empak
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Location: United States
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Posts: 5
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| Posted: 14 Sep 2012 at 16:30 | IP Logged
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So I'm having some trouble understanding this Wiley MCQ.
Is the question worded wrong or what?
In its financial statements, Hila Co. discloses
supplemental information on the effects of changing
prices. Hila computed the increase in current cost of
inventory as follows:
Increase in current cost (nominal dollars) $15,000
Increase in current cost (constant dollars) $12,000
What amount should Hila disclose as the inflation
component of the increase in current cost of inventories?
a. $3,000
b. $12,000
c. $15,000
d. $27,000
Wiley's answer: (a) The increase in current cost (nominal
dollars) of $15,000 is the total increase in current
cost, including any increase caused by inflation. The
effect of changes in the general price level is not
separated from the effect of changes in specific value.
The increase in current cost (constant dollars) of
$12,000 is the increase in current cost after eliminating
any increase caused by inflation. Therefore, the
inflation component of the increase in current cost of
inventories is $3,000 ($15,000 - $12,000).
I thought that current cost (nominal dollars) would only
consider the effects of appreciation and ignore the
effects of inflation. I also thought that current cost
(constant dollars) considers the effects of both
appreciation and inflation, not just inflation. Am I
wrong?
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Topic: Constant Dollar Accounting Wiley MCQ
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