EXAMINING THE EFFECTS OF INFLATION ON REPORTED PROFITS: IMPLICATIONS FOR DECISION MAKING

EXAMINING THE EFFECTS OF INFLATION ON REPORTED PROFITS: IMPLICATIONS FOR DECISION MAKING
 ABSTRACT
 
The purpose of this study is to examine the effect of Inflation on Reported Profits: Implication for Decision Making [A survey of financial institutions in Port Harcourt].  Financial Accounting information is provided to external investors and to Management.  For Management, periodic report are prepared for decision making purposes while for external investors, a summarized report profits is what they get.  These reported profits are not screened for inflation.  Consequently, the accounting conventions and inflationary rate impact negatively on investment decisions by external investors of the banks.  To achieve these general objectives, a number of specific objectives were derived directly from the general objectives and a hypothesis was formulated.  These research questions and the hypothesis guided the development of the instrument tests or items.  This instrument is titled “Effect of Inflation on Decision Making Descriptive Questionnaire”.  The Study findings revealed that: Accounting conventions influence the preparation of reported profits, thus, creating diversity which is at variance with the objective of efficient resource allocation; External users of these reported profits rely heavily on the information they provide for their investment needs; Inflation rate in the country has impacted negatively on the purchasing power of the Naira; Savings and investment rates have fallen due to inflation; There is a relationship between the rate of inflation and fall in the value of the Naira.  The study concludes that there is now more than ever, the need for inflation accounting in reported profits; the effect of generally accepted conventions on reported profits create a degree of diversity which is at variance with the objective of efficient resource allocation.  Therefore, reported profits should not strictly adhere to accounting convention because information provided for management decisions do not adhere to accounting conventions; There is now need to introduce an Account for Inflation as done in most advanced countries for example, the UK and USA.  In the UK, the current purchasing power method is used to produce for shareholders a supplementary statement in terms of value of their investment.  There is the need to do some for investors in this country; Savings and investments will rise again if investors know what the value of their present investment will fetch in the future; Operating profits should be decided after charging the value to the business of assets consumed during the period, this should include holding gains.