Abstract This article discusses various theoretical and practical issues related to purchase commitments and recommends a unifying framework to guide accounting and disclosure practices. Many businesses enter into contracts to purchase goods at fixed prices in order to ensure a continued supply of the goods or as a hedge against price increases. During the period that such contracts are outstanding, fluctuations in the prices of the underlying goods can have significant effects on the financial statements. The accounting literature provides no single comprehensive discussion of the issues involved in accounting for purchase commitments. This has led companies to adopt widely varying practices. A review of the financial statements indicates that many of the reported losses on purchase commitments have had a substantial impact on companies' net incomes. While accounting for purchase commitments may not be a very widespread problem, it is a problem that can have a significant effect on a company's bottom line and has largely been neglected by accounting policy makers. This article recommends solutions to problems in accounting for purchase commitments.
Gujarathi et al. (Thu,) studied this question.