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    What type of inflation accounting do you favor under high inflationary periods?
    Do you think tax allocation can improve the prediction of future tax payments in the short run?
    What are the economic consequences of SFAS No.87?

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    What type of inflation accounting do you favor under high inflationary periods?
    The basic computations of the model are fairly routine. Any future pro forma surplus of funds from retained earnings is assumed to be invested at the required expected return for the company (that equals the risk-free Treasury rate plus the stock beta times an assumed risk premium per unit of beta risk). Any projected shortage of funds needed to finance the asset growth that is needed to support sales growth is assumed to require issue of new equity shares at prices dependent on the existing price, the required expected return and projected dividends.
    The mechanical accounting adjustments in the model are designed to reflect the effect of existing accounting policies on future financial statements and cash flows. For instance, since property, plant and equipment values on the balance sheet are based on historical cost, the amount of new property, plant and equipment required to support increased unit sales (or to cover depreciation in the existing property) must be adjusted upwards for inflation in their costs. Information on past inflation rates can be useful for this purpose, as can projections of future inflation (such as from the Treasury inflation-indexed bonds) and actual current cost information (especially if it normalizes depreciation expense across firms to eliminate the effect of differential depreciation methods and useful life estimates).
    Current cost and inflation information can also be used to adjust estimates of future costs of goods sold and inventory requirements. In particular, higher inflation will result in Cost of Goods Sold (COGS) estimated with first in, first out (FIFO) accounting being reported lower than under last in, first out (LIFO) accounting that reflects the higher cost of the most recently produced inventory into cost of sales (with the average cost inventory method resulting in expenses between FIFO and ...

    Solution Summary

    Types of inflation are demonstrated.