangerate(KRW1,820,000÷900).TheresultistheadditionaldollarLIFOexpenseforthe

KRW10,920,000

KRW9,100,000

KRW1,820,000

currentyear$2,022

5.CalculatethetranslationlossonFIFOinventory

(line1)thathasalreadybeenreflectedin"as

reported"results:

a.Translateline1atJanuary

exchangerate(KRW10,920,000÷KRW900)

b.Translateline1atDecember31

exchangerate(L10,920,000÷KRW1,170)

c.Thedifferenceisthetranslation

lossin“asreported”results

$12,133

$9,333

$(2,800)

6.

Thedifferencebetweenlines4and5cis

thecostofsalesadjustmentindollars:

a.AdditionaldollarLIFOexpensefrom

line4.

b.Less:Inventorytranslationlossalready

reflectedin"asreported”results(from

line5c)

c.Thedifferenceisthenetdollarcurrent

costofsalesadjustment

$2,022

$(2,800)

$(778)

Here,thecurrentcostofsalesadjustmentisnegative(i.e.,reducesthedollarcostofsalesadjustment).Thisisbecausethewondevaluedbymorethanthedifferentialinflationrate(assumingaU.S.inflationrateclosetozero).Iftheliradevaluedbylessthanthedifferentialinflationrate,thecostofsalesadjustmentwouldhavebeenpositive.

12.

1.

2.

3.

4.

5.

6.

7.

8.

9.

Costoffixedassetsat12/31

FIFOinventoryat12/31

Total

Less:Owners'equityat12/31

Liabilitiesusedtofinance

fixedassetsandinventory

Restateliabilitiestobeginning

ofperiodmarkka(EUR26,000X300/390)

Purchasingpowergain

Purchasingpowergainin

pounds(EUR6,000/EUR1.5)

Translationgainonapplied

liabilities(EUR26,000/EUR1.5-

EUR20,000

EUR8,000

EUR28,000

EUR2,000

EUR26,000

EUR20,000

EUR6,000

£4,000

EUR26,000/EUR1.95)

10.Netpurchasingpowergain

£4,000

£-0-

Inthiscasethetranslationgainonliabilitiesusedtofinancenonmonetaryassetsequalsthepurchasingpowergainbecausethecurrencydevaluationmatchedthedifferentialinflationof30%.Hence,nopurchasingpowergainswouldberecognized.

Case7-1Solution

Case7.1KashmirEnterprises

1.a–c

HistoricalPriceLevelHistorical

CostAdjustmentCostConstant

IncomeStatementRupees

RevenuesINR6,000,000160/144INR6,666,667

CostofSales2,560,000160/1283,200,000

Selling&Admin.1,200,000160/1441,333,333

Depreciation160,000160/128200,000

Interest240,000160/160240,000

Monetarygains(losses)a-741,666

NetIncomeINR1,840,000INR2,435,000

BalanceSheet

CashINR2,480,000160/160INR2,480,000

Inventory480,000160/128600,000

Building3,200,000160/1284,000,000

Accu.depreciation(160,000)160/128(200,000)

TotalINR6,000,000INR6,880,000

AccountspayableINR620,000160/160INR620,000

Notespayable2,400,000160/1602,400,000

Owners'equity2,980,0003,860,000

INR6,000,000INR6,880,000

aMonetarygains/(losses):

Cash

Beg.balanceINR720,000160/128INR1,150,000

Downpayment(800,000)160/128(1,000,000)

Sales6,000,000160/1446,666,667

Selling&Adm.exp.(1,200,000)160/144(1,333,333)

Paymentonaccount(2,200,000)160/144(2,444,444)

Interest(240,000)160/160(240,000)

INR2,480,000

Monetaryloss

INR2,798,890

-2,480,000

INR(318,890)

aMonetarygainsandlosses:

AccountsPayable

Beg.balanceINR420,000160/128INR525,000

Purchases2,400,000160/1283,000,000

Paymentsonaccount(2,200,000)160/144(2,444,444)

INR620,000INR1,080,556

-620,000

MonetarygainINR460,556

aMonetarygains/(losses):

NotesPayable

PurchasewarehouseINR2,400,000160/128INR3,000,000

-2,400,000

MonetarygainINR600,000

Netmonetaryloss:INR(318,890)+INR460,556+INR600,000=INR741,666.

CurrentCostFinancialStatements

HistoricalAdjustmentCurrentCost

IncomeStatementCostFactorEquivalents

RevenuesINR6,000,000-INR6,000,000

CostofSales2,560,0001.33,328,000

Sellingandadm.1,200,000-1,200,000

Depreciation160,0001.4224,000

Interest240,000-240,000

NetIncomeINR1,840,000INR1,008,000

BalanceSheet

CashINR2,480,000-INR2,480,000

Inventory480,0001.3624,000

Building3,200,0001.44,480,000

Acc.depreciation160,0001.4224,000

TotalINR6,000,000INR7,360,000

AccountspayableINR620,000-INR620,000

Notespayable2,400,000-2,400,000

Owners'equity2,980,0004,340,000

INR6,000,000INR7,360,000

2.Yourauthorsfavorcurrentcostoverhistoricalorhistoricalcost/constantdollarfinancialstatements.

Financetheorystatesthatinvest