Growth And Inflation

The average rewards in the way of current dividends being comparatively low on ordinary shares, one would expect to find that the value of shareholdings would be rising otherwise why should people be willing to buy them? Of course, some shares have risen substantially, but the average movement in market prices between 1974 and 2012 has been only just sufficient for them to have retained their real value. The so-called growth element has been completely absent.

Several index numbers are compiled daily and published to indicate the general movement in prices. The best known of these indices is the Financial Times Index of Industrial Ordinary Shares (the FT Index) based on 30 of the leading large company shares in the industrial sector. Another one is the FT All-share Index, which is accepted as a better representative guide to movements in share prices generally.

In Fig. 6.1 the movements from 1970 to 2012 in the FT All-share Index are plotted against the movements in the Retail Price Index (the value of money). Over the period the average money value of shares has risen from 135 to 248, an apparent growth of 84%. But over the same period the RPI has climbed from 75 to 252, indicating that money in 2012 was worth less than a third of its value in 1970. So the 2012 share index of 248,

Inflation Accounting

The persistently high level of inflation in recent years has brought to the fore the inadequacies of traditional methods of accounting, under which, of course, the calculation of profits has been based on the historic costs of producing the output sold. It is now being recognised that for a company to be seen from its accounts to have earned profits of £100,000, in a year during which the cost of replacing its obsolescing fixed assets has risen by £100,000 more than the amount charged in the accounts for depreciation of assets, really means that it has made no profits.

5.19p net
Inflation Accounting

Personal And Business Finance 2018

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