A Technique to Adjust Financial Statement Data for Changing Price Levels.

Abstract A simplified technique for price level adjustments should allow an analyst to determine the price level effect on reported income without a great deal of additional detailed work. Once obtained, this information may accompany the regular cost-based financial statements. A reported balance sheet reflecting current values will greatly assist management and external analysts in evaluating a company's financial position based upon current dollars. Several approaches to the task of adjusting reported revenue for the changing value of the dollar have been developed, and some of these have become successful in their acceptance. In general, they represent similar techniques to reduce the distortion in financial statements attributable to price level fluctuations. Current assets and liabilities fixed in dollar amount such as cash, receivables, payables, are not altered in most price level adjustment techniques because their values automatically rise and fall with changes in purchasing power. However, when fixed dollar assets are held during a period of rising prices, the owner sustains a real loss in purchasing power. Now more fixed dollar assets would be needed at the end of the period to just maintain the level of operating resources which existed before the rise in prices.