Structural Changes and General Changes in the Price Level in Relation to Financial Reporting.

Abstract This article deals with structural changes and general changes in the price level in relation to financial reporting. It is not possible here to compare in any detail either the techniques which might be involved, or the results which might be obtained from the various bases of adjustment mentioned in the accounting research. The table shows different possible results in the case of a hypothetical corporation whose only asset is a non-depreciable fixed asset. The assumption is made that the asset originally cost one hundred dollars, and that its current market value is two hundred dollars. It is also assumed that the selected index of general prices has risen from one hundred to one hundred fifty between the acquisition date and the current date. The capital stock is considered as having been sold for one hundred dollars on the same day that the asset was purchased. No other transactions have occurred. Specifically, there has usually been a failure to distinguish between a change in the structure of prices and a change in the general price level. A change in the structure of prices involves a change in the prices of certain goods and services relative to the prices of other goods and services, with, therefore, a change in the real economic value of both sets of goods and services. A change in the general price level involves only a proportional change in the prices of all goods and services. If there is a change only in the general price level, this does not in itself imply a change in the value of any good or service, but does imply a change in the value of money and of obligations expressed in terms of a certain amount of money.