beyond the rate of general inflation without diminishing market share, due to keen competition in this sector. The company does not consider that it has cash flow problems. The company is all equity financed. Although a bank overdraft is a permanent feature of the balance sheet, this is primarily due to customers being given a 60-day credit period, while most suppliers are paid within 30 days. There is always a positive balance of short-term monetary assets. In the previous financial year, net profit after taxation on a strict historical cost basis was considered very healthy, and the directors felt that they could prudently distribute a major portion of this by way of dividend. The directors are considering whether, and if so how, to reflect price-level changes in their financial statements. They are concerned that this would affect their profit figure and therefore the amount they could distribute as dividend. The following price-level changes have been brought to the attention of the directors: Retail Price Index Index for company's machinery Raw materials inventory index 3 years previously 100 100 100 2 years previously 104 116 102 1 year previously 107 125 108 Present 112 140 120
You are the
beyond the rate of general inflation without diminishing market share, due to keen competition in this sector. The company does not consider that it has
| Retail Price Index | Index for company's machinery | Raw materials inventory index | |
| 3 years previously | 100 | 100 | 100 |
| 2 years previously | 104 | 116 | 102 |
| 1 year previously | 107 | 125 | 108 |
| Present | 112 | 140 | 120 |
You are required to prepare a report for your directors setting out in general terms how to explain to the shareholders the likely impact on the historical cost profit of possible methods of accounting for price-level changes.
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