IMPACT OF INFLATION ON FINANCIAL STATEMENT OF AN ORGANIZATION
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IMPACT OF INFLATION ON FINANCIAL STATEMENT OF AN ORGANIZATION
ABSTRACT
A financial statement is a report that summarises an organization’s financial situation. Inflation is a phenomena that causes distortions in an organization’s financial statements. This is due to the use of historical cost accounting in the preparation of the financial statement.
The depth of this project work was accomplished by performing extensive research on the topic, and the results are presented in chapters.
The introduction was handled in chapter one, where the significance, scope, and limitations of studies were discussed.
The second chapter of this book dealt with an analytical evaluation of related material involving the source and impact of inflation on financial statements.
The third chapter deals with research design and methodology, which includes data sources, data location, and data gathering methods.
Chapter four dealt with the summary of findings, and in chapter five, measures were implemented and a good conclusion was reached based on the summary of findings created in the previous chapter, resulting in reliable recommendations.
A bibliography was also given to clearly show how far the researcher had gone before this work was completed.
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND TO THE STUDY
As the need for an organization’s financial statements cannot be overlooked by users such as investors, creditors, members of the organisation, government, and even the general public,
the researcher has taken up the topic “the impact of inflation on financial statements of an organisation” as a project to research in order to find solutions to the impacts.
Financial statements of any organisation contained summarised information of its financial affairs organised systematically over time. The vital and crucial importance of financial statements is not only to the members of the organisation but also to third parties dealing with the organisation as mentioned above,
as well as financial analysis to examine the performance in order to make good investment decisions tax rate determination and distribution of profits. For many years, it has been recognised that financial accounts made based on historical expenses can be misleading in times of changing prices, i.e. inflation.
Because the accounting measuring rod of the value of money and accounting profits are also measured in monetary terms, the historical values at which assets and liabilities are sated in the balance sheet become unrealistic during times of economic crisis.
For example, dividing payments based on historical cost profit may result in servers under capitalization of the organization’s concepts of inflation.
As a result, inflation has become a phenomena that has plagued various economies around the world for a long time, notably in the preparation of financial statements for organisations. This condition of diminishing value might emerge from employing the historical cost concept,
which will necessarily mislead the reliability of an organization’s fixed assets while generating financial statements. Despite this, the solution to the phenomenon of financial statement inflation is to embrace the idea of current cost accounting concept in order to reflect the influence of changing prices on operational capabilities.
1.2 STATEMENT OF THE PROBLEM
The causes of inflation as well as myriad monopolistic whatever the route if total aggregate demand exceeds what the economy can produce at full employment demand will bear against the limited supply of commodities and will bid up the prices here the direction of causation is clear cut it proceeds from demand to inflation and this is known as “demand pull inflation”.
Modern inflation differs from simple demand-full theories in that prices and wages rise before full employment is realised. They rise even though 30% of factories are idle and 10% of the workforce force is unemployed.
We term this “cost-push inflation” when costs drive rising prices even when resources are scarce. Wage behaviour is certainly a significant component of cost-push inflation. These inflationary reasons will have an impact on an organization’s financial statements.
1.3 STUDY GOAL
My goal in varying out this study is to make ends towards which other actions the principles of this target are harmonious. The following points should be noted.
i. An empirical examination of the causes of inflation as they relate to an organization’s financial statements.
ii. A critical examination of the accounting for inflation on an organization’s financial statements as a result of changing prices in a relatively short period of time.
iii. The beneficial impact of the inflationary trend on financial statements via the application of inflation account techniques
iv. The negative impact of inflation on an organization’s financial statements.
v. If an organization’s financial statements show a mild tendency of inflation.
1.4 THE SIGNIFICANCE OF THE STUDY
This study, I hope, will be a handy supply of material for many users of financial statements.
Also for the completion and presentation of my two-year national diploma and certificate. Another benefit is that it will be useful to lecturers as well as students in the banking department as a material in both the serial of the school library and the banking and finance departmental library. Furthermore, this piece of work has provided me with a solid foundation in accounting for inflation.
1.5 DEFINITION OF TERMS
The following terms are defined to provide the reader with the specific meaning utilised in this study.
IMPACT: A strong impression or influence on anything that has happened or is going to happen. It is an expression on circumstances for the purpose of this research impact denotes a powerful impression on an organization’s financial statements.
INFLATION: An increase in demand without a matching increase in supply, resulting in a fight over the available commodity in an economy. However, for the sake of this study, inflation is defined as a phenomena that causes distortions in financial statements, resulting in inaccurate information.
FINANCIAL STATEMENT: This is a bill of health that provides an organization’s annual statement of affairs. For the purposes of this study, it is defined as a statement including an organization’s financial information.
ORGANISATION: An organisation is a legal entity that is established for either commercial or non-commercial purposes. However, for the purposes of this research, it is defined as an entity whose liability is limited by share. This stands for limited liability company.
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