Culminating

Effects of Inflation
Meghan Vogan

Greg McMaster
BAT4ME
June 22, 2015

Executive Summary

Inflation provides many weaknesses to the accounting cycle. It shows inconsistent,

and inaccurate information. Economists believe that inflation is caused by extreme
growth of the money supply. Inflation has effected many societies throughout history. For
example, hyperinflation hit hard in Germany, it was cheaper to burn money to heat the
house rather than using that money to buy fire wood. When inflation begins to occur,
people tend to demand higher wages. This only fuels inflation. It is very hard to control
inflation, because when it begins to occur peoples reaction is to increase the money
they have to keep up with the rising prices. This only makes inflation worse.

Introduction
Inflation refers to a continuous, general increase in the price of goods and services. Rise in
prices is called inflation.It is a very touchy issue, and must be monitored continuously. If

inflation is not monitored it can lead to hyperinflation which is out of control inflation.
Inflation has a very negative accounting cycles, it effects the financial statement. When
the value of money is decreased, prices rise. Therefore, prices of expenses will rise,
making a company spend more money on the same amount of expenses as before. It will
also look like the company is making more money from sales when in reality the prices
have been raised. However, the money is less valuable so in the long run the company is
not making more money. Inflation needs to be monitored and controlled.

What is inflation?
Inflation is continuous increase in the general price level of goods and services in
the economy over a period of time. When price levels rise the value of money decreases.
For example, in the past one dollar would have been very valuable, and now it is not
worth very much. This is due to inflation, and prices rising. Moreover, economists believe

that inflation is caused by extreme growth of the money supply. Economists also believe
that there are three separate factors that cause a rise or fall in price off goods. The first
factor is; the change in the value or production of goods. The second is, a change in
price of money. Lastly, currency depreciation resulting from an increase supply of
currency.

History
Hyperinflation which is out of control inflation hit hard in Germany after world war
two. By July 1922, the German Mark fell to 300 marks for $1. Then in November it was at
9,000 to $1. By November 1923 it reached 2.5 trillion marks to $1. Which was out of
control, the government kept producing more and more money which made the marks
less valuable. It made the marks less valuable, because the government printed so much
money, and everyone began to have a lot of money, therefore prices were raised. The
money then began to become less valuable per mark. During this time in Germany, it
was cheaper to burn money to heat the house rather than using that money to buy fire
wood.

Increase in quantity of money or in overall money supply has happened in many

different societies throughout history, changing with different forms of money used. For
example, when gold was used as currency the government would melt the gold down
and add other metals such as silver, copper, and lead. They would the leave then at the
same nominal value even though other metals were added to the gold. By adding the
other metals to the gold the government could issue more coins without having to have
more gold. This practice will increase money supply which resulting in the value of the
coin being lowered. Furthermore, customers will need to use more coins since the value
of the coins is decreased.

Negative effects
To start off, inflation is harmful to the overall economy. Firstly, it makes it very difficult for
companies to budget and plan for long term. It makes it hard for accounting, and
comparing income statements. If inflation occurs during a year, when companies
compare previous years expenses to the year that inflation was really high. It would look
as if the company had spent a lot of expenses, when really the value of the money was
just low. Therefore, the company would have to spend more money with prices being
higher. Also, artificially low interests rates, and the associated increase in money supply
can lead to reckless borrowing, resulting in malinvestments.

Also, with uncertainty about purchasing power it then makes investment and
saving very unpromising. Inflation also imposes hidden tax increase. For example, tax
payers will be receiving more income due to the inflation, which heightens the tax rates.
On that note, employees demand rapid wage increase to keep up with the rapid increase
in prices. However, increasing employees wages only worsens the inflation.

Conclusion
In conclusion, inflation has many negative effects on the accounting cycle. For
example, at a movie theatre, a show should be rated on how many tickets were sold
versus the amount of money made, because inflation makes monetary unit meaningless.
Furthermore, I think a way around inflation for accounting cycles would be for the
company to look at how many items they sold, or bought rather than the prices. It is very
important to control inflation, or we face serious consequences similar to what happened
in Germany.

References
Essay on inflation. Sanjran.9 Oct. 2011. Web 22 June 2015

https://sanjran.wordpress.com/essay-on-inflation/
"Impact of Inflation on Financial Statement Analysis - Boundless Open Textbook."
Boundless. N.p.,
n.d. Web. 22 June 2015. https://www.boundless.com/finance/textbooks/boundlessfinance-textbook/analyzing-financial-statements-3/considering-inflation-s-distortionaryeffects-46/impact-of-inflation-on-financial-statement-analysis-230-708/
Weimar Investing Weimar investing. Web 22 June
2015http://www.goldonomic.com/weimar_investing.htm
Wikipedia. Wikimedia Foundation. Web. 22 June 2015
https://en.wikipedia.org/wiki/Inflation