Historic cost accounting - Case Study Example

Unemployment in the UK has fallen to a twenty five year low and yet inflation has remained low. This shows that there has been an improvement in the trade-off between inflation and unemployment. The non accelerating inflation rate of unemployment (or NAIRU) has declined because of increased flexibility in the labour market and a reduction in structural unemployment. (Has the UK supply side improved') Estimates show that London has a higher level of wages than the North East (approximately 40 per cent higher, and approximately 30 per cent higher than the Great Britain average), and has seen the strongest wage growth between 1993 and 2003 in nearly all industry groups (especially in services industries).

The North East, by comparison, has cheaper wage costs in all industries compared with the Great Britain average (approximately 10 per cent less), and has seen a lower wage growth in nearly all industry groups. 3 the big advantage of hca is that it leads to absolute certainty and it fits in perfectly with the cash flow statement. Hca tells us exactly what has been paid and what has been received and therefore there is no doubt about balance sheet amounts. The alternatives, where accountants attempt to take inflation into account, can lead to many problems.

There have been several forms of current cost accounting, purchasing power accounting and so on since the mid 1970s that have been proposed as alternatives to hca. The reason the alternatives have not survived, and IAS 15 on inflation accounting is about to be replaced, if it hasn't been already, is that no one can agree on the best way to represent accounting values. Hca provides definite values, other methods don't!4 the disadvantages of hca include the fact that hca values can relate to transactions that could be a year old, 10 years old and as much as 100 years old.

It's true that some businesses have old equipment and old stocks (inventories) that are still working well but that were bought a long time ago: the problem is that the acquisition value may be out of date and so the balance sheet is showing out of date values. Taxation problems come with inflation accounting. In times of high levels of inflation, profits are inflated and therefore the tax bill tends to increase: this is the reason that inflation accounting was developed in the UK and elsewhere in the 1970s and onwards.

Guess what, though' Accountants found solutions to the inflation accounting problem that led to lower taxation but the Inland Revenue didn't like what the accountants