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date: 12 July 2020

inflation accounting 

A Dictionary of Economics

Nigar Hashimzade,

Gareth Myles,

John Black

The production of meaningful company accounts under inflationary conditions. During inflation, *depreciation allowances on capital goods based on historical cost do not provide for their replacement, and thus overstate profits, and increases in the prices of inventories also produce paper profits in excess of real ones. On the other hand, if interest rates increase in response to inflation, counting nominal interest payments as costs but taking no credit for the decrease in the real value of a firm’s debts understates true profits. There are also difficulties if the prices of a firm’s capital goods, inventories, or output change at different rates from the general price level.... ...

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