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For the following qn below,it states that there is an increase in price but how come the answer given shows a value that is lower than the profit (i.e it shows a decrease instead ? I dont understand why.
Qn) Ross ltd made a profit of $350 000 for 20X9 based on historical cost accounting principles. Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should Ross ltd record for 20X9 under each of the following
– real financial capital maintenance
– money financial capital maintenance
– physical capital maintenanceAns given:
– real financial capital maintenance $332500
– money financial capital maintenance
$350000
– physical capital maintenance
$280000Think about the physical capital maintenance problem (the maths is easier!)
Specific prices have increased by 20% in the year and general price indices by 5%
If we wished to spend all our $350,000 on buying new assets we would be able to purchase assets that last year would have cost only $280,000
The general price rises account for an increase in the cost of assets generally of 5% – in the above scenario that’s an increase of $14,000
Furthermore, the specific assets that we would be wanting to buy have had an alarming increase in cost of 20% compared with last year so that accounts for a further $56,000
In total, what would have cost us $280,000 last year is going to cost us $350,000 this year
Is that OK for you?
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