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Questions and Answers
A firm starts with a $1,000 cash investment, converts it to inventory, and sells everything for $1,500 with no price changes. If the general price level (GPL) rises from 100 to 121, and averages 110, what owners' equity is needed to keep up with inflation?
A firm starts with a $1,000 cash investment, converts it to inventory, and sells everything for $1,500 with no price changes. If the general price level (GPL) rises from 100 to 121, and averages 110, what owners' equity is needed to keep up with inflation?
- \$1,710
- \$1,500
- \$1,000
- \$1,210 (correct)
A company begins with $1,000 cash, buys inventory, and sells it for $1,500. The GPL increases from 100 to 121, averaging 110 during the year. What factor is used to express revenues in end-of-period purchasing power for GPL adjustments?
A company begins with $1,000 cash, buys inventory, and sells it for $1,500. The GPL increases from 100 to 121, averaging 110 during the year. What factor is used to express revenues in end-of-period purchasing power for GPL adjustments?
- 121/110 (correct)
- 121/100
- 100/121
- 110/100
A firm's cost of sales is $1,000 incurred at the beginning of the year. The general price level (GPL) increases from 100 to 121 during the year. What is the cost of sales expressed in end-of-period purchasing power?
A firm's cost of sales is $1,000 incurred at the beginning of the year. The general price level (GPL) increases from 100 to 121 during the year. What is the cost of sales expressed in end-of-period purchasing power?
- \$1,100
- \$1,331
- \$1,000
- \$1,210 (correct)
A company has revenues of $1,500 and expenses of $1,000. After GPL adjustments, adjusted revenue is $1,650 and adjusted expense is $1,210. What is the adjusted operating income?
A company has revenues of $1,500 and expenses of $1,000. After GPL adjustments, adjusted revenue is $1,650 and adjusted expense is $1,210. What is the adjusted operating income?
A firm starts with $1,000 cash, buys and sells inventory for $1,500. The GPL rises from 100 to 121, averaging 110. If the objective of GPL adjustments is to determine the amount that can be withdrawn while maintaining the firm's purchasing power, what is the primary goal?
A firm starts with $1,000 cash, buys and sells inventory for $1,500. The GPL rises from 100 to 121, averaging 110. If the objective of GPL adjustments is to determine the amount that can be withdrawn while maintaining the firm's purchasing power, what is the primary goal?
Flashcards
Initial Cash Investment
Initial Cash Investment
The initial cash investment a firm uses to begin operations.
Mark-Up
Mark-Up
Selling inventory for more than its cost, expressed as a percentage of the cost.
Income (Original Investment)
Income (Original Investment)
Income calculation where revenue represents the amount that can be withdrawn while maintaining the original investment.
General Price Level Adjustments
General Price Level Adjustments
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Revenue Adjustment for Inflation
Revenue Adjustment for Inflation
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Study Notes
- A firm starts with a $1,000 cash investment, converts it to inventory, and sells everything at a 50% markup for $1,500 by year-end.
- Revenues are $1,500, expenses $1,000, and net income $500.
- The $500 net income is the amount that can be withdrawn while keeping the original investment intact.
General Price Level Adjustments
- This aims to measure income as the amount that can be withdrawn while preserving the firm's original investment's purchasing power.
- Assume the same facts as above, but the GPL increases from 100 to 121 by year-end, averaging 110 during the year.
- Owners' equity should grow by at least $210 to keep up with inflation; beginning equity of $1,000 becomes $1,210 ($1,000 * 121/100).
- Revenues are expressed in end-of-period purchasing power by multiplying $1,500 by 121/110.
- Expenses (cost of sales) are expressed in end-of-period purchasing power by multiplying $1,000 by 121/100.
- This results in an adjusted operating income of $440 ($1,650 - $1,210).
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Description
Explanation of General Price Level (GPL) adjustments, which measure income as the amount that can be withdrawn while preserving the firm's original investment's purchasing power. Revenues and expenses are adjusted to reflect end-of-period purchasing power, impacting the calculation of operating income.
