Economic inflation is part of life—it’s part of history. Ups and downs in market trends are not new to accountants and financial analysts. However, the pandemic and tensions overseas add a new element to what can be predicted in the marketplace. Here’s how inflation will impact the industry as a whole.
Pay attention to the gap between cost and market price:
Usually, inventory balance sheets are recorded at cost or market price, whichever one is less. In times of high inflation, however, the gap between cost and market price can be large. If profits are skewed due to not taking the replacement cost of materials into account, then it’s easy to underprice a product. In times of inflation, getting unit sale prices correct to reflect production costs and interest rates is crucial. It will be your job to provide critical analysis, taking into consideration the challenge of meeting increased operating costs due to inflated materials costs.
Accounting consistency will be vital:
When it comes to procedures and trends, it becomes more critical that accounting principles are adhered to for an accurate overall picture. Legally, accountants are required to follow Generally Accepted Accounting Principles (GAAP). They are under the control of the Financial Accounting Standards Board (FASB) which is an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States. Inflationary forces can affect the type of inventory policy an accountant uses. The two basic types are first-in, first-out, (FIFO) which escalates the price as time goes on and makes inflationary forces less apparent in the long run, or conversely, last-in, first-out (LIFO) which uses the higher cost materials first but leaves the lower-cost materials on the books to skew inventory values.
It’s your job to be the voice of reason:
In times of economic pressure, it falls to the accountant to keep a lid on panicked executives which could lead to poor decision-making. The voice of reason from the accounting industry as a whole must sound loud and clear. It must show that spending and investing can lead to malinvestment and help business owners strike a balance between inflation-proofing their business in the present and guarding against future risk.
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