Global Finance 411study of these data is necessary to understand the reasons behind these quite
dif ferent messages.
The revenues in each of the three income statements are measured in the
average price level for the year based upon the Consumer Price Index for All
Urban Consumers.Tiger ’s revenues are earned fairly evenly across the year,
and therefore, the revenues in the historical-cost income statement are already
expressed in average prices for the year. Accordingly, the same revenue amount
can be used in both the constant-dollar and current-cost statements. The same
applies to the amounts for selling, general and administrative; interest, net; and
the income tax provision.
Modest adjustments were made to cost of operations to convert them to
constant dollars and current costs, respectively. The constant-dollar adjust-
ment requires multiplying the historical cost of operations by a ratio of price
indices. The index in the numerator is average price index for the current year,
and in the denominator, is the value of the index at the date closest to the date
on which the expense was incurred. To illustrate, assume that a $1,000 expense
was recorded on January 1, 2002, when the price index was 100; the average
price index for 2002 was 110. Adjustment to constant dollars is:
The same methodology is applied in adjusting historical cost of operations to
current-cost amounts. The difference is that specific indices of replacement
cost, or alternative measures of replacement cost, are used in place of a general
price index.
Tiger reported that increases in inventory costs, included in cost of oper-
ations, accounted for the adjustments to historical cost of operations. In gen-
eral, adjustments to the historical cost of sales will be small if the LIFO
inventory valuation method is used; the LIFO cost f low ensures that cost of
sales already approximates current costs. Adjustments will generally be greater
where the FIFO or average cost methods are in use.
Impact of Differences in General and
Specif ic Price Index Movements
The major Tiger cost adjustments were to depreciation and amortization. De-
preciation and amortization represent the conversion to expense of asset bal-
ances. In many cases these balances were recorded years earlier when the price
indices were far lower. Notice that the percentage increase in the current-cost
and constant-dollar depreciation and amortization over the historical-cost
amount is 28% and 45%, respectively. Tiger ’s disclosures explain the reason for
the differences: “Depreciation expense is greater when adjusted for general in-
f lation than when adjusted for changes in specific prices. The difference re-
f lects the Consumer Price Index (general inf lation) rising faster than the
$,^110 $,1 000
100× 1 100
=