by:

Istina Kurniasari 135020301111038

Dynda Damaiani Hasibuan 135020307111021
 Learning objectives

In this chapter you will be introduced to

some particular limitations of historical cost accounting in
terms of its ability to cope with various issues associated
with changing prices
a number of alternative accounting methods developed to
address problems associated with changing prices
some of the strengths and weaknesses of the various
alternative accounting methods
evidence that the calculation of income pursuant to a
particular method of accounting will depend on the
perspective of capital maintenance that has been adopted
 Limitations of Historical cost assumes money holds a
historical cost in constant purchasing power
Three components of the economy
times of rising which make the assumption less valid
than when historical cost was developed
prices

Support for historical

Definition of Income
cost accounting

Development of
Capital maintenance
accounting for
perspectives
changing prices
 Current purchasing power accounting
(CPPA)
Also called general purchasing power
accounting; general price level accounting;
constant dollar accounting
Based on the view that in times of rising prices, if
an entity were to distribute unadjusted profits
based on historical costs, in real terms the entity
could be distributing part of its capital
 Calculating indices

Performing current
Movements in net
purchase power
monetary assets
adjustments

Advantages of current Disadvantages of current

purchasing power purchasing power
adjustments adjustments
 (CCA)
Treatment of holding gains or losses

CCA under physical capital maintenance approach

Adjustments using Edwards and Bell approach

Advantages of current cost accounting

Criticisms of current cost accounting

 (CoCoA)

Capacity to adapt Definition of wealth

under CoCoA

Capital maintenance Advantages of

adjustment CoCoA

Criticisms of CoCoA
 Demand for price adjusted
accounting information

Professional support for

various approaches to
accounting for changing prices

Potential reasons for lack of

continued support