ABSTRACT

A company holding tangible property and owing fixed monetary obligations during a period of rising prices is generally in a more advantageous position than one holding monetary claims. The same plant facilities require increasing investment in terms of monetary units. These requirements for increased financing as price levels rise must be met either from operations or from the addition of new capital. The difficulty lies in knowing whether or not properties will be replaced in kind, and if so at what price levels, how to distinguish between replacement and expansion, and how to recognise the effect of technological increases in efficiency. The present position in the United States is that generally accepted accounting principles forbid the introduction of price level adjustments into the preparation of primary financial statements except in so far as the lifo inventory method may be regarded as doing so.