1. 191PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. ACCOUNTING Financial and Organisational Decision Making Chapter 19 Alternative accounting system Slides written by Sandra Porritt designed by Tony Van Eekelen

2. Chapter 19:Alternative accounting system 19.2 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives In this chapter you will be introduced to: –the capital maintenance conceptand why it is of crucial importance in the measurement of periodic profit –how the decisions relating to asset valuation, unit of measurement, and financial or physical capital concept impact on the measurement of profit

3. Chapter 19:Alternative accounting system 19.3 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives –the capital maintenance concept and the calculation of profit under the current purchasing power (CPP) system

4. Chapter 19:Alternative accounting system 19.4 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives –the capital maintenance concept and the calculation of profit under the continuously contemporary accounting(CoCoA) system –the capital maintenance concept and the calculation of profit under the current cost accounting (CCA) system

5. Chapter 19:Alternative accounting system 19.5 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. –how to prepare CPP, CoCoA and CCA financial statements from given information in basic situations –the advantages and disadvantages of the CPP, CoCoA and CCA systems. Learning Objectives

6. Chapter 19:Alternative accounting system 19.6 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Introduction Capital maintenance concept underlies the historical cost system Look at three (3) accounting systemt that have an alternative capital maintenance concept

7. Chapter 19:Alternative accounting system 19.7 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Measuring profit and wealth profit = general growth in wealth over time

8. Chapter 19:Alternative accounting system 19.8 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Capital maintenance concept What property of the asset represents its wealth In what unit of measurement shall that wealth be measured Is capital to be maintained in terms of its financial value or the physical operating capacity it provides

9. Chapter 19:Alternative accounting system 19.9 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. The property of an asset Motor vehicle for example –current replacement cost –net initial cost (historical cost) –realisable value or market value –present value of cash flows (represents valuations for different purposes)

10. Chapter 19:Alternative accounting system 19.10 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. The unit of measurement dollar constant or price- level adjusted dollar

11. Chapter 19:Alternative accounting system 19.11 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Maintenance of financial value versus phsical operating capacity the financial value of capital maintaining the ability to replace the physical asset held by the entity

12. Chapter 19:Alternative accounting system 19.12 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example Opening capital $50,000 Profit for the period $5,000 Closing money capital is $55,000 but assume a general rate of inflation 4%

13. Chapter 19:Alternative accounting system 19.13 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example continued Capital at 31 December 20X3 $ 55,000 Purchasing power adjusted opening capital ($50,000 x 104/100) 52,000 Current purchasing power (price level adjusted) profit 3,000

14. Chapter 19:Alternative accounting system 19.14 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. An analysis of the major alternative systems CPP Current Purchasing Power Accounting CCA Current Cost Accounting CoCoA Continuously Contemporary Accounting

15. Chapter 19:Alternative accounting system 19.15 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. CPP : Current Purchasing Power Accounting 1. PROPERTY MEASURED : Original cost 2. UNIT OF MEASUEMENT : The constant dollar 3. CAPITAL MAINTENANCE : Financial value

16. Chapter 19:Alternative accounting system 19.16 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. An evaluation of the CPP system Capital maintenance –adjustment for changes in general price level Financial analysis –growth in purchasing power Reliability –index can be verified but which index

17. Chapter 19:Alternative accounting system 19.17 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example of CPP Assets at beginning Cash at bank $6000 Motor Vehicle 5000 Land 9000 An index of general price level was: 1 January 20X1 100 30 June 20X1 105 31 December 20X1 120

18. Chapter 19:Alternative accounting system 19.18 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. example continued The first entry calculates the capital maintenance reserveby restating the opening balance in year end equilivant purchasing power DR CR Cash at bank ( $6000 x 20%) $1200 Motor Vehicle ( $5000 x 20%) 1000 Land ( $9000 x 20%) 1800 Capital maintenance $4000

19. Chapter 19:Alternative accounting system 19.19 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Developments in CPP adoption of CPP accounting was considered in the early 1970s because of high inflation the accounting profession in 1974 produced an exposure draft on CPP (A Method of Accounting for Changes in the Purchasing Power of Money)

20. Chapter 19:Alternative accounting system 19.20 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. CoCoA : Continuously Contemporary Accounting 1. PROPERTY MEASURED : Current cash equivalent 2. UNIT OF MEASUEMENT : Constant dollar 3. CAPITAL MAINTENANCE : Financial value

21. Chapter 19:Alternative accounting system 19.21 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. An evaluation of CoCoA Capital maintenance –current cash equivalent values Financial analysis – bases the recognition of revenue and expenses on changes in market prices Reliability –relient on current market price data

22. Chapter 19:Alternative accounting system 19.22 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example of CoCoA Initial capital of the Company consisted of cash $42,000 Assets at beginning of the second year Equipment $28 000 at cost 23 000CCE Cash at bank 14 000 A general price level index disclosed a rise of 10 per cent:

23. Chapter 19:Alternative accounting system 19.23 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. example continued Wealth at end –Sum of closing CCE values $68 000 The capital to maintain Opening CCE values $42 000 plus Price level adjustment 4 200 46 200 CoCoA net profit $21 800

24. Chapter 19:Alternative accounting system 19.24 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. CCA : Current Cost Accounting 1. PROPERTY MEASURED : Current cash equivalent 2. UNIT OF MEASUEMENT : Constant dollar 3. CAPITAL MAINTENANCE : Financial value

25. Chapter 19:Alternative accounting system 19.25 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. An evaluation of CCA Capital maintenance –to maintain the operating capacity of thr entity Financial analysis – values are at current cost Reliability –a deficiency of CCA system is that it relies on many allocations found in historical cost

26. Chapter 19:Alternative accounting system 19.26 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example of CCA Profit and Loss Statement for the year ended 31 December 20X1 Historical CCA Cost Sales $7500 $7500 less Cost of Goods sold 3000 4500(1) Gross Profit 4500 3000 less Depreciation 900 1000(2) Net Profit $3600 $2000

27. Chapter 19:Alternative accounting system 19.27 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. example continued Note (1) an adjustment is made to the current cost adjustment account for $1500 Note (2) an adjustment is made to the current cost adjustment account for $100

28. Chapter 19:Alternative accounting system 19.28 PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Summary Change to accounting practice will be slow in terms of the objectives of accounting each of the alternatives have been appraised International consensus on alternatives to the historical cost system does not currently exist