ment being required a month later. From an economic point of view the firm is col-
lecting $11,834(TL2,000,000/TL169). The accounting system reports a figure of
$15,385 resulting in a variance of $3,551.
Actual $11,834
Reported _______$15,385
Variance ______________$3,551In this case, the conventional reporting system overstates sales by 23.1% with the
positive variance being offset by an equivalent nonoperating translation loss below
the line. This scenario is probably the most common in practice as businesses cus-
tomarily send out invoices at or near month’s-end. While home offices may not be
happy with the implications of this analysis for reported performance, market effi-
ciency suggests that reliance on fictitious gains permitted by generally accepted ac-
counting principles is self-delusory.
The magnitude of the dispersions associated with differing invoicing and payment
terms is set forth in Exhibit 27.2. Depending on sales terms, sales can be overstated
or understated by significant proportions.
Why are we concerned with these distortions? Traditional reporting systems could
induce suboptimal behavior on the part of the sales force. For example, there is no
motivation for a company’s sales force to improve payment terms. If sales are
recorded at the end-of-month rate, some sales personnel may be unconcerned whether
they are paid in cash or in 30 or 60 days. In an inflationary environment, the sooner
money is in hand the better. One might argue that payment terms are dictated from the
top and thus minimize this possibility. However, with sales personnel often number-
ing in the hundreds, management may not be in a position to personally monitor all
competitive pricing terms. Under these conditions, it is important to have in place a
system that encourages the sales force to act in the best interests of the company.
Traditional reporting systems also provide no motivation for the sales force to in-
voice and ship earlier in the month. Again with sales being recorded at end-of-month
rates, the time of delivery is of no consequence to the salesperson. Yet, even a day’s
delay in shipment could be costly; for example, 1.2% of exchange losses plus inter-
27 • 6 FINANCIAL REPORTING IN HYPERINFLATIONARY ENVIRONMENTSTL$2,000,000 Sales in Month 1
Varying Invoice Dates and Payment Dates
Invoice Payment Today’s Proposed
Day Terms Measure Measure Diff. %A 1 Cash 15,385 20,000 4,615 30.0%
B 5 5 days 15,385 18,248 2,863 18.6%
C 5 15 days 15,385 16,722 1,337 8.7%
D 5 25 days 15,385 15,385 0.000 0.0%
E 10 30 days 15,385 14,124 –1,261 –8.2%
F 20 30 days 15,385 12,945 –2,440 –15.9%
G 30 30 days 15,385 11,834 –3,551 –23.1%
Exhibit 27.2. Dispersions Associated with Differing Invoicing and Payment Terms.