IMPACT OF INFLATION ON FINANCIAL STATEMENT OF AN ORGANIZATION

ABSTRACT

Financial statement is an information that shows the summary of state of affairs of an organization. Inflation is phenomenon that sources distortion to a financial statement of an organization. This is as a result of the use of historical cost accounting in preparing the financial statement.

The in depth of this project work has been achieved form conducting a comprehensive research on the topic and the following are arrived at in chapters.

The introduction was taken care of in chapter one where purpose significant, scope and limitation of studies worked into.

Analytically, review of related literature which involves the cause and impact of inflation on financial statement was dealt with in the second chapter of this work.

In chapter three research design and methodology which involves sources of data location of data and method of data collection was dealt with.

Chapter four dealt with summary of findings and in chapter five, measures were effected and good conclusion was made from the summary of findings developed form chapter aforementioned, which result to reaching reliable recommendations.

Bibliography was also included to clearly states the extent the researcher ahs gone before this work was achieved.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

As the need of financial statement of an organization cannot be looked down upon by the user such as investors creditors, members of the organization, government and even the general public the researcher has taken up this topic “the impact of inflation on financial statement of an organization” as a project to be researched upon as to finding solution to the impacts.

Financial statement of any organization contained the summarized information of its financial affairs organized systematically over a period of time the vital and crucial importance of financial statement is not only to the member of organization but also to third parties dealing with the organization as have been mentioned above as well as financial analysis to examine the performance in order to make good investment decision tax rate determination and distribution of profit or divided. It has been realized for many year that financial account prepared based on historical costs can be misleading in time of changing price that is inflation. During economic crisis inflation results to distortion of financial statement since the accounting measuring rod of value of money and accounting profits is also measured in monetary terms the historical values at which assets and liabilities are sated in the balance sheet becomes unrealistic in times of inflation. For instance if divided payment are made on the basis of historical cost profit it might lead to servers under capitalization of the organization concepts of inflation.

Therefore inflation has become the phenomenon that has been haunting different economy in the world for along time now, particularly in drawing financial statement for organization. This condition of declining value can result from using historical cost concept which will invariably distort the reliability of the fixed assets in an organization as to preparing financial statement. Not withstanding the panacea to this phenomenon of inflation on financial statement is to adopt the theory of current cost accounting concept so as to reflect the effect of changing price on operational capability.

1.2 STATEMENT OF PROBLEM

Inflation comes in many shapes and sizes the causes of inflation as well as myriad monopolistic whatever the route if total aggregate demand exceeds what the economy can produce at full employment demand will bear against the limited supply of commodities and will bid up then prices here the direction of causation is clear cut it proceeds form demand to inflation and this is called “demand pull inflation”.

What differentiates modern inflation form the simple demand full theories is this price and wages being to rise before full employment is reached. They rise even when 30 percent of factories are idle and 10percent of labour force is without work. When costs push up prices even in periods when resources are undeveloped we call this “cost-push inflation”. Wages behaviours is clearly an important part of cost-push inflation. These causes of inflation will indeed affect the financial statement of an organization.

1.3 OBJECTIVE OF THE STUDY

My objective of varying out this study is to make ends towards which other activities the principles harmony of this objective. The following points are to be observed.

i. The empirical overview of the cause of inflation as regards to financial statement of an organization

ii. The critical analysis of accounting for inflation on financial statements of an organization due to changing price at a relatives short period of time.

iii. The positive impact of inflationary trend on financial statement through the use of inflation account techniques

iv. The negative impact of inflation on financial statement of an organization.

v. If any moderate trend of inflation on financial statement of an organization.

1.4 SIGNIFICANCE OF THE STUDY

It is my believe that this work will be a ready sources of material to numerous user of financial statements.

Also for the fulfillment and awards of my two year national diploma and certificate. Another points is that it will also be of help to lecturer as a students in department of banking s a material in both serial of the school library and the banking and finance departmental library. Moreover this piece of work has given me a board basis in accounting for inflation.

1.5 DEFINITION OF TERMS

The following terms is defined in order to give the reader the exact meaning adopted as used in this study.

IMPACT: This is a powerful impression or effect on something, which has happened or will likely to happen. It is an expression on circumstances for the purpose of this research impact means strong impression on financial statement of an organization.

INFLATION: This refers to an increase in demand without a corresponding increase in supply, which leads to struggle for the available commodity in an economy. But for the purpose of this study, inflation is defined as a phenomenon, which cause distortion to financial statements and thereby result in unrealistic information.

FINANCIAL STATEMENT: This refers to a bill of health which shows the annual statement of affairs of an organization. For the purpose of this study it is defined as a statement, which contains the financial information of an organization.

ORGANIZATION: Organization could be defined as an entity which is set up either for business purpose or for non-business purpose. But fore the purpose of this study it is defined as an entity which its liability is limited by share. That is to say limited Liability Company.