Question

Describe how the general price level adjusted (GPLA) model accounts for changes in the general purchasing power of the reporting currency over time. 3 What are the strengths and weaknesses of the GPLA model?

MUST BE ORIGNAL WRITING!

Answer 1

General Price Level adjusted (GPLA) model accounts for changes in the general purchasing power of the reporting current over time are also be called as general price-level accounting or general purchasing-power accounting or Constant Dollar Accounting. In this type of accounting the attribute which is measured is historical cost but the measuring unit for such attributes is the constant dollar instead of the nominal dollar.

Conversion factor is used to convert the nominal dollar into the constant dollar.

Strengths of this model:

1. The measurements can be added and subtracted logically which are having same purchasing power unlike the historical accouting-nominal dollar which uses a mix of constant and nominal dollars.

2. It makes more meaningful comparisions between various companies as they are express their financial statements in the same measuring unit.

3. It allows the users to make more meaningful comparisions of a company's performance over time, because each year's financial statements are expressed in the same measuring unit.

4. It doesn't depart from the hisotrical accounting which is highly reliable.

Weakness of the model:

1. It doesn't reflect the adjustments for specific price changes.

2. It may confuse the users of financial statements. Users may erroneously believe that these financial statements present current values instead of historical costs.

3. Purchasing power gains and losses which are prepared are never being realised in cash.

4. Inflation is rare in the economy, hence, nominal dollar financial statements are not materially distorted for changes in the general price level.