The Nature of Price Changes

The Effect of Price Changes

Inflation has become an important fact of life in almost all countries of the world. As a result it is necessary to take into account the effects of price changes on financial reporting.

We know that a change in price affects the purchasing power of a monetary unit. We have alternative methods of accounting for price changes. The main objective of purchasing-power accounting is to restate the unit of measure into a common denominator. The restatement means to a scale adjustment.

For example:

I could say that I bought an accounting book for US $100 and I bought another accounting book for CDN $100. So I spent $200 US and CDN dollars. Saying like this is meaningless to me because the scale of measurement of the value of US and CDN dollar is different. I could say that I bought two books for US $171 or for CDN $240 if I assume that the exchange rate or price for US $ is CDN $1.40. So if the price of US$ changes, we have to adjust the scale of meas...