Framework – examples – ACCA Financial Reporting (FR)
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When it comes to P&L effect of inflation the anser given is wrong because when their is inflation, the prices of our inventory and expenses purchases and the prices or our selling goods or other income are getting higher through the year, and so our profit margin might also go upwards and compensate for higher depreciation. So the right answer would be “It depends” !!!
Since, it being OT question not much information is given so according to question, we have to assume that inflated prices of inventory and expenses will be compensated by the increase in profit due to inflation.
And therefore, value of depn using HC OR CV will be the determining factors as to find if profits are overstated or understated.
Great information Delivery Sir, and I really enjoyed it! Thank you so much and it seems to be an exciting journey to clear FR paper with your great support!!!
so what if the price is low which is deflation ,the effect on both the historical & current value
But when we follow current cost method, we will be revaluing the asset upward. Why didn’t we consider the effect of this upward revaluation on the profit?
revaluation surplus will land in Other Comprehensive Income, and not in Profit. Revaluation affects Profit only through depreciation cost, which becomes higher if the value of the assets increase. Increased depreciation cost then causes the Profit to decrease.
Depreciation is lower based on the historical cost – as in the economy with growing inflation the cost will increase, so upon revaluation of your asset then your depn expense will increase
Why is depreciation lower in economy with growing inflation?
I presume it cause the asset is calculated at historical cost as against the current value. Therefore the asset is undervalued resulting in lower depreciation which will eventually increase profit.