[Anonymous]

In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices. Hila computed the increase in current cost of inventory as follows:

Increase in current cost (nominal dollars) $ 15,000

Increase in current cost (constant dollars) $12,000

What amount should Hila disclose as the inflation component of the increase in current cost of inventories?

a.

$27,000

b.

$15,000

c.

$3,000

d.

$12,000

The answer is C. Based on (today’s) nominal dollars compared to (last years) constant dollars.

I don’t understand, I thought the nominal dollars were the ones unadjusted for inflation and constant dollars are????

[haseltonk]

Nominal dollars are not adjusted for changes in purchasing power. So an example of nominal dollars would be, in 1975 you could buy a new car for $3,000, whereas $3,000 in todays dollars will get you a transmission. Same amount of money but much less purchasing power. Constant dollars is adjusting dollars based on CPI, so that same $3,000 in 1975 is the equivalent of $25,000 today. I don't know any tricks to remember the difference, but I think of constant dollar as constant value. Works for me, may or may not help you but I hope it helps…

[mla1169]

Think of the definition of the word nominal-in name only. The company paid $12h for the inventory but it's current value, what it could sell the inventory for, is $15k. The fact thaf it's still sitting in inventory means they haven't resold it so the increased value is in name only until a transaction happens with it

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

I still don't understand. I understand that nominal dollars aren't adjusted for inflation, which is why it seems to me that the Constant dollars should be the figure that is $3,000 greater in this example, not the other way around. To make matters more confusing, the solution calls the nominal dollars TODAYS dollars and the constant dollars LAST YEARS dollars. Shouldn't the nominal amount be the one that doesn't change for inflation and the constant does??

[haseltonk]

Check the definitions for both on investopedia. They do a much better job of explaining this than I can.

[Author]

Replies