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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: selivanov who wrote (13467)	1/3/2013 4:28:59 AM
From: John Pitera	1 Recommendation Read Replies (1) \| Respond to of 33421

Inflation from Investopedia... August 06 2011\| Filed Under » Economics, Investing Basics Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase as reported in the Consumer Price Index (CPI), generally prepared on a monthly basis by the U.S. Bureau of Labor Statistics. As inflation rises, purchasing power decreases, fixed-asset values are affected, companies adjust their pricing of goods and services, financial markets react and there is an impact on the composition of investment portfolios. Tutorial: All About Inflation Inflation, to one degree or another, is a fact of life. Consumers, businesses and investors are impacted by any upward trend in prices. In this article, we'll look at various elements in the investing process affected by inflation and show you what you need to be aware of. Financial Reporting and Changing Prices *Back in the period from 1979 to 1986, the Financial Accounting Standards Board (FASB) experimented with "inflation accounting," which required that companies include supplemental constant dollar and current cost accounting information (unaudited) in their annual reports. The guidelines for this approach were laid out in Statement of Financial Accounting Standards No. 33, which contended that "inflation causes historical cost financial statements to show illusionary profits and mask erosion of capital."* *With little fanfare or protest, SFAS No. 33 was quietly rescinded in 1986*. Nevertheless, serious investors should have a reasonable understanding of how changing prices can affect financial statements, market environments and investment returns. Corporate Financial Statements In a balance sheet, fixed assets - property, plant and equipment - are valued at their purchase prices (historical cost), which may be significantly understated compared to the assets' present day market values. It's difficult to generalize, but for some firms, this historical/current cost differential could be added to a company's assets, which would boost the company's equity position and improve its debt/equity ratio. In terms of accounting policies, firms using the last-in, first-out (LIFO) inventory cost valuation are more closely matching costs and prices in an inflationary environment. Without going into all the accounting intricacies, LIFO understates inventory value, overstates the cost of sales, and therefore lowers reported earnings. Financial analysts tend to like the understated or conservative impact on a company's financial position and earnings that are generated by the application of LIFO valuations as opposed to other methods such as first-in, first-out (FIFO) and average cost. (To learn more, read Inventory Valuation For Investors: FIFO And LIFO.) Read more: investopedia.com