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At the last part of the lecture on chapter#19 you explained value of our assets and profits during the high inflation. Please correct if I understood anything wrong.
1. During high inflation our non-current assets on SOFP will be undervalued because we record our assets on historical cost. And overvalue the cost of NCA during low inflation period?
2. Similarly, during high inflation our net profits on SOPL will be undervalued also because the value of our assets has increased but so does the depreciation calculated on inflationary cost?
3. If we calculate our depreciation on historical cost then our profits in high inflation would be overvalued but if we calculate our depreciation on inflationary cost then our profits in high inflation period would be undervalued because we have higher depreciation expense each year and it will decrease our profits for the year?
4. Im high inflation period do we calculate our depreciation on inflationary cost or historical cost accounting?
You have understood correctly.
We always use historical cost accounting and so depreciation is calculated on the historical cost. The statements explain why many people think that we should change the ‘rules’ and take inflation into account.
In HIGH inflation period:
Our non-current assets on SOFP will be undervalued because both the value of NCA and depreciation charged are based on historical cost which means we have less depreciation charge for the year. However in low inflation period the cost of NCA will be overvalued because we charge more depreciation on historical cost which means we have more depreciation charge for the year?Similarly in high inflation period our net profits on SOPL will be undervalued because we have more depreciation charge for the year which will reduce our profit for the year?
However if we calculate our depreciation on historical cost then our profits in high inflation would be overvalued but if we calculate our depreciation on inflationary cost then our profits in high inflation period would be undervalued because we have higher depreciation expense each year and it will decrease our profits for the year?
Is it okay?
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